How can I set up good money habits?

It may seem like where you start in life or what you earn are the most important determinants of future wealth. They definitely play a role.

But the biggest factor that will determine whether your financial life progresses and serves you is the habits you adopt when dealing with your money.

High-income earners can be free spenders with high debt and financially messy lives while low-income earners can be budgeters and savers who quietly grow wealth and thrive, free of financial stress.

Whatever your age, income or career trajectory, managing your money using these good habits can lead to financial well-being that serves you by helping you to manage challenges and make the most of opportunities to achieve the things you want in your life.

Healthy money habits

1.  Budget to spend less than you earn

Living within your means is the first step. It may not be the life you want to live always, but it is the way to create the space to grow your financial life into the one you want. If you live beyond your income, you will most probably do so by incurring debt. Debt that attracts interest will mount and will ultimately catch up with you and reduce what you have to spend on your lifestyle.

Tracking your income and expenses and ensuring your expenses do not exceed your income by using a budget will help you avoid debt and identify and free up money that you can use to eradicate existing debt, grow wealth and then attain the life you want.

2.  Think about how you spend

Rather than spending impulsively without a plan, give some thought to what you need to spend on necessities, what you can allocate to your goals and the spending that brings value and meaning to your life. After necessities and allocations for goals, you may enjoy spending on your family, in your community or on a hobby.

With a plan in place for the basics, your goals and spending that has meaning, you can make better decisions about how much and when to spend, avoid impulse buys and make your money work harder for you.

3.  Pay down debt as soon as possible

Expensive unsecured debt – such as personal loans, credit cards and overdrafts – can mount quickly and will cost you in interest. Paying off this debt as quickly as you can means you will pay less in interest and it will enable you to free up the repayments for other purposes sooner.

In order to pay off your debt as quickly as you can, you need to pay more than the minimum repayment each month – use your budget to identify how much extra you can direct to repaying your debt. This may mean short-term sacrifices for a longer-term stronger financial position.

Bigger, longer-term debts such as a home loan and car finance also attract costly interest but typically at a lower rate because the loan is secured by the asset. If you can afford to pay more into this debt, do, but you may need to tackle paying down this debt over a longer period.

4.  Build an emergency fund

You may be very disciplined and have put a lot of thought into your budget, but a financial emergency can upend your best laid spending plans unless you have an emergency fund. A job loss, a medical emergency not covered by health insurance, a family crisis, the insurance excess after an accident. If you do not have money for these kinds of expenses, you will find yourself skipping payments on bills, raiding your savings or making use of credit.

If you have money set aside for life's surprises, it can protect you from financial shocks and reduce stress.

If you are struggling financially, start with a small emergency fund and focus initially on your debt. After paying off your high-cost unsecured debt, building your emergency fund, should be your next priority.
 

5.  Set your goals

Once you have cleared expensive short-term debt, focus on your financial goals. What do you want to achieve with your money? You may want to save for a new appliance, put down a deposit on a house or a car, or save for a holiday. You may be worried about your retirement or your children’s education.

Every goal should have a target amount, a timeline and plan as to how you can achieve that goal.

Your goals should motivate you and give your money a sense of purpose. If you have named your goals and set up plans to achieve them, you are less likely to impulse spend and deviate from your budget because you will know the cost of doing so.

6.  Pay yourself first

If you want to save and invest to meet financial goals, you need to prioritise saving by making it the first item in your budget that you allocate money to before you start paying expenses. This is known as paying yourself first and will ensure that you build wealth over time.

Create this habit by setting up a savings account and automating a transfer into it on the same day you are paid.


7.  Protect yourself

Some financial crises are just too big to fund yourself. The loss of your ability to earn an income, for example, could amount to many multiples of your current earnings. But paying a premium for income protection or disability cover can ensure that should something happen to you, your future lifestyle is safe. If you have a family, life insurance, having a will and knowing how your estate will be wound up, can protect the lifestyle of your family should something happen to you.

Health insurance – particularly medical scheme membership – ensures you can get health services when you need them without facing crippling financial costs.

Short-term insurance also ensures you are protected against the loss of expensive things you own – your home, your car, the contents of your home, for example.  

Insurance is expensive and should be kept lean and reviewed often. But hoping something does not happen to you is a big financial gamble – one you should avoid once you have the means to insure yourself.