When it comes to financial planning, many people start off unaware of how damaging their bad financial habits can be but also relieved to find out that they may have been practicing some good financial planning all along. So to help you spot your own financial habits, we’ve collected some of the top Do’s and Don’ts of financial planning to help you shift your mindset around good money habits.
As eye-opening as these tips can be, it’s always best to work with your qualified financial planner to customize your money-handling habits to fine-tune and maximize your financial outlook.
Financial Planning Don’ts
Let’s start with the top financial planning Don’ts to get your focus on the most damaging habits to avoid:
DON’T avoid tracking your expenses.
Expense-tracking apps exist for very good reason and can be very helpful in avoiding unnecessary expenses (that add up and drain your budget over time.) It’s fascinating for us to see that almost nobody tracks their daily, monthly and yearly expenses anymore.
We all saw our parents and grandparents sitting at the kitchen table or their desks, poring over their expense notes and notebooks, wisely in the habit of looking at those little $5 and $10 purchases, grocery shopping receipts and bills. It’s a habit they took on after seeing their own parents pay mind to where their money is going.
During the Great Depression and after World War 2, tracking every expense was a necessity to make sure there would be enough money left over at the end of the month, and perhaps knowing that the expense ‘reckoning’ would soon occur kept them from impulse purchases and other waste. It was a system that worked and in many cases, kept households going.
Rarely do people know what they spend. In fact, 95% of people don’t know what they’re spending and where. Mindlessly shopping and depending upon auto-pay for some bills can drain your bank accounts and surprise you at the end of the month when you happen to glance at your bank balance, wondering where your money went. Without that expense ‘reckoning,’ there’s very little to keep you from over-spending.
People often don’t feel the need to account for every purchase, thinking that they have a default savings auto-paid every month and they always have their credit cards to fall back on if their checking account dwindles. Without tracking your expenses, you could spend more than you should, leaving you with less money to put to your advantage in savings and investments.
DON’T live above your means.
This Don’t ties into the one above, since mindless spending can lead you quickly into living above your means. In addition to big-ticket items like a too-large house or luxury car, it’s credit card spending that’s the real devil here.
Charging purchases to your credit cards becomes invisible spending with very little ‘reckoning’ on your mind. You might think, “Oh, I’ll pay it off later,” which eliminates any sense of ‘should I or shouldn’t I buy this?’ Paying minimums on your cards is tempting, and perhaps your habit, but compound interest works both ways, with credit card interest building and working against your goals.
If you didn’t have credit cards at all, you couldn’t live above your means. You’d only be able to spend the money you have, which would lead you into the habit of moderation. But these days, moderation is a foreign concept. Especially with credit cards tempting you to spend more for instant gratification.
Do you need to get rid of your credit cards? Not necessarily. They may be essential for emergencies. Just don’t trick yourself into thinking lattes and stylish new shoes are emergencies. We’re looking at a new generation of young people just out of high school and college who may not see their parents and grandparents keeping track of expenses at the kitchen table. They may not be learning to be mindful of their expenses, and soon they will pay a big price.
Millennials are reported to delay house-buying and family-starting because of school loans and credit card debt that make it very hard for them to get home loans. We sadly have an entire generation that has grown more comfortable having debt. The older generations saw credit cards as evil, and we can benefit from adapting more of that mindset and their wisdom in tracking even the smallest expenses.
DON’T dismiss savings.
Treat savings as one of your most important expenses, like your mortgage payment. You know you HAVE to pay your mortgage, or else. It’s a big Don’t to treat your savings as optional or minimal in importance (“I’ll put whatever I have left over into savings” becomes, “Oh well, I’ll do that next month” when mindless spending leaves you with almost nothing at the end of the month.)
Treat retirement as an important long-term goal, and save mightily for it. Because life, and inflation, will stand menacingly before you when you start thinking more about retirement when you’re older. And by then, there won’t be as much time to build up retirement funds for a comfortable lifestyle.
Financial Planning Do’s
The Do’s of Financial Planning have already been revealed in the Don’ts above:
DO track your expenses.
Tracking expenses makes you cognitively aware of where and how you are spending your money. By knowing, you can then take action in order to save for retirement. In many cases, households can cut 10% from their budget without impacting their standard of living.
Use any method that’s easiest for you, from using an app to carrying a small notebook in which you record all of your expenses, from medical costs to grocery shopping to lattes, gifts, even tips. It may be uncomfortable to begin this habit at first. But soon you’ll grow used to it, and perhaps even use it to feel more confident in your mastery over mindless spending when you see that you have more money left over at the end of the month than you did last month.
The ‘reckoning’ habit gets into your mindset, and you may be less likely to overspend or live above your means. When you see that extra money at the end of the month, you can adjust your automatic deposits into your savings account to boost your compounding interest amounts that build over time.
DO live within your means.
Again, it can feel uncomfortable when you start this practice, since you may have grown used to retail therapy, your daily expensive habits and trying to keep up with others’ lifestyles. But once you begin changing this habit, it will get easier, and your future self will thank your present self for making this smart change in your spending habits.
Your sense of need will change. You’ll recognize what in your expenses list is actually a want or even a not at all. And you’ll have a healthier relationship with your money, especially when you start seeing more in your savings and when your retirement dreams then start taking form earlier in your life.
DO establish or boost your savings for retirement.
Right now. Not tomorrow or next week. Now! And let time and wisely-chosen investments work better for you.
Your financial planner can help you set up new practices and support your evolving, improving money mindset to help you build a better, safer, more comfortable future. Starting right now.
For more on this topic, check out our podcast here.