At this point in January, many well-intentioned New Year’s resolutions have already fizzled out, allowing old habits to reassert themselves. Often, the most challenging aspect of sustaining resolutions is sticking with them long enough to form new habits. However, the ability to develop the right habits is vitally important for achieving success in many areas of life. This is especially true when it comes to personal finance and health, which happen to share many similarities in the realm of habit formation.
When managing your health, there are certain keystone habits (eating well, exercising, getting enough sleep) that, established early in life, will put you on the right path to a healthy lifestyle and make it easier to maintain the positive momentum as you grow older. Conversely, if you fail to take care of your health when you are younger, it can be difficult to change course and make up for lost time later in life. The same is true with your finances. When managing your finances, developing the following habits (particularly early in your career) will allow you to build a solid foundation for your financial life and significantly increase the probability of achieving your financial goals.
If you don’t know what you are working toward, you’ll have a hard time making decisions and tracking your progress along the way. However, once you establish what is important to you, you can then make money decisions that are aligned with your values and goals. This process of goal-setting doesn’t happen overnight. It takes time and effort to contemplate what’s most important to you and what role you want money to play in your life. That said, time spent on this endeavor is time well spent. Once you begin to clarify your values and goals, you start to establish a “blueprint” for managing your financial life and you can ensure that each decision you make brings you closer to your vision of the future.
It sounds simple, but it’s important to understand where your money is going. It’s amazing how often people either underestimate how much they are spending or don’t even know where their money is being spent. Being aware of your spending and saving behavior empowers you to be more intentional with your decision making. And overspending isn’t the only thing to be mindful of; excessive frugality can also be problematic. If you are saving enough to retire by age 45, but plan to work until age 60, you might be making unnecessary sacrifices to your current lifestyle. Developing a habit of awareness allows you to evaluate whether your spending and saving decisions are aligned with your values and goals.
The cardinal rule for building wealth is to spend less than you earn. While your expenses will ebb and flow over time as life changes, a good rule of thumb is to save at least 15% of your gross income annually, on average. One of the most effective ways to develop good saving habits is to automate saving. Whether this means contributing to your employer’s retirement plan through preset payroll deductions or automatically transferring money to your investment/savings accounts each month, making saving a mechanical process dramatically increases the likelihood that you will stick with it over time.
While people love the prospect of “getting rich quick,” building wealth takes time. Successful investing isn’t a sexy process, but rather one that requires discipline and a long-term perspective. By establishing an investment strategy that is aligned with your financial goals, steadily contributing to your investments year after year, and weathering the ups and downs of the market rather than trying to time it, you’ll be surprised what you can achieve over the course of a few decades. One practice that is particularly helpful for developing the habit of patience is to ignore the financial media. Recognize that their job is to generate eyeballs/clicks through dramatic and fear-inducing headlines, not to help you build wealth or achieve better investment returns.
Be smart about where you put your money. Understand there are plenty of ways to save, but some are more financially optimal than others. If your employer offers a match on retirement plan contributions, make sure you are capturing it. If your health plan has a Health Savings Account and you expect to have qualifying health expenses, contribute money to the Health Savings Account. If you have space to invest in tax-advantaged accounts (such as an IRA for retirement or a 529 plan for college savings), direct investment money there rather to your bank account or taxable accounts. Think about your saving behavior from the perspective of optimization, and whether each decision you are making is the best one for you among the different options.
Building new habits is easier said than done, but for the financial habits outlined above, the effort is well worth it. While developing these practices requires a little more time on the front end, it will save a lot of time and headache later, and any adjustments required later in life will be more akin to shifting course in a motorboat than trying to turn an ocean liner. Also remember that to achieve your financial goals, you don’t have to get every little detail correct and making a few small changes can have a significant impact. Get the big things right early on, and you’ll be amazed how the benefits compound over time.
About MD Wealth Management: We are an Ann Arbor financial planner that specializes in providing financial planning for physicians and retirees. We are CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors who operate on a fee-only basis, which means we do not sell financial products or collect commissions. As an Ann Arbor financial advisor, we enjoy working with clients both locally and remotely.