How to create good money habits

Practicing good spending habits is an excellent way to straighten out your finances. Here we explore cost-benefit analysis and some other tricks to help you save.

Video Transcript

- Our daily habits impact our finances. One way to make a decision on spending money is to use cost-benefit analysis to examine the potential costs and benefits of that purchase. Here's how it could work.

Let's say you'd really like to buy a new or used car but you already own a car. You can determine the cost of the new car you want in terms of a down payment and monthly payment for a certain number of years. Then you can compare those costs to what expenses are involved in maintaining your current vehicle.

With this cost-benefit analysis, it's clearly more expensive to get a new car than to keep your current car. However, as your car ages and needs more repairs, the cost-benefit analysis will shift at some point, when the repair bill for your aging car will exceed the down payment on a new car. When possible, spending money on assets that appreciate versus those that don't is the best route.

A home is an example of an appreciable asset, but it's not a guarantee, as real estate prices are unpredictable and a home isn't an easy asset to liquidate. On the other hand, cars, especially new ones, tend to depreciate quickly, meaning it becomes less valuable over time.

One important aspect of creating disciplined spending habits is to understand the difference between needs and wants and how to make decisions about spending that are rational rather than emotional. It's easy to indulge in unnecessary and impulsive spending, but if the purchase isn't necessary you can be hurting your financial goals.

The desire to buy new things can spring from many sources. Sometimes it's emotional. If you're feeling low, going out and splurging on something new can make you feel better. Other times, you feel compelled to keep up with the Jones's or you have a coupon that's influencing your decision to spend so you can get that deal.

Try leaving a credit card at home or setting aside a small amount of money in your budget for these types of purchases and sticking with that limit. And don't be so hard on yourself when the inevitable splurge happens. Remember, a splurge doesn't have to cost a lot of money or come from a store. It could be an experience that you enjoy. Stay financially fit, friends.

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