Start Saving by Improving Money Habits

Most of us have money habits and attitudes we are not even aware of that profoundly impact our financial lives. For example, some people become very anxious about buying big ticket items but won't think twice about spending $1,500 a year on daily stops at a coffee shop. They just don't think the little things add up. Alternatively, they might do a lot of impulse buying instead of budgeting and shopping for the best deal. The brain gets a jolt of happy chemicals when we buy things and is very good at convincing us the purchase is a rational one. However, when we can't cover the bills or when an emergency pops up, all those happy chemicals drain away.

If we have financial goals we never seem to reach, we need to begin by recognizing and reconfiguring our money habits.

Know Your Spending Cycle

Cycle 1: Earn/Spend/Earn/Spend

This is living paycheck to paycheck. You spend your money as fast as you earn it and there's never enough for savings or investments.

Cycle 2: Earn/Spend/Borrow/Spend

You know you're spending beyond your means, but you can always justify it. Your brain convinces you the deluxe model is a better value, even though you can't afford it; you need the trip to Paris; you should consider the bags full of Gucci clothes an investment in your career.

Cycle 3: Earn/Spend/Save

You understand the concept of budgeting and saving and really want to do it, but there never seems to be enough money for anything but survival. You have the vision; you're just not making the progress you want.

Cycle 4: Earn/Save/Spend

Before you buy a single stick of gum with your paycheck, you make sure a certain amount goes into your 401K or other retirement accounts, your savings account, your emergency fund, and other things like a life insurance policy. You pay yourself first. Many people say they can't afford this. They have bills to pay. However, experts argue that if you have to figure out how to pay the electric bill, you'll get creative and frugal and find a way. Most people are less motivated to squirrel money into a retirement fund until they're aging, and they've missed an opportunity.

Separate Needs and Wants

This is a lot tougher than it sounds. As we mentioned, the brain can easily convince you that you "need" something. In fact, scientists discovered a decade ago that we make unconscious decisions about 10 seconds before we know what decision we made. So maybe it's a good idea to write down a list as to what is actually a need, like bread, and what is a want, like the freshly baked artisanal bread that costs four times as much. You might need a car but want a new sports car.

Make this list when you're motivated to change your financial life and keep it on hand when you're tempted.

Write down your goals

What do you want from life? To pay off student loans? Freedom from stress? Travel? The opportunity to change jobs or cities if you want? A house? A family? Maybe you want to retire at 50?

Figure out what you want and what kind of financial investment or commitment that goal requires. That will probably take some research.

Then ask yourself, what are you doing to get yourself in a financial position to reach that goal? Are you saving? Are you working extra? Do you look for sales, freebies, or inexpensive alternatives when buying things?

It might be wise, for a while, when you're looking to buy something you don't really need, consider whether you want it enough to put your goal off a little bit longer.

Break your goals into chunks

Staying motivated to achieve long term goals is difficult. So, if you want to save $10,000 by the end of the year, you must save $833 a month, or (if you get paid bi-monthly) $416.50 a paycheck. What do you have to give up for that goal?

If that's still too hard, sign up for a program—either through work or on your own—that saves money for you. That might be a 401K, or it might be an app like Acorns or Stash. These make it easy to put money away without missing it and exciting when you do see the results after a few months.

Track your spending

Tracking doesn't mean you have to carry a little notebook with you and write down whenever you buy a doughnut. However, if you use software that tracks your spending, like Mint, you can see your trends. Where is your money going? You might be shocked to realize how much is going to the corner convenience store, for example. This would probably illuminate some of the changes you really need to make.

Pay off credit cards every month

About half of Americans carry a credit card balance and the average interest rate on those cards these days was over 17% and climbing at the start of 2019. Just using a credit card that you don't pay off every month is like poking a hole in your pocket to watch the money drain out.

Make a budget

Again, with modern software, this isn't hard. It can take an hour or two once you download transactions, to make sure everything is marked correctly and the expenses to your dentist aren't in the "Groceries" category. However, once it's set up, most software can help you stay aware of when you've spent outside the lines so you can make better decisions next time.

Know your triggers

When are you most tempted to blow money? When you've had a hard day? When a friend bought something—a laptop, a couch—that you think makes yours look bad? When you have a windfall of cash like a bonus or tax refund? Pay attention to what triggers your desire to spend outside your budget and have a plan to deal with it. For example, if you are triggered, permit yourself to buy a small treat, less than $20. This may give your brain the sense of reward it was looking for without blowing your budget.

Changing your habits is hard. In the interest of saving energy, your brain is wired to keep habits static. If you really want to become a master of your financial future, you have to be prepared to deal with emotional ups and downs. The good news is that eventually, the emotions will stabilize and so will your finances.