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Empowering your money

How to create good money habits

At a glance:

  • The first question to ask

  • How small habits can become expensive

  • What is cost-benefit analysis? The basics

  • Ways to transform unnecessary and impulsive spending

  • Summary of creating good money habits

  • Practical ideas you can start with today

Over time, most of us have created a number of daily habits that impact our finances.

Even the smallest choices have potential consequences on our ability to reach our life and financial goals.

Whether it's an impulsive decision to buy a new car instead of a used car or brown bagging lunch instead of going out, habits can either undermine our savings resolutions or support them.

Over a lifetime, being aware of our habits and consciously deciding to align those habits with our goals can make a big difference.

The first question to ask

What are you spending your money on?

Every day, we make many choices that affect our finances.

These decisions may not seem like a big deal because they aren't that expensive in and of themselves.

But over time, they can add up financially and create habits that are very hard to break.

And it's not just the cost of those decisions, it is the potential health impact over time.

In addition, not every one of those decisions is small or inexpensive, such as smoking cigarettes or drinking too much.

How small habits can become expensive

Consider the following examples and how they can impact your finances:

  • Every work day, you brew coffee at home instead of stopping at a coffee shop for a regular coffee, or perhaps a mocha or latte. Coffee brewed at home usually costs less than $.25 a cup, while a mocha or latte can run up to $4. In a month's time, you could save between $75 and $95. Over a year, that could add up to $1,000 or more. If you put the savings in a savings account to meet a life financial goal, such as saving for a new car or retirement, that $1,000 a year could make a big difference. Even if you cut back to treating yourself to a premium coffee once a week or a few times a month instead of every day, you'll save a significant amount of money.

  • Instead of taking the time to shop for and make lunches at home to take to work, you eat out most days. Because you don't have much time for lunch, many times you use a fast food drive-through. The cost of even an inexpensive lunch can easily get close to $10 a day. Even two fast food lunches a week can cost $80 a month or nearly $1,000 a year.

As noted in the previous examples, habits may have consequences over the long term, not just in terms of how much they cost you, but also in other ways. Consider the fast food example.

Over five years, eating fast food two times a week could cost you $5,000.

What else could you do with that money that would be more productive? That money could pay a semester's tuition at a community college for your child, for example.

In addition, there are health consequences associated with eating fast food.

The fat and salt content alone could create health problems that may make it difficult to function in life and on the job and may mean more out-of-pocket healthcare expenses.

What is cost-benefit analysis? The basics

One way to make a decision on spending money on something you want to buy or do is to use a cost-benefit analysis.

Under a cost-benefit analysis, you examine the potential costs and benefits of that purchase.

For example, if you'd really like to buy a new car or a new-to-you used car, but you currently have a car now, you can determine the costs of the new car you want to buy 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.

Here's how that could work:

By this cost-benefit analysis, it is 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, and it may be worth it to get a new car.

If your car breaks down at some point and it costs more to fix than a down payment on a new car, then it most likely makes sense to go ahead and get the new car.

Spending on appreciable vs. non-appreciable assets

It's more worthwhile to spend money on assets that are likely to appreciate versus those that aren't.

For example, a home is likely to appreciate, though you can't count on it making a lot of money for you, as real estate prices are unpredictable and real estate isn't an easy asset to liquidate.

Other examples of appreciable assets are investments. Mutual funds, which you may invest in through your workplace 401(k) plan, are likely to appreciate over time and be worth more than when you originally invested in them.

Stock mutual funds, especially, have potential for appreciation and can help fund your retirement and other long-term goals.

Many other assets don't carry the same appreciation potential as a home or investments.

Cars, for example, tend to depreciate quickly, especially new cars. Depreciation means that an asset will become less valuable over time.

Ways to transform unnecessary and impulsive spending

With so many ways to shop, it is very easy to indulge in unnecessary and impulsive spending. Stores and malls are all around and most stores are online, so you can shop from home.

Unnecessary spending can happen for a lot of reasons.

With so much conspicuous consumption in the media, on television and the Internet, there are always new clothes, accessories, technology, furniture and experiences out there.

FILE- In this March 5, 2019, file photo Esmeralda Chapparro, a Starbucks barista, moves a finished Cloud Macchiato coffee drink to the counter as she works at a store in the company's headquarters building in Seattle's SODO neighborhood. Starbucks Corp. reports earns on Thursday, April 25. (AP Photo/Ted S. Warren, File)
Do you need that cup of coffee every day? (Photo: AP Photo/Ted S. Warren, File)

Credit and debit cards make it all too easy to buy anything you want and deal with the consequences and bills later.

Many stores offer discounts when you shop and sign up for their credit cards, so that makes it especially tempting to buy things at new stores.

In many cases, unnecessary and impulsive spending needs to be addressed from two different angles.

The first is dealing with the issue that prompts the spending and the second is dealing with the source of funds for the unnecessary spending.

The desire to buy new things can spring from many sources. Sometimes it's emotional — if you're feeling bad about something, going out and splurging on something new can make you feel better.

Other times those feelings come from seeing what other people have and wanting those things for yourself.

In other cases, a catalog or coupon can make you feel like you can save money by buying something on sale and get a deal.

If you can identify what you are feeling when you are thinking about buying something new, you have a better chance of controlling the impulse to spend and avoiding spending money on something you can't afford.

In addition, if the source of funds for spending isn't available, then you'll have a better chance of staying away from temptation and spending.

That might mean cutting up a credit card or keeping it in a drawer at home instead of carrying it in your wallet. Or it could mean setting aside a small amount of money in your budget for these types of purchases and sticking with that limit.

Track your spending habits

If you're not aware of what you are spending money on, you can't change those habits.

See the impact of wasteful spending

One of the best ways to curtail wasteful spending and stop impulse purchases is to go through your checkbook and bank statement and track your spending on a daily basis.

Often, you don't realize where your money is going until you track it. Once you do that, a budget calculator can help you see where the money is going and what expenses you can cut out.

If you tend to spend money on alcohol, either when you are out in a bar with friends or at home, the calculator at Rethinking Drinking will show you how expensive drinking can be.

This calculator from the American Heart Association provides information on the costs of smoking.

Once you've figured out how much money you are wasting by spending money on fast food or clothes or technology or whatnot, this spending calculator at can help you determine how much you can save when you put that money to better use.

Maintain a healthy budget

When it comes to spending, planning spending and spending moderately are the keys to maintaining a healthy budget.

Without a plan, you won't know where your money is going; and without moderation, it's too easy to spend a lot of money on a few things or a little money on a lot of things and get into debt or run out of money before the month is over.

There are ways to preserve your budget, spend in moderation, and still do nice things for yourself. There are things you can do for yourself that are free and other things that aren't that expensive that will help you feel good without busting your budget.

Understand what to buy and when to buy it

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.

For example, you need to buy food every week to feed your family. But you may want to buy a new purse. If you already have a purse in good condition, you don't need a new purse today.

It's that simple, but can also be more complicated. Within the category of buying food, which is a need, there can also be wants.

For example, you may feel too tired to cook many nights after a hard day on the job and want to go out to eat instead.

Both cooking at home and going out to eat are ways to satisfy the need to feed your family. However, consistently making the choice to eat out makes meeting the need to feed your family more expensive than it would otherwise be, especially if you've already bought food at the store to prepare meals at home.

Treat yourself to free stuff

It's all too easy to think that to treat yourself well, you have to spend money. That just isn't the case.

There are many activities that are free. Many cities have attractions that periodically are open for free. This can include museums, zoos and parks. Many parks, lakes and beaches are free as well.

Spending time with loved ones is free. For example, all too often, parents think their kids want expensive presents for the holidays or their birthday, when what they really want is time with their mom or dad.

So instead of buying a lot of expensive presents, buy fewer presents and take the day off work to spend with your son or daughter or grandchild around the holidays or his or her birthday.

Splurge safely

No matter how tight your budget, it's prudent to build in some room for periodic splurges. That's because if you don't, you will most likely impulsively spend anyway, and that will really put a hole in your budget.

A splurge doesn't have to cost a lot of money or be something that you do everyday. It doesn't have to be something that you buy in a store; it could be an experience that you enjoy.

One way to splurge might be by getting a massage, especially if you have some stress in your life. Many schools that teach massage therapy offer discounted massages by students that cost less than half of what a regular massage would cost.

Another way to splurge might be to treat yourself to a special kind of coffee, tea or other drink once or twice a month, which will likely only cost $4 or so.

Or if you have a special event coming up that you need a new outfit for, you could plan and build that into your budget and shop at a consignment shop instead of a boutique or department store.

Southern states tend to be worse at managing money. (Graphic: David Foster/Cashay)
Southern states tend to be worse at managing money. (Graphic: David Foster/Cashay)

Summary of creating good money habits

We've discussed how activities you engage in every day and the money you spend doing those things can impact your wallet and your overall financial life.

It's all too easy to just spend here and there without thinking about it, so we hope the ideas we've provided will help you get a better handle on your daily spending.

Using these tips, you can examine what you're doing and create better habits that can lead to more savings and a happier financial outlook for your family.

Now that you understand how your habits can impact your wallet, we'd like to encourage you to curb unnecessary spending and put a little money in your budget for splurging.

Practical ideas you can start with today

  • Change one habit that costs more money than you'd like to spend, and take the savings and put it into a savings account.

  • Find one fun, free activity in my community that you can do to be nice to yourself.

  • Use a budget calculator to help me see where my money is going and what expenses I can cut out.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

Read more information and tips in our Spending section

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