Three habits to help you plan for financial success
We will all have our unique financial goals. However, no matter what we are working towards, there are common financial habits to help us achieve those goals. Explore more in the article.
Financial success means something slightly different to each of us, whether you are aiming for a specific bank balance, a more comfortable lifestyle or simply for your finances to be stress-free. Working towards financial success often boils down to creating some positive financial habits and sticking to them.
In this article, we explore three habits to help you achieve your financial ambitions.
1. Set financial goals
By setting financial goals, we give ourselves clear reasons to stick with a savings plan. Most of us will have a mixture of short-term and long-term goals that we need to balance in order to achieve an optimal outcome. Perhaps the most common long-term goal is saving for retirement since we all want to retire with a degree of comfort; another is saving for a house/flat deposit. Meanwhile, short-term goals can include things like saving for a holiday or paying off credit card debt.
Once we have an idea of what our financial goals are, it’s imperative that we prioritise and balance them because we don’t want our short-term goals (e.g. saving for a holiday) to restrict our ability to achieve our longer-term ones (e.g. saving for retirement) and vice-versa. There is no right and wrong when it comes to prioritising your financial goals as, ultimately, this will be a personal decision. For example, conventional wisdom might mean that we should always prioritise saving for retirement but if you are passionate about something, such as studying for a postgraduate degree, then you may prioritise in the short-term.
One caveat to this would be if you have outstanding high-interest debt such as a credit card. The longer that bill goes unpaid, the more it will cost in the long run, so repaying this type of debt may need to be prioritised over some short term goals.
2. Create a budget - and stick to it!
Once we have an idea of what our financial goals are, we need to produce a budget (and stick to it!) in order to achieve them. A budget is basically a plan of how our income will be spent and saved over a period of time. If you are paid monthly (and bearing in mind that bills and rent are often paid monthly), it might be best to set up a monthly budget rather than, for example, a weekly one.
Below are some simple steps to get started with budgeting:
Step 1 - Understanding our current expenditure by analysing our spending over the past several months. Some banking apps will automatically categorise spending, which makes this task much easier.
Step 2 - Working out what our non-negotiable expenses are. These are things like rent/mortgage payments, groceries and commuting, which are things that most of us will need to pay. However, rather than just accept that these costs are inevitable, it’s worth considering whether we can cut down anywhere without greatly compromising our quality of life. This could be something like moving to a cheaper area to take advantage of lower rents, getting a lodger or simply switching phone contracts.
Step 3 - After we have worked out our non-negotiables, we need to deduct these from our income. What’s left will be the amount that we can save and spend on discretionary things (e.g. clothes or going out) over the course of our budget period. At this stage you should set a monthly savings target. Deducting your monthly savings at the start (rather than at the end) of each month can help to ensure that we don’t overspend.
3. Learn about investing
If you have followed recent ICAEW Careers+ articles, you will know investing counters the effects of inflation on our savings. As a recap, the cost of things in an economy typically goes up over time; this is called inflation. The practical effect of inflation is that our savings decrease in real value as time passes because we can buy less stuff for the same money.
In previous decades, interest rates offered by banks on savings could counteract the effects of inflation. However, with interest rates currently at historical lows, this is no longer the case and keeping our savings in a bank account for many years can leave a rather large disappointing hole in our finances over the long-term. Meanwhile, investing in assets such as property, bonds and the stock market can increase the value of our savings over the long term.
There is a wealth of information out there on how to invest in a manner that best suits your particular needs. However, given the volume of advice out there, it’s crucial to first make sure you have set yourself some financial goals and a budget that will help you achieve them. Otherwise, you risk taking investment advice from someone whose goals might not align with yours and who will therefore be taking risks (or taking too few risks) that do not correspond to your financial situation.