It has been said that we become what our habits make us, and that is especially true of our money habits. Money-savvy people foster good financial habits that ensure success and financial security, while impulsive and impatient people often spend recklessly and live on the edge of bankruptcy regardless of how much they earn. In this article we look at why this is true and what you can do to develop money habits that will ensure your prosperity.
Why develop good money habits early on
Compound interest
The earlier you start saving, the more interest you will accumulate over time. Look at it like this: If you started saving a mere R200 a month at the age of 20, by the age of 65, you'd have R767,568 (at 7% interest) to put towards retirement. If you started putting away R200 a month at age 35, by 65 you'd only have R247,040 - significantly less. By starting to save now, you set yourself up for a comfortable and stress-free retirement. Or maybe, if your time horizon is shorter, you can use this strategy to save for a deposit on a house.
Hone skills that will help you avoid bigger mistakes
When you’re younger and earning less (and before you qualify for any significant amount of credit), your losses and mistake are generally small. It’s best to hone your money skills while learning from these smaller mistakes. Then by the time you have real earning potential (and potential to get into debt) you will have the know-how and self-discipline to make the most of your income and avoid the financial pitfalls that trap so many people.
Avoid the debt trap
Besides costing you money (the interest accrued), debt robs your future self of your income, and it can cause a lot of stress if you take on too much of it. If you are already in the red, it can just take one more loan for an emergency like a car repair to hike up your debt to a level that you can’t pay off. Soon you are taking out loans to pay other loans, and your debt cost snowballs. Developing good money habits will help you to avoid this trap.
Money habits that will serve you well in life
Separate your sense of self from what you own
One of the most widespread false beliefs that afflicts young South Africans is that you are what you own. People of real substance don’t need to impress others with things. Their strength of character – resolve and self-discipline – says a lot more about them. On that note, it’s much truer to say we are our habits since it’s these that shape us. Resist the impulse to impress others with possessions. Impulsiveness and impatience are the two most dangerous forces behind reckless spending. You are a work in progress, and you don’t want to let down your future self by getting yourself into financial trouble that could take months or years to get out of.
Learn to budget
The road to success starts with a plan, and when it comes to your finances, that means having a budget. A budget will help you to prioritise expenses properly, cut down on expenses, and save. And it doesn’t have to be difficult or complicated. Budgeting might seem restrictive, but really what you are doing is telling your money where to go, and that is how you take control.
Differentiate between wants and needs
It’s all too easy to confuse needs with wants. Maybe you need a smartphone for work, but do you really need the latest and greatest? The same question can be asked of the clothes you buy. You can’t walk around in your underwear, but you also don’t need to wear designer labels to look good. With a confident posture, you can look good in a R500 outfit. Save your money and put it towards furthering your education or upskilling. One day you could earn enough to be able to afford those nice clothes without even feeling the dent in your budget – not that you actually need them.
Keep a tight reign on your debt
Taking on too much debt is the fastest way to land yourself in financial trouble. Besides that, buying things on credit also costs more in that you have to pay interest. Only take on debt to pay for an emergency expense or for something that can help further your career or raise your earning potential – like courses and tools you need for work. And if you do take on debt, aim to pay if off as quickly as possible. There is a big difference in the total cost of a loan with a 24-month term and one with a 12-month term
Learn how to save money without actually giving anything up
It has been said that the best things in life are free, and there’s some real truth to that. Consider the cost of these different experiences: a picnic on the beach (R150 for two) vs. a big night out in an expensive club (R1000 or more if you really have no self-control). Fun doesn’t need to be expensive. And there are many other ways you can cut costs without giving up anything. Buy in bulk and buy things when they are on special. Your budget will help you identify areas in which you can save money.
Look for ways to supplement your income
Having a side hustle is the best way to make extra money and acquire some business acumen that you could use later in building up your empire or progressing your career. Yes, you’d have to cut back on your social life, but then you would also save money. It’s actually a win-win. Need further inspiration? Most successful entrepreneurs start their businesses in their ‘spare time’ – that is all the time they don’t have to commit to their nine-to-five. And, of course, you’ll have more money in the bank.