Building Good Habits for Everyday Financial Success
How many times have you had the passing thought of “I’ll sort out my finances later”, however, you never get around to even defining what this means, let alone achieving this colossal goal? Here at Pursue Wealth, we get excited about spending schedules and banking structures but we understand the vast majority of people don’t feel the same way.
The stress of understanding personal finance compounded with vague goals like “I want to be rich / I want to be a millionaire / I want to be financially free” can quickly lead to frustration, and consequently, poor money habits that end up serving the opposite purpose of your goals. Often times, the unhealthy financial behaviours you fall into become your everyday norm, and it’s not until you’re knee-deep in consumer debt that you think to reassess how you use your money.
Charles Duhigg, best selling author of “The Power of Habits”, states 40-45% of our days are driven by automatic behaviours. This means we are spending roughly half our waking hours running on auto-pilot without thinking about how certain processes affect our lives in the long term. This can be devastating for those that have neglected financial hygiene and don’t have robust systems or healthy spending habits in place. However, habits can also be amazing for people who are prepared and have their money appropriately set up to optimise everyday spending and saving for future goals.
At this point, you might be asking, “What are some unhealthy financial habits, and do I have any?” With our unique position of being financial advisers, we’ve had the opportunity to experience working with members from both ends of the spending spectrum. Many people initially come to us feeling lost about their cashflow, and it’s a topic we feel strongly about because it sets the foundation of every financial plan.
Unhealthy Financial Habits
Ignorance is not always bliss. When it comes to your money, it is vital to know the details of both your income and your spending.
People who live pay check to pay check, or are guilty of overspending, may sometimes choose to be blind to the facts. However, this is a completely counterproductive strategy to managing your cashflow and will not get you any closer to paying off credit card debt or getting in control of your spending.
If you’re a high income earner, you are also prone to financial ignorance, as you may think whatever you earn will always be enough to meet your needs. However, this is not the case, and not knowing will often lead to over consumption in areas that don’t align with your values.
Regardless of your salary or how many income streams you earn, having a clear picture of your income is important for ensuring you are living within your means.
We experience this regularly at Pursue Wealth, when members reschedule their first meeting with us, or existing members avoid their annual financial review (yes, we are calling you out!)
It’s a normal human response to avoid pain, and we know that confronting the unknown or owning up to some money mishaps can be rather uncomfortable, especially if you grew up learning that money is a ‘taboo’ topic.
However, we believe you grow the most outside your comfort zone and it’s important to educate yourself, and have difficult money conversations with your loved ones (and yourself) when you need to.
In the day and age of credit cards and Afterpay, it’s not a surprise that many Australians struggle with overspending. The instant gratification you receive when making a purchase is hard to say no to, however, splurging can have huge ramifications on your future lifestyle if a significant portion of your monthly income goes towards paying back consumer debt rather than achieving your goals.
Many people have never thought about ‘excessive saving’ as an unhealthy habit, however, this behaviour can also be detrimental if it is hindering you from living a meaningful life, or stopping you from purchases that would bring you value.
At Pursue Wealth, we are all about balance. Although it is important to save money, there is little use in hoarding money for no set purpose. If there is a more appropriate use for your money now, then use it to improve the quality of your life. At the end of the day, money is a resource that can help you achieve your desired outcome, whether that’s saving for your first home, investing for your family’s future, or having an early retirement. Money itself is not the outcome.
Don’t cut out your morning coffee if that’s what you look forward to everyday. Instead, put it in your budget!
Everyday Financial Success
Do not panic if you identified any of the above behaviours in yourself – it’s not uncommon to experience at least one, and becoming self-aware is the first step to addressing the issue.
The most exciting part of financial advice for us has always been in helping our members achieve their dreams. We centre our entire financial plan around our members’ lifestyle goals to ensure their money is working towards the life they envision for themselves and their family.
For you to start on your journey of everyday financial success, we break down what “sorting out your finances” looks like in a simple 3 step process. Note that we say ‘simple’ and not ‘easy’ because we understand money can be a daunting topic when you’re diving into personal finance for the first time (or trying to do this again). However, once you attain a solid grasp of these three elements, you will have the ability to confidently approach your finances and start a productive conversation with yourself and your loved ones on how to start getting ahead of the game.
Step 1) Goal Setting
As cliché as this might sound, setting goals is the number one most important step to working out your financial plan. Don’t try to skip this stage because you think it sounds “too fluffy” and you’re “ready to get right into the numbers”. Without a goal, your numbers have no meaning.
A common guide people use for goal setting is the S.M.A.R.T goals model. Your goals should be specific, measurable, achievable, realistic, and timely. We encourage you to delve deep and question yourself like never before. If you’re in a relationship, try this exercise with your partner – you may be surprised how different your visions are for the future. If you have multiple goals, put it on a timeline and determine which ones you prioritise.
A common goal we hear is “I want to be financially free”, but this means so many different things to each person that walks through our front door. If this is your goal, think about what would make you feel “free” and try to imagine a day in your life where you have already achieved this goal. Then turn it into a S.M.A.R.T goal.
E.g. “My partner and I want to have a fully offset family home in the Inner Western suburbs of Melbourne (worth $650k) and a holiday home in Rye (worth $450k) by the time we are age 45, so we can spend quality time with our children, feel financially secure, and have the flexibility to experiment with our careers.”
Just because the goals you’re working towards are specific, doesn’t mean they can’t change. In the meantime, this realistic image you have painted will motivate you to invest and save for your future self rather than indulging on modern day luxuries.
Step 2) Spending Schedules
As we’ve previously mentioned, money is only a resource we use to achieve our goals. Like other resources, it’s important to allocate it accordingly to not only optimise your current spending but also ensure some money is being put aside for your future goals. Finding this healthy balance can be difficult at first, but it starts by determining how much you currently earn and spend.
This is arguably the most gruelling part of the process for some people. If you have never looked at where your money is going, this can be an interesting exercise and you may learn a lot about yourself in return. There are several ways to go about doing this; for example, you can look at previous bank statements and categorise every line item, you can download a budgeting app, or keep tabs on all your expenses for the next few months. This government budgeting tool is useful for first timers if you’re unsure what categories to look out for.
Once you work out your current spending schedule, look at the data and ask yourself some questions.
- Do you have a monthly surplus or deficit? Are you living within your means?
- What’s your biggest expenditure category? Does this align with your values?
- What adjustments can you make to optimise your spending?
- Maybe you spend more on entertainment and eating out than you would like?
- Maybe there are unused gym memberships or online subscriptions you can cancel?
- Maybe your credit card is propelling you to do more online shopping than you need?
Then create a new spending schedule, putting in the amounts you would ideally like to spend on each category (be realistic!) and allocate any surplus towards the goals you created in Step 1. For example, if your goal is to go on an annual holiday for $5,000, include a line in your spending schedule of $417 per month for “Holiday Savings”.
Step 3) Banking Structures
This is where the magic happens. It’s one thing to give yourself a budget, it’s an entirely different story whether you actually follow it. When you have systems in place that enforce your spending schedule and limit the funds you visibly have access to, you remove unnecessary temptation and it becomes a lot easier to follow the plan.
In a previous blog post, we dissected each category in our recommended banking structure, and explained how it could assist in automating your savings process. In summary, we have three broad account types: Spending, Savings, and Investment. Spending accounts are further categorised into a bills buffer (we generally suggest retaining a balance of 1 month of bills), an everyday and lifestyle account (for day to day expenses), and loan repayment accounts. Savings accounts include emergency funds (we suggest 1 month of income), and any other goals you might be saving for (e.g. holidays, new home, new car). Investment accounts are for your long term goals.
By having a different account (and even different banks) for each of these categories, you can ensure every dollar you earn has a purpose. As a result, you are less likely to transfer money from your savings account to your spending account, because you will be actively compromising on your personal goals. To turn this banking structure into an automated process, make use of scheduled payments and direct debits so that everything functions harmoniously in the background. If you make it a habit to only use the money coming into your everyday and lifestyle spending accounts, you have set yourself up to save and invest on autopilot! Hooray!