Did you know that only 40% of Americans have enough savings to cover a $1,000 emergency expense? They contend that they would have to result in borrowing.
To some, this means asking friends or family members for a personal loan. For others, it means charging the expense to their credit card.
This should be a wakeup call that your financial security is in jeopardy and you need to do something about it – fast! This article explores 9 money habits that you can adapt to become financially independent in 5 years or less. Read on!
1. Great Money Habits 101: Create a Budget and Stick to It
Before you can even dream about financial independence you need to start by creating a budget. This is to help you figure out where all your money is going.
You’ll be able to identify what your bad spending habits are and replace them with some positive ones. Start by listing all your monthly expenses.
These include things like rent, utility bills, groceries, entertainment, loan installments, debt repayments and any other expenditure you would typically incur. This should paint an accurate picture of what you spend in a month.
Compare this against your income after deducting taxes. The whole idea behind this exercise is to see what you need to cut back on.
For instance, you might notice that you’re spending a huge chunk of your money ordering expensive takeout. It would make more financial sense to cook your own meals instead.
2. Save First and Spend What’s Left Over
Here’s how most people sabotage themselves when they’re trying to attain financial security. When they get their pay-check at the end of the month, they first pay off all their bills and put aside money for miscellaneous expenses.
These might include things like entertainment, grocery shopping, shoe shopping, etc. Then, if there’s any money left over, they might channel that into their savings or a retirement plan like a 401(k).
The problem with this system is that it doesn’t prioritize your savings. You need to restructure this so that, saving is the first thing you do before you spend money on anything else.
Set a realistic savings goal based on your income. For instance, if you decide to save $200 of your income every month, that’s exactly what you need to do first.
Treat this amount like any other bill you have. If you have any money left over, that’s what you can use to spoil yourself.
3. Don’t Spend What You Don’t Have
At the risk of stating the obvious, adopting good money habits means that you should always spend less than you earn. This is the basic principle of personal finance.
If you don’t master it, getting financial independence will be nothing more than a pipe dream. So, say for instance you earn $1000 this month.
You end up spending $1100. It means you now have a $100 deficit.
That extra money has to come from somewhere, right? So, you charge this amount to your credit card.
When you settle your credit card bill at the end of the next month, there’s interest you’ll have to pay on that amount. So now you’re more than $100 in the hole.
If you make this a habit you’ll soon realize that you’re now a couple of thousand dollars in debt and have to keep using credit cards to meet your day-to-day expenses.
This ultimately means that you’ll never have any money to channel towards savings. Learning how to control spending your money frivolously will prevent this from becoming your new reality.
4. Substitute Exorbitant Brands with Cheaper Alternatives
Human beings are conditioned to do certain things without any solid reason why. This is true for spending habits as well.
For instance, you may have grown up watching your mom use a specific brand of dishwashing liquid. Now as an adult you buy the same brand but can’t really explain why.
You continue to do it regardless of the fact that there are cheaper alternatives that are just as effective. It might be time to de-condition your mindset.
Carry out a household audit on the items that regularly feature on your grocery list. Next, indicate the price of each item and identify what is important to you versus what item brands you couldn’t care less about.
For instance, if butter is important to you, then you can keep using the brand you’re accustomed to. However, you don’t care about what brand of cheese you use in your mac and cheese, switching to a generic brand will save you a couple of bucks.
5. Cut Back on One Spending Category
Adopting a saving culture isn’t a one-off event. You’re in it for the long haul. With that said, it’s important to ensure your savings plan is sustainable.
An easy way to do this is to commit to spending less on specific spending categories. This is way more effective than trying to generate substantial savings in every single area of your life.
You might even find that one of your categories has redundant spending. A prime example of this would be gym membership fees. It doesn’t make sense to keep paying for your membership if you recently joined a sports league.
Or, you might be one of those people who have a gym membership just to use their pool. Getting a recreational pool pass at your nearby recreational center can save you loads of money.
6. Make Use of Discounts
If you always shop at a particular store, then you know the specific times they offer the best deals. “Buy two for the price one” is an example of a discount you should definitely take advantage of.
Subscribe to email updates from the shops you frequent often. That way you won’t miss out on any giveaways or clearance sales that they may have. Sites that offer discount coupons are worth checking out too.
Plan your weekly shopping trip around the days that have those offers. You might save as much $10 every time you go to the store.
Adopting better money spending habits also means buying stuff when they’re out-of-season. For instance, buying winter coats in the summer is way cheaper than purchasing the same coats at the end of fall. A little research before hitting the shops will save you a truckload of money in the long run.
7. Open a Separate Savings Account
Have a separate account for your savings or you might just end up spending it. If you saved $40 on groceries after you made a concerted effort to substitute various household items with cheaper alternatives, transfer that amount into your savings account.
You can also set up automatic payments on your transactional account to transfer a specific amount into your savings account every month. For instance, once you deposit your $1500 pay-check, and you had previously set out to save $200 every month, an automatic payments system will auto-transfer that amount into your savings account once that check clears.
8. Plan Your Purchases Beforehand
Instead of making a quick run to the drug store to grab a few items that you might need, try to plan out your shopping trips in advance. Make a list of all the items you’ll need and exactly how much they’ll cost.
Then, when you do go grocery shopping, only buy the items on your list. The rule of thumb is: If it’s not on the list, then you don’t need it.
This will save you from making impulse purchases and going over your budget. The same applies to online shopping purchases.
Determine what you need and if you can afford it. It helps to wait at least three days before buying something online. Your feelings about the item might change which could save you from a potentially impulsive buy.
9. Spend Your Bonus Cash Wisely
Whatever money you earn over and above your usual monthly income or any unexpected money you receive is bonus cash. You may have had a great month freelancing, or you perhaps took up a side gig to earn you some extra bucks.
While it’s perfectly alright to want to splurge on something you like, don’t spend it all. Make a point to save a percentage of it.
The other alternative would be to use your bonus cash to reduce your debt. The path to financial freedom largely depends on how fast you can offset your debts. Rather than spend your tax refund on something that won’t matter in a couple of days, how about using it to accelerate your debt reduction?
The Bottom Line
The secret to becoming financially independent rests in your ability to replace bad money habits with constructive ones. You have to be intentional about setting aside money every month and finding practical and sustainable ways to save money in your everyday life.
Start by making small changes in different areas of your life and adopt the principles outlined in this article. It’s never too late to secure your future.
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