“We are what we repeatedly do. Excellence then, is not an act, but a habit.” – Aristotle
While you can cut costs here and there, the real, lasting changes won’t come until you change your habits. If you currently give in to impulse purchases on a regular basis, for example, you’ll still spend a lot of money despite making numerous cuts in other areas.
An important long-term strategy is to create new, sound financial habits, one at a time. See The Power of Less for more on creating new habits. Use the effective habit-change techniques in the book to change one habit at a time. Here are some important habits to form:
1. Make savings automatically
This should be your top priority, especially if you don’t have a solid emergency fund yet. Make it the first bill you pay each payday, by having a set amount automatically transferred from your checking account to your savings (try an online savings account). Don’t even think about this transaction – just make sure it happens, each and every payday.
2. Control your impulse spending
The biggest problem for many of us. Impulse spending, on eating out and shopping and online purchases, is a big drain on our finances, the biggest budget breaker for many, and a sure way to be in dire financial straits. The first step to controlling this habit is to monitor it and become more aware of your urges. Then create a 30-day ban on impulse buying and focus on not buying anything other than necessities for one month. After that, create a 30-day list … anything you want to buy other than necessities goes on the list (with the date it was added) and you can’t buy it until 30 days later.
3. Evaluate your expenses, and live frugally
If you’ve never tracked your expenses, try the One Month Challenge – track your expenses every day for a month. Then evaluate how you’re spending your money, and see what you can cut out or reduce. Decide if each expense is absolutely necessary, then eliminate the unnecessary.
4. Invest in your future
If you’re young, you probably don’t think about retirement much. But it’s important. Even if you think you can always plan for retirement later, do it now. The growth of your investments over time will be amazing if you start in your 20s – and yes, even if the market isn’t great, it will recover and eventually start growing again. Start by increasing your 401(k) to the maximum of your company’s match, if that’s available to you. After that, the best bet is probably a Roth IRA. Do a little research, but whatever you do, start now!
5. Keep your family secure
The first step is to save for an emergency fund, so that if anything happens, you’ve got the money. If you have a spouse and/or dependents, you should definitely get life insurance and make a will — as soon as possible! Also research other insurance, such as homeowner’s or renter’s insurance.
6. Eliminate and avoid debt
If you’ve got credit cards, personal loans, or other such debt, you need to start a debt elimination plan. List out your debts and arrange them in order from smallest balance at the top to largest at the bottom. Then focus on the debt at the top, putting as much as you can into it, even if it’s just $40-50 extra (more would be better).
When that amount is paid off, celebrate! Then take the total amount you were paying (say $70 minimum payment plus the $50 extra for a total of $120) and add that to the minimum payment of the next largest debt. Continue this process, with your extra amount snowballing as you go along, until you pay off all your debts. This could take several years, but it’s a very rewarding process, and very necessary. More on debt elimination in the next chapter.
7. Use the envelope system
This is a simple system to keep track of how much money you have for spending. Let’s say you set aside three amounts in your budget each payday – one for gas, one for groceries, one for eating out. Withdraw those amounts on payday, and put them in three separate envelopes. That way, you can easily track how much you have left for each of these expenses, and when you run out of money, you know it immediately. You don’t overspend in these categories. If you regularly run out too fast, you may need to rethink your budget. This isn’t an absolutely necessary habit, but one you might find useful.
8. Pay bills immediately, or automatically
One good habit is to pay bills as soon as they come in. Also, as much as possible, try to get your bills to be paid through automatic deduction. For those that can’t, use your bank’s online check system to make regular automatic payments. This way, all of your regular expenses in your budget are taken care of.
Remember to focus on one habit at a time!
Stay tuned for chapter 8 – Getting Out of Debt or download the ebook for free here.
About the author:
Leo Babauta is the author of The Power of Less and the creator and blogger at Zen Habits, a Top 100 blog with 80,000 subscribers – one of the top productivity and simplicity blogs on the Internet.
It will look like this: Thriving on Less – Changing Your Spending Habits