The Top 5 Financial Habits that Guarantee Your Success
“Live within your means and save.”
Boom! He drops the mike and walks off the stage! Ok, that encompasses the 2 Top Financial Habits…below I expand the list to 5.
Master these 5 and you master your financial life/your life
These habits are not rocket science. We all know them. We just have to do them. Understand how your mind works. You have two hemispheres in your brain – the left or rational side and the right or emotional side. Science and experience tell us that we cannot succeed until both sides work in harmony. Logically we all know that we should eat our vegetables, exercise and save money, but without the emotional right side of the brain that dominates our actions we will never consistently do these things. We have to jump-start the right or emotional side of our brain into compliance by giving it what it wants – some inspiration, fun, something to experience and look forward to. We have two ways of doing this. 1) Letting the right side of our brain control us by falling into its trap – “hey, eat that piece of cake, buy those shoes or golf club, you deserve it, you work hard…” or 2) getting it involved with the plan that the left side of our brain created. “If we can save $200 per month we can go on that trip that I know you like…imagine yourself sitting on that beach with a drink and a book…” We can forgo that piece of cake, shoes or golf club if there is a reward at the end. It is that simple. It is the science of how our brains work. Use this information to your advantage. A great book that provides some of the science behind this is Switch (How to Change Things When Change is Hard) by Chip and Dan Heath.
Have a Vision of what you want that inspires you to do what is needed. This is where many of us fail. We lack inspiration and motivation and spend money on things we “deserve” instead of saving for what we really want BOTH in the near-term and in the future.
Two essential habits:
Spend within your means. We all have different means. Stay within yours and you will be fine. It worked for our parents/grandparents and it will work for us. Below are quotes from my wife, Chris. When I was writing this document, I asked her “What are essential habits for financial success/success in life?” These are from random sources and possibly some from her own brilliance?!?
“Don’t bother keeping up with the Jones’s, they’re jerks anyway!” Unknown
“We spend money we don’t have on things we don’t want to impress people we don’t even like!” Unknown (Edward Norton is known to have said something similar – at least that is what Google told me ☺)
“Raise grateful kids that don’t have a sense of entitlement, you will save a lot of money and time negotiating with them.” Unknown (Christine Bartley?)
Think before you spend. Think about what you want to/need to spend at the beginning of the week or month and stay within that guideline. The dollar amount will act as a buffer, a guiding principle during the week or month. The shorter the time-frame, the better – e.g. you can break it down per day. The book Decisive by Chip and Dan Heath uses the term “trip wire.” For example, set a trip wire of a $3,000 per month for your credit card bill.
Two essential habits:
Sweep money from your paycheck/checking account to savings. Basically “Pay yourself first.” It sounds so Suze Orman trite, but it is an essential, uncomplicated key to building your success. How do you do it? Simple – electronically sweep money from your paycheck and your checking account into your retirement account and savings account(s). Pre-define your goals short and long term, do the math and then save that amount per pay period or per month.
Positive compounding is the eighth wonder of the world. An example:
Twin sisters, Jane and Sue, contribute $3,000/year to an IRA. Jane starts early (age 20) and only invests until age 30 investing $30,000 in total ($3,000 x 10 years). Sue starts later (age 30) investing $105,000 ($3,000 x 35 years). Jane, who started at age 20 and invested $75,000 less, ends up with $125,000 more at age 65 – $642,000 vs. $517,000 (@ 8% compound interest).
Two essential habits:
As best you can, use debt for appreciating assets (mortgage, education) and NOT for depreciating assets (e.g. consumer goods) Yes, a vehicle loan may be necessary.
Pay back your loans on schedule or faster. Negative compounding is a killer! Take the Jane and Sue positive compounding example in number 3 above and reverse it. For example: if Jane and Sue each had a $400,000 mortgage loan at 4% and Jane decided to pay back the loan over 15 years, she would have a monthly payment of $2,959. The total interest she would pay would be $132,575. If Sue decided to pay her loan back over 30 years, her monthly payment would be $1910. The total interest she would pay would be $287,478. Sue would pay $154,903 more over the life of the loan. That is real money even with inflation and paying back with cheaper dollars.
Take value into consideration. You do this when shopping for consumer items. Why wouldn’t you do this when investing? Because Wall Street wants us all to think it is always a great time to buy! They don’t provide us the information we need so we know when an investment is a good purchase or a poor purchase. We wouldn’t hire a sunglasses manufacturer to do the daily weather forecast so why would we want Wall Street to tell us when to buy?
Download Why Avoiding Large Market Downturns is Important from the Philosophy page of this website. This one-page easy to read document provides details on why value matters.
Robert Shiller of Yale won a Nobel Prize for his work on valuing stock market and real estate assets. Review his monthly update of the value of the S&P 500 when investing. It is available for free online. With this information in hand, adjust your allocation to stocks based on the markets over- or under-valuation. This is the Warren Buffet basic rule to investing. It is why he has had so much success. Keep it simple.
Bonus Habit – Have Fun and don’t take yourself too seriously!