Financial Habits

Financial Habits

What Are Habits?

Habits are automatic behaviors that we have learned throughout our lives. These behaviors have become so common that we perform them without thinking, unconsciously. Although we may not always be aware of them, habits have a significant impact on our lives, including our finances.

We all have habits, some good and some bad, that affect different areas of our lives. In this chapter, we will focus on financial habits—those behaviors that determine how we manage our money.

Bad Financial Habits

Identifying bad financial habits is the first step to improving them. Some common examples include:

• Not Budgeting: Many people don’t plan their income and expenses monthly, which makes them lose control of their money.
• Spending More Than You Earn: Using credit cards without considering your available budget can lead to spending more than you have, creating difficult-to-pay debts.
• Not Saving for Emergencies: Not having an emergency fund means that any unexpected expense can become a major financial problem.
• Impulse Buying: Buying things without planning or comparing prices can lead to spending more than necessary and accumulating unnecessary items.
• Paying the Minimum on Credit Cards: Making only minimum payments on credit cards generates high interest, which prolongs the debt and makes it cost much more.
• Not Planning for Retirement: Many people delay saving for retirement, which can lead to an uncertain future without the necessary resources for a good quality of life.
• Not Keeping Track of Debts: Not knowing how much you owe or to whom can cause debts to pile up, making it difficult to create a repayment plan.
• Taking Unnecessary Loans: Using loans for non-essential expenses or to maintain a lifestyle beyond your means is a dangerous practice.
• Ignoring Small Expenses: Expenses like daily coffee, unused subscriptions, or small impulse buys may seem insignificant, but over time they add up to a substantial amount of money.
• Not Comparing Prices or Looking for Deals: Buying without researching prices or taking advantage of discounts leads to paying more for products or services that could be obtained at a better price.

Good Financial Habits

Adopting good financial habits is key to improving our financial health. Some examples are:

• Create a Monthly Budget: Make a budget to plan income and expenses. This allows you to know exactly where your money is going and adjust when necessary. A good habit is to review the budget at least once a week.
• Save Consistently: Set aside a fixed percentage of your income for savings. Ideally, save at least 20% of your income, but any regular amount is better than nothing. Automate savings by transferring part of your salary to a savings account as soon as you receive it.
• Have an Emergency Fund: Establish an emergency fund that covers 3 to 6 months of essential expenses. This fund provides peace of mind and prevents the use of credit cards or loans in emergencies.
• Avoid High-Interest Debt: Limit credit card use and avoid paying only the minimum. If you already have debt, pay more than the minimum and prioritize debts with higher interest rates.
• Spend Less Than You Earn: Maintain a lifestyle within your real means. Avoid impulse purchases and reduce unnecessary expenses to maintain a healthy balance in personal finances.
• Smart Investing: Use part of your savings to invest. This could be in mutual funds, stocks, real estate, or even personal education to improve job skills. Investing helps grow wealth.
• Follow the 24-Hour Rule for Impulse Buys: Before making an unplanned purchase, wait 24 hours to evaluate if it’s really necessary. This habit helps avoid spending on things you don’t need and reduces impulse buying.
• Review and Plan Financial Goals: Set short-, medium-, and long-term financial goals. Regularly reviewing them helps you stay motivated and adjust if necessary to reach those goals.
• Track Daily Expenses: Keep a detailed record of daily expenses to identify spending patterns and areas to reduce. Tools like financial management apps can make this process easier.
• Take Advantage of Automatic Bill Payments: Set up automatic bill payments to avoid late fees and improve your credit score. This habit keeps finances organized and avoids unnecessary stress.

Identify and Evaluate Your Financial Habits

The first step to changing your habits is becoming aware of them. Carefully observe your daily actions and recognize which of them contribute positively or negatively to your personal finances. Make a list of all your financial habits, both good and bad, using the examples above as a reference. When doing so, be honest with yourself to ensure the assessment is as accurate as possible.

Then, categorize each one as either a good or bad habit, and note why you believe it’s positive or negative. The idea is to maintain and strengthen good habits and work to change or eliminate bad habits. This requires constant commitment and a conscious focus on improving your actions, always remembering that small changes sustained over time can lead to big results.

Small Changes, Big Results

You don’t need to make a huge transformation overnight to get the results you want. Small changes, when done consistently, can make a big difference in your finances. The key is to be consistent and repeat good habits until they become an automatic part of your life.

The Four Rules for Forming Good Habits

An effective technique for forming good habits is based on four rules:

• Make It Obvious: Place visible reminders or make the habit easy to remember so you don’t forget to do it. For example, if you want to record your daily expenses, put a sticky note in a visible place, like on your nightstand, to remind you to write down your expenses at the end of the day. You can also use your mobile phone to set alarms.
• Make It Attractive: Link the new habit with something you enjoy to increase motivation and make it more pleasant. For example, if you want to review your budget weekly, do it while having a cup of your favorite coffee or tea to make it feel like an enjoyable moment.
• Make It Easy: Simplify the habit as much as possible so there are no barriers that prevent you from doing it. Start with small actions. For example, if you want to start saving, start with a small amount that doesn’t affect your budget, like $10 a week, to make it easy to maintain.
• Make It Satisfying: Find a way to reward yourself when you perform the habit so that it feels good to do it and you want to repeat it. For example, every time you meet your savings goal, treat yourself to a small reward, like watching a favorite movie or enjoying a special meal.

It’s crucial to change our mindset towards a positive attitude to improve our financial situation. Forming the identity we desire is key: we must see ourselves and act like the successful person we want to be. If we don’t believe we can achieve it, we are unlikely to reach our goals. It’s important to decide what kind of person we want to be and then prove to ourselves that, with small actions, we can achieve the desired results. Additionally, we must focus not only on the end goal (such as eliminating our debts) but also on the process (e.g., paying a little extra on the monthly credit installment to reduce the term or interest portion) and on the identity we want to build (such as seeing ourselves as an organized and disciplined person who can achieve goals).

Creating Good Habits to Improve Your Finances

Knowing the theory of personal finance is useless if we don’t apply it in our lives and change our habits. It’s important to take action and use tools that make this process easier. For example, using a mobile app to track our expenses and income and compare them against our budget in real-time can be an excellent way to simplify managing our finances and ensure we are moving towards our financial goals.

If you want to learn more about habit theory, I recommend reading Atomic Habits by James Clear. It’s an excellent resource for improving all our habits and achieving positive changes in different areas of our lives.