How To Build Good Money Habits

Making big-picture plans is a key part of managing your finances, but it’s your actual day-to-day financial decisions that turn your plans into reality. That’s why developing good money habits is so important. It’s tough to control your spending, stick to a budget, and work toward your savings goals if you have to constantly do mental gymnastics to figure out your financial situation. By cultivating healthy money habits, you can make smart financial choices a no-brainer; over time, the actions that support financial stability can become second nature. 

Whether you’re trying to manage the difficulties of living paycheck to paycheck, overcome the challenges of saving money, or simply want to feel more in control of your finances, building good money habits can help reduce your stress and set you up for long-term success with financial management. 

In this article, we’ll cover:

• Why building good money habits matters

• Building a realistic budget

• Monitoring your spending

• Saving and investing your money

• Curbing impulse spending

Why building good money habits matters

Building good money habits is akin to laying a strong foundation for a sturdy house. It might take time and effort initially, but the long-term benefits are immense. By fortifying yourself with healthy money habits, you can create a stable structure that enables you to work toward longer-term goals that support financial stability. 

For instance, habitual saving can help you build an emergency fund or reach a big milestone like saving enough to buy a house. A regular investing habit can help grow your wealth over time, allowing you to reach long-term financial goals like having enough money to retire comfortably. And on a day-to-day level, strong money habits help you ensure your essential expenses are covered each month and avoid overspending that could lead to unnecessary debt. 

When healthy money habits become ingrained in your life, it’s easier to implement the practices that lead to a more secure and prosperous life. Think of habits as the compound interest of self-improvement: a small effort today can result in significant gains over time as your good money habits build on each other.

Build good money habits with a budget

Creating a budget is one of the most effective ways to build good money habits. It serves as a roadmap for your monthly spending, helping you allocate your resources wisely to ensure you’re living within your means. Because a budget requires you to track your income and expenses, you’ll be able to identify areas where you can save more, spend less, and ultimately make more informed financial decisions. This foundational step assists in managing day-to-day expenses and plays a key role in achieving your long-term financial goals. Here’s how to build a budget that works for you.

Evaluate your income

Start by listing all sources of income, including your salary, earnings from freelance work or side hustles, and any other money you receive from things like child support or government programs. Then add up the total income you make each month. This helps you budget effectively by showing how much money you can spend and save each month

Understanding gross and net income is important when you make your budget. Gross income is your total earnings before deductions like taxes and insurance. Net income, or take-home pay, is what you receive after all those deductions. Generally, your net income is the amount of your actual paychecks each month, but be aware that if you’re paid as a contractor or earn money through freelance or gig work, taxes aren’t deducted from your pay. You’ll have to calculate how much you need to set aside for taxes in order to determine your net income in such cases. 

Track your expenses

Start by identifying all your monthly expenses. Review your bank statements, credit card bills, and receipts to capture all outgoing funds. Break down your expenses into fixed costs that remain consistent each month, such as rent or mortgage, cell phone plans, and insurance. Next, account for variable expenses like groceries, transportation, and entertainment, which can fluctuate. Remember to account for irregular expenses that may occur quarterly or annually, such as subscriptions or oil changes. Group your expenses into budget categories so you can more easily plan for them.

When evaluating your expenses, distinguish between your needs and your wants. Needs include essentials like housing, food, utilities, transportation, and healthcare. Think of them as your non-negotiable monthly costs. Wants are discretionary costs like dining out, entertainment, and vacations that enhance lifestyle but aren't strictly necessary. One of the most valuable money habits you can cultivate is the ability to determine if an expense is something you really need or a nice-to-have. This allows you to identify where you might be overspending and ensure your financial resources cover your primary needs first. Plus, getting into the habit of identifying needs versus wants empowers you to make intentional choices about how you want to use your money based on your big-picture priorities.

Set financial goals

Building good money habits includes defining both short-term and long-term financial goals. Short-term goals might include saving enough money for a vacation or healthy emergency fund, while long-term goals could be building a retirement fund or saving for a child's education with a custodial account.

Once you have clearly identified these objectives, align your budget to support your goals. Break down each goal into smaller, actionable steps. Next, review your current financial situation to see how much you can save each month to fund your goals. Allocate money in your budget specifically toward each objective, adjusting your spending habits as needed to prioritize your financial goals.

Allocate funds

Once you have a clear understanding of your income, expenses, and savings goals, allocate your monthly income for spending and saving. To simplify the process of allocating funds, consider adopting the 50/30/20 budgeting rule. This method allocates 50% of your income to essential needs such as housing and groceries, 30% to wants like dining out and entertainment, and the remaining 20% to savings and investing. By dividing income into three clear categories based on percentages of your income, this rule can help you build better money habits by making budgeting more straightforward and providing clear guidelines to prioritize essential expenses and savings while still allowing for discretionary spending.

An alternative budgeting strategy is the 70/20/10 rule, which provides a slightly different focus. In this method, 70% of your income goes toward essential expenses, 20% is put into savings/investments, and the final 10% is dedicated to discretionary spending. This framework can be more realistic if you have a high cost of living, and it helps you make the money habits of saving and investing a priority over discretionary spending. 

Review and adjust

Regularly reviewing and adjusting your budget helps maintain financial health and foster good money habits. Start by setting a regular schedule to assess your financial situation, like each time you get paid or at the start of each month. During each review, compare your actual income and expenses against your budgeted amounts to identify discrepancies. This will help you see where you may be overspending and highlight areas where you might be able to save more.

When evaluating your budget, consider significant life changes that may affect your finances, such as a new job, a change in expenses, or shifts in personal circumstances. If your income has increased, think about reallocating the extra funds toward savings or debt repayment to accelerate your financial goals. Conversely, if you’re encountering unexpected expenses, such as medical bills or home repairs, adjust your budget to account for these changes, perhaps by cutting down on discretionary spending or looking for practical ways to save money.

Reviewing your budget keeps your financial plan on track and reinforces good money habits. By actively engaging with your finances, you develop a deeper understanding of your spending patterns and priorities. This practice fosters mindfulness about your financial decisions, helping you make informed choices that reflect your goals. 

Monitor your spending to build better money habits

Monitoring your spending helps you maintain control over your finances. By keeping a close eye on where your money goes each month, you can gain better awareness of your spending patterns, and can use that insight to make informed decisions that align with your financial goals. This process helps identify areas where you may be overspending and empowers you to redirect funds toward savings and essential expenses. Here are a few suggestions for how to monitor your spending.

Use budgeting apps

Budgeting apps can make it easier to monitor transactions and build good money habits by increasing your awareness of your spending. Many apps sync with your bank account and automatically categorize expenses, providing a clear and convenient overview of your financial activities. These platforms can help you gain better insight into your spending habits, set financial goals, and effectively manage your budget.

Set alerts

Activate notifications in your budgeting app to receive alerts for significant transactions or when you're nearing your budget limits. Your bank and credit card accounts might also have alert features you can set up. This proactive approach helps you stay consistently informed about how you’re using your money. Receiving real-time insights into your spending patterns helps you build good money habits by increasing your awareness and making it easier to adhere to your budget. When you continually engage with your financial situation, you develop discipline and a clearer understanding of your financial picture.

Review statements

Regularly reviewing your bank and credit card statements can be a helpful money habit for evaluating your larger spending patterns and remaining engaged with your personal finances. This practice helps you spot errors or unauthorized transactions and highlight areas where you might be able to reduce unnecessary expenses. By consistently monitoring your financial activities, you can make informed decisions to better manage your budget and savings. 

Create a spending diary

As you’re beginning to build your money habits, it can help to dedicate detailed time and attention to your spending. Consider keeping a detailed record of every purchase you make for a few months. This practice heightens your awareness of your spending habits and aids in identifying and analyzing your spending patterns over time. Building good money habits is fundamentally about fostering awareness and control over personal finances, and a detailed spending diary can help you do just that. You may find that this practice kick-starts better money habits around your spending, so that eventually you don’t need a granular record of all purchases in order to monitor your spending effectively. 

Develop regular saving and investing habits

Establishing regular saving and investing habits can help create long-term financial stability and growth. By consistently setting aside a portion of your income, you not only build a safety net for unexpected expenses, but also create opportunities for wealth accumulation through investments. Here are a few ways to help you develop healthy money habits related to saving and investing.

Automate savings

Establish automatic transfers to your savings account immediately after you receive your paycheck. This will ensure that you consistently set aside money for future goals without having to remember to do it manually each time. Automation puts your money habits on autopilot so that you get into the practice of regular saving without extra effort. 

Another way to save automatically is to round up every purchase to the nearest dollar and deposit the spare change into your savings account. This small but effective strategy can accumulate significant savings over time with minimal effort. Many online banks and budgeting apps have tools you can use to automate this process. 

Start small with investments

You don’t need a large lump sum to start a regular investing habit. Start by investing a small amount on a set schedule, and gradually increase your investments as you become more comfortable. This approach allows you to ease into the world of investing without overwhelming yourself. By starting small, you can slowly but surely learn the ins and outs of the stock market, understand your risk tolerance, and build confidence in your decision-making.

A robo-advisor can be a valuable tool to guide you in getting started with investing. These automated platforms can provide personalized investment strategies, manage your portfolio, and help you navigate the complexities of financial markets, making the process more accessible and efficient as you build money habits for investing.

Diversify your investments

Diversification in investing means spreading your investments across different asset classes, such as stocks, bonds, and mutual funds, to minimize risk. By not putting all your money into one type of investment, you reduce the impact of any single asset's poor performance on your overall portfolio, thereby achieving a more balanced and resilient financial strategy. As you’re developing money habits as an investor, learning how to diversify investments can help you build an investing strategy that’s aligned with your long-term goals. 

Stay informed

Staying informed helps you develop good money habits by providing insights into financial trends and strategies. Dive into the world of finance by exploring the latest news and staying updated on market trends. Enhance your knowledge by subscribing to insightful financial blogs or engaging podcasts that keep you informed and inspired. These resources offer valuable perspectives and expert analysis to help you navigate the ever-evolving financial landscape. You may even find bloggers and podcasters who are entertaining as well as informative, making the process of learning about personal finance and investing fun. 

Cultivate better money habits for impulse purchases

Learning to reduce impulse buying is key to sticking to your budget and prioritizing big-picture goals. Spontaneous discretionary spending can quickly derail even the best-designed budgets, leading to unnecessary expenses and financial stress. By consciously avoiding impulse purchases, you reinforce your ability to make intentional and thoughtful spending decisions, which fosters more disciplined money habits. This practice not only helps you stick to your budget but also cultivates patience and a long-term perspective on how your spending choices align with your financial goals. Impulse buying is one of the money habits people often want to break; the following suggestions can help you kick the habit. 

Create a waiting period

Before making any non-essential unplanned purchase, try implementing a 24-hour rule. This means waiting a full day before deciding to buy. During this time, think about whether you genuinely need or truly want the item. If, after 24 hours, you still feel it's worth having, then it might be a good decision to go ahead and purchase it. This approach can help prevent impulse buying and ensure you're spending according to the priorities that really matter to you.

Use a shopping list

When heading to the store, come equipped with a detailed list. This simple approach helps you focus on what you really need and keeps you from getting sidetracked by unnecessary items. This is especially important when you're in supermarkets or big box stores, where it's easy to get tempted by all the options. Sticking to your list can save you time, money, and even reduce waste. Plus, it gives you peace of mind knowing you won’t forget anything essential. You can give yourself a better chance of sticking with this money habit if you put yourself in the right mindset before shopping: make sure you’re not hungry, tired, stressed, or in another state of mind that’s likely to trigger an urge to make impulsive purchases.  

Unsubscribe from retail emails

One effective way to resist temptation is by unsubscribing from those pesky promotional emails. It can be overwhelming to have your inbox flooded with offers and deals that constantly test your willpower. Thankfully, there are tools available, like Unroll.Me, which can help you manage and organize your subscriptions. By taking control of your email, you can reduce distractions and focus on what truly matters. And don’t forget about other places where advertising lures you to shop. Unsubscribe from promotional texts, unfollow brands or promotion-heavy influencers on social media, and mute the TV when ads come on. 

Identify your triggers

Take a moment to identify what triggers your impulse purchases. Perhaps it's stress or boredom that nudges you toward shopping. Maybe seeing friends or influencers showing off purchases online gives you a sense of FOMO or peer pressure. Or it might be a lack of planning, like swinging through the drive-through on the way home because you didn’t plan dinner. 

Once you understand your personal triggers, consider exploring more effective ways to manage them. Recognize the emotional states that lead to impulse buying and cultivate alternative ways to respond, like engaging in exercise or diving into a hobby you enjoy. Notice where time pressure or a desire for convenience drive impulsive purchases and set yourself up for success with pre-planning and emergency backups, like keeping some granola bars in your glove box. Not only can finding alternatives to impulse shopping help curb unnecessary spending, but it can also lead to a more fulfilling and balanced lifestyle.

Consistency and patience are key to developing good money habits

Building good money habits doesn’t happen overnight. It requires consistency, patience, and a willingness to learn from your mistakes. But making a commitment to cultivating more healthy money habits is worth it: the tiny steps you take today can compound into significant financial security in the future. Stick to your budget, monitor your spending, and don’t be too hard on yourself if you slip up occasionally. Building good money habits takes time, and your future self will thank you for your efforts.