Today we’re going to learn how to break your bad money habits forever so that you can actually comfortably retire one day, instead of having to work for extra cash as a 70-year old Uber driver scaring the crap out of your passengers.
The absolute first way to break bad money habits is also something you’re going to hear very often in your personal, professional, and financial life: you have to set clear, specific goals.
When you have specific goals, you know exactly what you are working towards and it makes what you want much more concrete.
There are those who believe there’s power in literally writing your dreams and desires on a piece of paper, putting it away, and the universe will allow for it to start to manifest itself.
Is it true? I don’t know, let’s test it.
Here’s my goal: To build my YouTube channel to 1 million subscribers within 3 years.
If you want to contribute to the manifestation of my goal though, then Subscribe to my YouTube channel now 🙂
Do I personally believe in a written goal magically manifesting itself though? No.
I don’t believe we reach any of our biggest dreams or wants in life without actually having to take action towards it.
I think it sounds super awesome that your dreams can manifest, but it’s more realistic to write down goals where you can take clear actionable steps and set mini-milestones on your way to achieving it.
So let’s take setting clear goals to a common personal finance example, which is saving up enough money for a down-payment on a house.
To keep the example simple, let’s say you want to purchase a house for $500,000 and will do the typical route of a 20% down payment, which is $100,000.
If you simply desire a $500,000 house and don’t take action towards it, then nothing will happen.
But, if you set out a clear path in saving $100,000 for a down-payment, then it can absolutely happen.
When you’re in the mentality of hitting specific goals, it becomes much easier to avoid present temptations that may derail or delay your plans, in exchange for future wins.
You start to weigh out your spending options and take a step back to ask yourself, “What’s more worth it?”
“Should I buy that $25 drink at this New York City bar? Or should I save for the house?”
So let’s say you want to save up $100,000 over 5 years for that down-payment.
The big number of $100,000 may seem daunting, which is why most people tend not to actually set out a plan for big goals because it doesn’t seem easy to achieve.
However, you can counteract that by setting mini-milestones.
$100,000 over 5 years is $20,000 per year.
$20,000 per year over 12 months is less than $1,667 per month.
And if you plan to buy it with a significant other, then that means the both of you only have to save $833 each per month.
Now THAT looks and feels more do-able, right?
That actionable plan is the biggest difference between simply waiting for the universe to manifest your dreams, versus writing down the goal and also figuring out the exact steps to get there.
Setting clear, specific goals is critical to breaking a part of your bad money habits.
It’s called personal finance for a reason
The second way to break bad money habits is to simply do you.
People tend to go through life with a desire for keeping up or outdoing each other as if showing off how much money or stuff you have is a competition.
Then, as they make more money, they have lifestyle inflation. So even though they’re making more money, they’re not necessarily saving more because they want to upgrade everything, from houses to cars to clothing.
But personal finance is called personal finance for a reason. This financial journey is about yourself. It’s about achieving your own personal goals.
I really don’t recommend trying to keep up with others because it is a never-ending battle and quite frankly, you’re unlikely going to win because there’s always a bigger fish.
My point is that it is a really bad habit if you spend money trying to keep up with others for material things, which funny enough is completely immaterial to your future retirement goals.
Breaking this bad money habit is simply a combination of a mindset shift in combination with your social activities.
If you struggle with the mentality of trying to keep up with others, then one thing you can do is to get off social media.
It can be really toxic online, especially when everybody is only showing off the good parts of their lives.
I believe that when we’re all older and wiser, we will eventually stop desiring to outdo each other anyways.
So my question to you is, “why not start now?”
Automate paying yourself first
The next bad money habit to break is paying yourself last.
What do I mean by this?
Let’s take the example of a paycheck.
By the time you receive your actual paycheck in its net amount, there are many people who have already dipped into your hard-earned money.
It’s like a bunch of greedy bears dipping their paws into your honey pot and then sharing it last with you.
These bears go by the names of the federal government, state taxes, social security, medicare, and more, and you bet they’re going to be there every single time.
So by the time your own hard-earned honey pot gets to you, it feels like you’re just trying to get that last drip of the honey that they oh-so-graciously left for you.
From the paycheck standpoint, that’s what it means to pay yourself last.
So then how do you pay yourself first?
Well, since taxes aren’t something you can avoid paying, then the only thing you can do is to take action on tax-advantaged accounts like your employer-sponsored 401k.
The maximum annual personal contribution amount for 2020 is $19,500 and that’s the amount you can put into your 401k before those hungry tax bears even touch it.
And that’s how you pay yourself FIRST.
I know this is an obvious one and pretty much automatic if you’re a traditional employee but stick with me on the principle here.
At a minimum, if you don’t contribute this maximum amount to your 401k annually, then at least hit your employer’s matching percentage because that is a freebie for being an employee.
On the flip side, the self-employed and freelancer version of paying yourself first through a retirement plan is something called a Solo or Individual 401k.
Build and grow your ‘pay yourself first’ account
The next step of paying yourself first after the 401k contribution is putting money towards your personal savings or investing account.
Typically, you pay your bills for rent or mortgage, utilities, cell phone, Netflix, etc. Then, whatever is left over, you keep it for savings.
Instead, inverse it and pay yourself first.
Work out a savings plan where you put money into your savings first, let’s say $500-1,000 per month, and then you allocate the remaining amount towards your necessary bills and discretionary spending.
By doing this, you’re putting yourself first and ensuring that you’re saving money for your own personal financial goals.
And you can even fully automate this whole process.
For example, if you’re an employee, you can tell your employer to send a certain portion of your paycheck to two separate bank accounts: your spending account and your savings account.
The amount that you send to your savings account is your “pay yourself first” account and the amount you will not use to spend at all.
This “pay yourself first” account will only be used for savings and investing. In other words, it’s only used for growth towards your financial goals.
Your other account will only be used for spending and you can spend this as you please for things like bills, eating out, and other things that make you happy so that you don’t have to feel super restricted.
For example, lots of financial experts like to tell you to stop buying Starbucks because it is expensive and adds up quickly.
Or in my scenario, my fiance’s version is boba tea.
I’m pretty sure her blood runs on boba and I’m almost afraid to find out what happens if she ever goes cold-turkey.
Anyways, my point is that if those $5 coffees or bobas make you happy and you’ve already paid yourself first, then it really is no big deal in my books.
Break bad money habits with immersion
And finally, I know I said it was going to be my top 3 tips but I want to leave you with a bonus one.
One of the best ways to break bad habits is by immersing yourself into the world that best matches the goals and overall life you’re looking for, whether that’s people, online content, community, or books.
Immersion allows you to more quickly build up the mindset that you’re looking for because you’re constantly priming your brain in the right direction.
If you allow yourself to be immersed in educating yourself for personal financial growth, then breaking bad money and spending habits doesn’t feel like a chore, but becomes more of a personal mission.
And the more immersed you are in constantly being around people and content that helps you move along your personal financial goals, the easier it is to have it become a part of your identity and that’s when you start to really enjoy the process.
There’s a lot of great personal finance content out there already for free, so dig around and find the people who suit your needs the best.
And if I’m lucky enough to be one of your trusted personalities on personal finance, career, and business then you can keep up with me by Subscribing to my YouTube channel by clicking here.
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So once again, this is Alan signing off and here’s to you investing in your knowledge and future in the Freedom of Choice lifestyle. I’ll see you soon 🙂