This post is the first of a series on four foundational habits that anyone can use to improve financial health. You can read the next one here.
There are a million ways to do anything, but my advice is always to start with small, manageable, and repeatable actions to build good habits. Having a good relationship with money has little to do with a high income and how much nice stuff you own and everything to do with living within your means and saving what you can.
Making big, sweeping changes all at once can set you up for disappointment when you inevitably hit a bump in the road. Instead, start small with actions you know you can manage and let those small victories build into something you can be proud of. Here are four easy to understand foundational habits that anyone can start using today:
Spend a little bit less than you want to.
Save a little bit more than you have been.
Pay off debt a little bit faster than you need to.
Invest what you can when you can for the rest of your life.
I consider those four topics – cash flow, saving, debt management, and long-term investing – to be foundational to good financial health. I start each client relationship with a review of those fundamentals to establish a baseline (where are you right now?) and identify easy to understand practices that can help build the habits that will take you where you're going. There are certainly other important topics in personal finance, but getting those four right will set you up for a lifetime of positive financial health.
So let's dive into the first topic and identify a few easy to understand ways to build good habits!
Spend a little bit less than you want to.
Morgan Housel calls wealth "the ability to do what you want, when you want, with who you want, for as long as you want to", and that's as good a definition as any I've heard. Another way to think of wealth is as potential: the opportunity to change your circumstances using money. So how do you get there? The first step is mastering your cash flow.
The basic formula for cash flow is this:
What You Earn - What You Spend = What You Can Save
Your savings represents all the potential you will ever have to change your circumstances in the future. In other words, your ability to save directly correlates to your ability to build wealth. I'm going to make the argument next week that saving could actually come before spending in terms of keeping it easy, but there is a compelling reason for starting with spending: earning and saving often depend on circumstances, but spending is completely up to you.
Yes, you can get a raise or take on more work or increase your fees to bump up the income side of the equation. But all of those options are at least partially out of your hands. Will your boss agree to a raise? Will your clients hire you more often or pay you more money? That can certainly happen over time, but the "when" of it is not up to you.
Spending, on the other hand, is in your control and you can change your spending today to improve your financial future. I'm never going to tell anyone to live like a monk for the next 30 years so they can finally live their dreams when they are old and rich. You've got to have some fun along the way! But I strongly believe that nearly everyone can spend a little bit less without impacting quality of life in any noticeable way. Let's start there!
Here are three ways that you can take action today to reduce your spending:
Choose 2-3 expenses that you can skip for a month, then evaluate the impact on your life. An easy place to start is subscriptions like streaming video, music, or news services. If the difference is minimal, consider eliminating those expenses indefinitely. If you decide to bring an expense back, look for another one to skip next month.
Set a "double check" policy – and a time delay – for any purchases above a pre-determined dollar amount. For example, you could say that any purchase above $50 requires a second evaluation after 30 minutes. This gives you an easy to remember rule to help prevent impulsive purchases. For even more accountability, ask a close friend to be the one to give the thumbs up or down. It's much easier for someone else to be objective when it comes to your spending.
Wait until the end of the week to buy the items in your Amazon (or online retailer of your choice) cart. With one-click purchasing available at all times through our smart phones, there is very little separating impulse from action when it comes to online shopping. Add a little resistance by waiting until a specified day & time to review your cart and make purchases. What seems super exciting in the moment might seem totally unimportant after 6 days.
Good luck! Let me know if you have any helpful tips & tricks for managing your spending that don't require pouring over a budget each month. The next topic will look at ways to keep saving easy. Thanks!
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals remove stress while taking control of their financial futures. As both advisor and accountability partner, we help identify current strengths and weaknesses, clarify and refine your long-term goals, and prioritize understandable, manageable, and repeatable actions to bring long-term financial well-being. Reach out today to take the first step.