We all face dozens of decisions that affect our finances. They range from minor to life-changing. The sum of these big and small decisions determines your bank account balance, financial stability, and financial security.
Yes, some people are born into wealth, and people do win the lottery. For the average person, whether you’re broke, rich, or somewhere in the middle largely depends on the quality of your financial decisions. The more financially sound choices you make, the better off your finances will be. Here, we offer 18 tips to help you be more financially sound.
You’ll have a tough time making financially sound decisions if you have no idea where your money goes. If you’re not currently tracking your spending, start. Tracking your monthly daily expenses will expose any money-wasting or destructive money habits.
Create a Budget
Starting a budget ensures that you’re monitoring your income and your expenses. A budget is not meant to prevent you from enjoying life. It’s simply a road map for spending money that reflects your priorities.
Identify and Eliminate Bad Money Habits
Once you start tracking your spending and creating your budget, you’ll probably spot some bad habits that need addressing. Bad financial habits include impulse spending, being late on bills, and overspending on credit cards. Eliminating bad spending habits saves money for your financial goals.
Live Within Your Means
Living within your means is one of the core principles of sound money management. Regardless of your income, you’re headed for trouble if your monthly spending exceeds your monthly income.
Living within your means means spending less than you make. You don’t necessarily need to live a more frugal life, but addressing bad habits and cutting expenses where possible helps. Budgeting and controlling impulse spending also help.
Review Your Budget Regularly
Income and living expenses fluctuate, and needs, goals, and plans change. Success with budgeting requires creating a realistic budget you can stick to and reviewing it occasionally.
Compare what you planned to spend in the prior month with what you spent. Note any categories where you went over or expenses you underestimated. Make any necessary adjustments. Devise a strategy for staying on or under budget for the next 30 days.
Set Financial Goals
Creating SMART financial goals is an excellent way to keep yourself motivated and on track. You might have short-term goals like saving for a down payment or your next vacation. Your longer-term goals might include starting a college savings plan for your kids or increasing your savings for retirement.
Break your short-term and future goals down into action steps. This will make your goals more manageable and make tracking your progress easier.
Use Cash for Daily Expenses
Use cash for your everyday living expenses. It’s too easy to rack up credit card debt or lose track of how much you’re spending when you use your debit card for everything. Handing over cash makes you much more aware of your spending habits and less likely to go overboard.
Prepare for Emergencies
Part of your financial plan should include being prepared for emergency expenses. You can’t know what tomorrow will bring, but you can bet life will throw you a few surprises, and those surprises often cost money.
Most financial experts recommend setting aside 3 to 6 months of expenses in an emergency fund. If your primary source of income fluctuates, say you’re a contractor like me or work on commission, then saving 8 to 12 months’ worth of expenses would be a financially sound decision.
Secure Your Family’s Future
Beyond having an emergency fund, if you’re married or have dependents, you should have a life insurance policy. Do this as soon as you can. After identifying any expenses you can cut, you might be able to use the money you free up for the premium on a life insurance policy. And don’t forget to create a will.
Eliminate and Avoid Debt
One reason many people struggle financially is credit card debt. Being saddled with high-interest credit card debt makes it hard to progress in other areas of your finances.
It’s not just carrying high-interest credit card balances that get people in financial trouble. Any debt, including mortgages, student loan debt, and other so-called “good debts, ” can lead to financial ruin. That’s why paying off debt and avoiding new debt is so important.
Make Savings a Priority
Savings should be one of your top priorities, especially if you haven’t established an emergency fund yet. You might think you don’t make enough to save, but you can save money on a low income. Focus on what you can put aside, not what you can’t, even if it’s only $5 a week.
Establishing a savings habit is more important than the dollar amount. You can always save more aggressively when your financial situation improves. Budget for savings just as you would for any other important financial obligation.
Automate Your Finances
When given a choice, we don’t always make wise decisions. We know a salad is healthier, but often, we go for the greasy cheeseburger instead. Automating your finances is one of the easiest financially sound decisions you can make when starting.
Set up transfers from your bank account for as many bills as possible. You can set them up to occur on or near your paydays so the money for bills goes toward your bills before you can spend it on other things. Also, set up automatic transfers to your savings, investment, or retirement accounts. That way, you pay yourself first without even thinking about it.
Invest for Retirement
What are your plans for retirement? Unless your ultimate goal is working daily for the rest of your life, you need a plan. If you’re young, you probably don’t think about retirement often.
But it’s never too early to start investing or retirement planning, especially if your company offers a 401k with employer matching. If your company retirement plan offers employer matching, take advantage of it. Employer matching is free and risk-free, making it a sound investment.
Make Healthier Choices
One of the surest ways to go broke in America is by getting sick. Medical bills can ruin even the best financial plan. Living a healthier lifestyle can save you money by preventing health issues. Making lifestyle changes will not be easy, but it is worth it. You’ll be there for your loved ones and enjoy the fruits of your labor.
Increase Your Income
You can be financially stable and make financially sound choices regardless of your income. Making more money will help you reach your goals faster, however. Multiple income streams also offer protection in case of a job loss or pay cut.
You can try asking for a raise at work, finding a second part-time job, using your skills to freelance, starting a low-cost side hustle, or via gig economy websites and apps in your spare time.
Never Stop Learning
Most schools don’t teach personal finance, even though everyone could benefit from learning how to manage their money. That means learning about personal finance is up to you. Fortunately, there are plenty of resources available.
There are plenty of blogs and websites dedicated to personal finance. For the basics, grab a personal finance book from Amazon. If you prefer more structured learning, sign up for the free Kahn Academy Personal Finance Class.
Be Patient and Consistent
You’ll have to make financially sound decisions daily for an extended period. Establishing an emergency fund or reaching a savings goal takes time, as does getting out of debt. Compound interest, dividends, and retirement savings grow over time, not overnight. But that doesn’t mean you shouldn’t celebrate the little milestones along the way.
The Case for Being Financially Sound
How much you earn doesn’t determine whether you live well or struggle. How much of your income you spend and how much you save are what separates success from misery.
Financially successful people make sound decisions. They don’t spend more than they earn, and their spending choices reflect their priorities, not their impulses. Being financially sound gives you more options in life and assures you won’t lose any sleep over finances.
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