9 Money Habits To Live By

by Darwin on October 14, 2009

Bad habits are tough to break. Fortunately, due to my upbringing, our family’s circumstances, discipline and good luck, I was able to enact some good money habits early on that have set our family up for success now, with contingency built in for unplanned circumstances.  I do believe that there’s a very strong correlation between what kind of financial environment someone grows up in that translates into how they handle their finances later in life. There are exceptions of course, but often times, a frugal person had frugal parents and a free-spending, keep up with the Joneses-type that is living above their means often grew up in a similar setting.  That’s not to say that people don’t exercise free will and have the potential to create their own destiny, but just like many other behaviors ranging from how you treat others, to your political beliefs, to your religious beliefs, etc., the apples often don’t fall far from the tree.  That being said, I’ve carried on some of the successful money habits I learned from my parents early on, as well as some that I’ve discovered on my own.

#1 Credit Cards – Never. Ever. Ever. Ever – pay a dime in interest payments to a credit card company.  This is one of the most fundamental pieces of advice you’ll hear over and over.  I can’t stress the importance of this rule more though.  In a nutshell, if you find yourself in credit card debt, there are a few key points to ponder when introspectively assessing how you go there.  First, you relied on credit to fund an expenditure that you could not afford.  It’s that plain and simple.  Emergencies do occur – that’s what emergency funds are for.  There are zero interest teaser rates (money for free, right?) – well, that comes to an end too, and chances are if the zero interest teaser enticed you, by the time you should have paid off that loan, you’ve been similarly enticed by other credit traps.  Moving on though, when paying interest on a credit card, you’re paying exorbitant interest rates.  You’re basically subsidizing every person that does pay their bills on time that the company loses money on.  You’re paying for the cash-back rewards I rely on by paying my mortgage off on time each month.  You’re paying the salaries of their employees.  You’re paying for high margin profits that flow to their bottom line.  You’re paying a rate that is currently 10 times more than what you can earn in a CD account right now.  These are rudimentary facts you’ve probably heard in one fashion or another, but it’s worth repeating.  You’ll never establish good savings habits, good investment habits – good life habits, if you get in over your head in credit card debt.

#2 Investing – Start investing early on with meaningful contributions to a retirement account.  As demonstrated in this example of why young people should start investing today, when comparing a 25 year old vs 35 year old starter, the difference is night and day due to compound returns – just that 10 year difference in start date makes all the difference in the world at the retirement finish line. While many people that are 65 now look back and say, “I wish I started putting away more when I was younger”, you probably won’t hear many 65 year-olds say “I wish I leased that BMW instead of buying a used Honda…I wish I was a tech early adopter and paid top price for the newest gadgets instead of waiting a year…I wish I always had the newest fall fashion from Banana Republic instead of wearing Gap and Old Navy”, etc.  With regard to your investment accounts, pay yourself first.  Set it and forget it.  If you’re a young employee and you are not contributing to a 401K plan, you really need to step back and consider what you can do differently in your monthly budget.  Surely, you can muster up at least 5% of that salary to at least optimize a company match or realize the beauty of tax-deferred compound growth.  Life is not just about instant gratification and having fun.  It’s also about discipline, planning and saving for a rainy day.  Think about some minor adjustments you can make on the expenditure side or ways you can earn some extra money on the side to allow you to set aside a little extra each month in your 401K or equivalent retirement plan.

#3 Emergency Planning – Aside from establishing an emergency fund (many recommend 6 months salary.  Frankly, I just don’t think that’s achievable for many people early on, but at least a few months’ savings in liquid assets is prudent), you must also consider your will, estate plan and near term tactical plan for your spouse and loved ones.  Here’s an example.  If you died tomorrow, would your spouse have access to your liquid funds?  Are your accounts held jointly?  Does he/she know your online passwords and where you have assets if you do the financial planning?  What I did was establish a password protected spreadsheet and stored all our assets, websites, passwords, total net worth, etc., so that if I died tomorrow, she would immediately have one less thing to worry about and say, “OK, so through the employer, there’s going to be a life insurance payment of xxx thousand, through supplemental insurance, yyy thousand, this much in the savings account, 401K, IRA, kids 529s” and so on.  She’ll know that there are enough liquid assets to sustain the current family expenses for several months, there’s enough set aside for a good chunk of college for the kids, etc.  I don’t want my wife to have to spend months with an overpriced attorney trying to sort out our finances when it was easy to organize up front.

#4 Cash – While we choose to use a cash back credit card for the majority of our purchases (not in violation of rule #1 since we’ve never paid a dime of interest or late fee to a card company) for various reasons (it’s also very easy to track where every dollar gets spent and plan how to reduce spending in certain categories in subsequent months; I’ve found tracking cash expenditures to be overly burdensome), it’s also important to have ready access to cash at all times.  I don’t carry wads of cash around with me, but I always have enough to cover an emergency where a credit card isn’t going to cut it, and I also carry that “hidden twenty” that I have busted out on occasion.  Having some cash on hand can save you from some embarrassing situations.  I’ve gone to pick up food before only to find that the place doesn’t accept credit cards.  So, what do I tell them if I showed up with just a credit card?  The alternative is often a conveniently placed ATM in their establishment with a hefty fee.  So, for the convenience of not having any cash, you’re likely incurring hefty ATM fees each year.  I can’t recall ever paying an ATM fee.  I don’t even know what they are these days, frankly.  But I don’t want to pay for an unnecessary service.  I also keep cash in the house.  There are multiple occasions where my wife hits me with “Oh, we oh so-and-so $50 for that gift we split for the shower” or we have to pay a repair guy or I want to buy something at a garage sale down the street.  Having no cash is just another sign of being stretched too thin.  If you can’t afford to always have a buffer of at least a few hundred bucks between your wallet and your home hiding spot, you’ve gotta question whether you’re living on the edge.  Emergencies do happen.

#5 – Bill Paying Practices – Paying bills is not very rewarding.  It’s pretty dull, it’s seeing money go out instead of come in, it’s supplanting time that I’d rather be doing something else.  But, I do it in an efficient manner that minimizes the pain and reduces the opportunity for errors, which can be costly.  I pay the bills twice per month via efficient batch processing.  I had our credit card bills set to be due at the same time each month early in the month.  Our mortgage is due mid-month.  Since I get paid at the end of the month, it’s like clockwork.  I go through and perform batch processing and bang out the majority of our bills right after the paycheck comes in each month.  I then loop back about two weeks later and hit any stragglers that just came in, any checks I have to write for the kids’ school stuff or whatever, and I also spend some time sending some money into different investment accounts if applicable that month.  Some people procrastinate and wait until the last minute – or worse, they’re late on bills because they didn’t establish a routine.  Missing a credit card payment can be terribly costly when considering late fees, interest, and a ding to your credit score.  Once, an insurance check was routed wrong and they went and flat out canceled my insurance immediately due to a single payment.  While it only took a phone call to straighten it out, it was still a hassle wasting time on the phone and unnecessarily caused me undue stress.  By establishing good payment practices early on, you’ll save yourself money and anxiety.

#6 – Don’t Squander Windfalls – While life is full of unexpected expenses and emergencies, occasionally, you’re going to come in to some money that either wasn’t planned or was planned, but comes in a lump sum sporadically.  An example of a planned lump sum may be your annual bonus or a sizable tax refund.  An example of an unplanned windfall may be an inheritance or settlement from an auto accident for instance.  The thing is, while you may have an adequate plan in place for how to deal with an unexpected outflow of cash due to an emergency, do you have a plan for what to do for sizable inflows?  Unfortunately, for many, the first instinct is to spend it.  It’s good to think about what you would do with large sums of money that come in during these rare occurrences.  Perhaps your immediate reaction is to put it into a savings or money market account.  Perhaps if you’re carrying high interest credit card debt, it makes sense to pay that down.  A good approach may be to split it up into a few buckets – perhaps save a little, put some aside for your emergency fund, pay some debt, invest a little, and perhaps use a little for fun.  Everything in moderation.  But at least have a concept in mind now about what you’d do in this situation rather than reacting impulsively when the time comes.  Employing strategy over instant gratification is the key.  This article from one of my favorite bloggers may give you some additional ideas on what to do with $1,000.

#7 DIY – There are probably many things you’re paying for now that you could be doing yourself and saving money.  This really becomes an exercise in personal priorities and balance.  For instance, I pay for dry-cleaning because I hate to iron and my wife laughs in my face when I recommend she take this on.  To be honest though, my job is quite virtual and I get away with wearing the same pants a few times per week and I wear short-sleeve button downs 3/4 of the year.  So, all in all, the dry-cleaning bill for long sleeve business attire is relatively low – but this is something we could save money on if we had to.  I mow my own lawn.  For some, taking an hour or two every week or so isn’t worth saving the $40-$60 you might be saving.  Things that don’t tend to make DIY sense to me include changing your own oil and other repairs that are reasonably priced and require a fair amount of time or expertise.  The point of this one though, is to really just go back and assess what the various services are that you’re paying for and ask yourself whether you really need to pay for these.

#8 Eliminate Money Leaks – Surely, there are some recurring expenses you’re incurring that are unnecessary.  I have them and as I type this, I’m thinking through how I’m going to go about plugging these holes.  Some of my recurring expenses include a gym membership, a newspaper delivery, my daily lunch bill, coffee, etc.  While I’ve taken action to greatly reduce my outlays by saving money on coffee and I’ve completely eliminated the ridiculous water bottle ritual, I’m continuing to use the gym routinely so it’s worth it.  The newspaper is debatable.  While we do use the weekly circulars for coupons, I’m considering switching to an online coupon-printing expectation and doing away with the paper since I can pretty much get all the same content and more online for free.  There are a few others that don’t come to mind just yet – but I’m sure you’re thinking of yours already.  Do you need to pay these fees every month?  Are there ways to modify or eliminate these expenditures?  If allowed to go unchecked for years, these money drains equate to a substantial loss of savings/investing opportunities.  It’s worth revisiting this concept annually at least.

#9 Your Car Does not Define You – This is a classic that all young people should prescribe to (and not forget as they age).  I did and it has paid dividends for years.  As I stated in my take on the new normal, there is no correlation between actual income and the type of car you drive.  As much as people tend to think there is, as they grow older and wiser, they learn that often times, very wealthy, practical people drive Hondas and very impulsive, indebted people lease BMWs.  To gawking twenty-somethings, the BMW may scream “Rich!”.  To me, it is met with indifference.  If people simply stopped trying to live up to what they believe to be social expectations around the type of car they drive, they could easily save thousands of dollars per year.  It doesn’t mean you have to drive a piece of junk, but something reasonable.  Out of college, I drove my uncle’s rusting Honda with over 100,000 miles on it while my friends leased and bought $40K+ cars.  I was the first to buy my own house – during my first year of employment.  That move turned out to be the best investment I ever made since it turned into a six-figure profit when I sold and had enough for a 20% down payment on a larger home as our family grew – plus some extra investment dollars.  If I had been shelling out thousands per year on a hot car instead, it never would have happened.  How, we drive newer cars, but again – practical cars – and I negotiated hard to save thousands on a new car purchase.

It takes time to break social norms and expectations but people quickly stop judging and become indifferent to your frugal moves as long as you don’t go overboard and don’t actually become “cheap” to the point that it impacts your relationship.  Skimping on reciprocating or your fair share of the dinner bill is cheap.  Living with your means and making prudent financial decisions can be frugal.  Big difference.  I can’t guarantee that these steps will solve everyone’s problems, but they’ve been highly effective for our family and I hope to impart the same behaviors to our children in an ever-increasing materialistic society.

What are some of your Favorite Money Habits?

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* Help Yourself, Not The Economy
November 17, 2009 at 8:01 pm

{ 5 comments… read them below or add one }

1 Financial Samurai October 16, 2009 at 3:19 am

My favorite money habit is to “go broke to win big” as I write on FS. The idea is to flush all your money away to different banks so you’re left with razor thin cash flow. This forces you to know exactly where your money is and live within your means.

If you work in finance for example, you could have a decent $120,000/yr salary. But, it’s the multiple bagger bonus you are hoping for. That has always got to be saved. Spend your salary, save your bonus!

See you over at FS one day!

Best

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2 Kevin October 16, 2009 at 1:29 pm

Good article. I spend way too much money on dry-cleaning. It drives me freaking nuts. I work in an office every day but its only a few times a month that I actually see clients so I try and make the argument that I don’t need to “dress up” every single day. The argument seems pretty futile tho w/ my company…

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3 Evan October 16, 2009 at 3:30 pm

Kevin,

This has nothing to do with the article but you have to check out the iron-less dry clean free shirts from Brooks Brothers. They are amazing and never have to be pressed or dry cleaned! Couple bucks more but not much more – will make your money back in a couple months vs. buying a new normal shirt.

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4 FB @ FabulouslyBroke.com October 17, 2009 at 9:09 am

A definite check for me, on all the points above.

My parents didn’t give me or show me ANY money habits, and luckily that was what pushed me to learn all of that on my own before it was too late (like at the age of 65, about to retire).

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5 BadBoysDriveAudi March 16, 2010 at 12:17 am

With regard to #5, you might want to automate your batch processing. My mortgage is paid biweekly automatically. All utilities (and anything else that could be automated) are paid automatically to one credit card. The credit card bill is due in the last week of the month and that’s automatically paid out of my bank account. I have 60 days to itemize and check statements to spot any billing errors. Anything that can’t be paid by the card gets set to be paid automatically from the bank account.

With all that automated, I don’t even think about bills. I hated the process of gathering everything, writing checks, seeing all the cash outflows month after month. Now I just set everything up and let it run like clockwork. One day a month, I sit down and itemize my credit card statement to look for irregularities. It’s pretty easy too since I sync everything into Quicken. I can spot an overbilling on utilities or identify a fraudulant credit charge and take appropriate action in short order.

Freeing up that time allows me to spend it where I want…playing a new game, spending time with friends/family, researching a new investment, etc.

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