Below are a few common financial struggles that people admit to:
“I need new brakes but bought concert tickets instead.”
“I want to buy a car but my extra money goes to clothes and make-up.”
“I just got my $110 tax refund for textbooks but bought a ring.”
Sure, each of these people displayed short-term thinking superseding long-term desires; and probably a lack of any budget. But in my opinion, one of the easiest ways to turn things around is to begin with tiny financial habits.
There is a general pathway of building sustainable financial habits, the first one of which is a routine of saving money. As kids, we may have put change in a jar, advanced to setting aside some allowance dollars, and then at some point get a small savings account at a bank. This is where there are two paths, one group has the self-discipline to continue saving money into their teens and twenties, while the other group, who don’t have as much self-restraint, blow through every penny they get their hands on.
In my experience, the best way to get back on a track of saving money is to set a percentage of all income into a location where you do not spend the money. It can be an envelope, in a safe, or a savings account; any place where you normally do not access for spending money. The percentage of money that you save is important. I have found that people who start saving less than 3% get too discouraged and quit after a few months when they realize that their savings isn’t amounting to much. People who have never saved before and begin by trying to save at a rate of 10% or more normally find that percentage too restricting and painful. So they abandon saving money as well within a few months. In my opinion, it is best to start at a ratio between 3% and 10% when starting from scratch. The money that is saved must be viewed as going into a one-way vault: money can go in but it can rarely come out. The only person who can stop your savings from being blown on short-term desires is you.
Once you have begun the habit and have found a comfortable percentage, you need to slowly ratchet up your savings rate to something meaningful. For example, save 5% of your income as a reserve for an emergency fund and then larger expenses. Plus, save an additional 15% of your income into savings for retirement, hopefully into a qualified tax-deferred account like a Roth-IRA.
The tiny financial habit of saving only 3% of your income, and then slowly ratcheting up that rate over time is the mechanism to build financial stability for yourself. This savings habit is one that you will want to maintain over your lifetime. This habit builds your net worth and will provide you many financial options in your future, but they are only available to those who remain vigilant with their savings plans.