Your financial position is almost exclusively a byproduct of your habits, especially when you take the long-term view. Practice good habits, and you’ll likely be successful. Practice bad habits, and you’ll inevitably hit a low point – though even low points offer opportunities to recover.
What are the best and worst habits to consider, and how should you employ them?
The Power of Habits
Your habits have the power to control your destiny, and this is especially true in the world of finance. Imagine a simple scenario in which you spend more money than you make, ultimately spending $100 a month more than you have coming in. This simple habit may not seem like a big deal in isolation, but it could result in the accumulation of $1,200 in debt every year. With interest and steady accumulation, this can eventually result in five or even six figures of debt, leaving you with minimal financial flexibility and a very difficult situation to correct.
Of course, even if you do find yourself in a bad, seemingly inescapable financial situation, there are always options available to you. While it shouldn’t be the first option you consider upon experiencing financial distress, bankruptcy is a viable option.
If you meet with a bankruptcy attorney, they can help you understand the bankruptcy process and review the various types of bankruptcy that are available to you. Moving forward, you could have a viable fresh start, allowing you to rebuild from scratch, or nearly so.
That said, it’s much better to work proactively with good habits to avoid this type of circumstance in the first place.
Good Financial Habits
Let’s start with some of the best financial habits you can adopt:
· Budgeting. Budgeting is arguably the most important financial strategy you can adopt, because it allows you to control almost every aspect of your finances. You need to fully understand how much money you’re making, how much money you’re spending, and where you’re allocating your resources. At the very least, you should have a strict monthly budget to help direct and contextualize your spending.
· Exercising frugality. One of the most common (and most important) pieces of financial advice is to live below your means. Essentially, this means spending less money than you make. Sometimes, it requires sacrifices, such as moving to a cheaper area or a smaller house. But as a result of living below your means, you’ll be able to accumulate savings that can eventually lead you to wealth.
· Saving. It’s important to save the extra money you have left over at the end of each budgeting period. This way, you’ll be free to use it however you see fit, such as covering emergency expenses or investing.
· Investing. Eventually, you’ll want to invest your extra proceeds in assets capable of appreciating in value, generating income, or both.
Bad Financial Habits
There are some bad financial habits to be wary of as well:
· Spending blindly (or living above your means). One of the worst financial habits to adopt is living above your means, or spending more money than you make. If you’re not careful, this can lead to devastating consequences down the line.
· Racking up bad debt. There are some types of good debt, but almost any debt with high interest is bad debt. Accumulating bad debt makes you vulnerable to the worst effects of compound interest, eventually causing you to accumulate debt in a way that spirals out of your control.
· Making late payments. Avoid making late payments altogether. A single late payment isn’t going to kill you, but if you miss payments consistently, it can greatly damage your credit score.
· Living paycheck to paycheck. Sometimes, you can’t help living paycheck to paycheck. But this is a sign that you need some kind of financial intervention, such as budgeting more strictly, if you want to succeed in the long term.
Changing Your Habits
Changing any type of habit is difficult. But it becomes much easier when you employ strategies like the following:
· Start with what you can control most. Focus on the habits you can control the most. You may not be able to multiply your income overnight, but you can certainly cancel your streaming subscriptions at any time.
· Commit. Once you make a decision to adopt a new habit or stop an old one, stick to it.
· Employ consistent standards. Be almost religiously consistent with your new standards.
· Reward yourself. Make sure to take the time to reward yourself for doing the right things.
Changing your financial habits is tough work, especially if you don’t have much experience with personal financial management. However, once you learn to recognize the best and worst habits available, you’ll be primed for financial solvency and, eventually, wealth accumulation.
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