Habits.
Human brains love them!
Any time we can go on auto-pilot, we jump at it.
Author Samuel Johnson observed, “The chains of habit are too weak to be felt until they are too strong to be broken”.
I also like a quote from Agatha Christie on the subject “Curious things, habits. People themselves never knew they had them”.
In your financial life, many of your significant habits are formed in your 20’s. And often you don’t realise it until much later. So today’s post highlights some of the habits you might have inadvertently picked up, and suggests some ways that you can create new habits to put you in a stronger financial position into the future.
Whilst my 20’s are now quite a while back, they’re not so distant that I can’t recall the enormous transformation that occurred from the beginning of that decade in my life, until I came out at the other end.
Uni and work – I studied part-time at night over 6 years and worked during the day. From living at home with the parents, through a few share houses, to buying my first property.
And of course the normal relationship ups and downs, including an engagement that never made it to the big day. I also met the lady who is now my wife, and I must have done something right in my 20’s, because only a few weeks after turning 30, our first child was born.
What is clear when I think about my 20’s, and those of my friends, is that they were such an important decade, laying down many of the foundations for our lives. It’s a big call perhaps, but I wonder if your 20’s aren’t perhaps the most important in your life.
But that doesn’t mean the trajectory that you set for yourself in your 20’s is locked in for the remainder of your days. So let’s look at some potential bad habits that you may have picked up, and see if we can’t get you onto a better path.
The number 1 financial problem for Australian’s is spending too much, which is most often facilitated by credit cards. Habits are tough to break. If you get used to just slapping everything on the credit card in your 20’s, there’s a good chance you’ll continue with that approach in 30’s and 40’s.
And if you move from your 20’s and into your 30’s carrying unproductive debt such as credit cards and personal loans, you might never be able to break into the housing market, an important financial foundation for very many of us.
But if you find yourself in that position, it’s never too late to change.
The first step if you’ve gotten yourself into a spending induced hole is to stop digging! Take the credit card out of your purse or wallet, reduce the limit, and if you’ve got multiple cards, cancel all bar one.
Personal debt such as credit cards are a symptom of spending beyond your means. To solve this problem, you need a budget, and as mentioned in past episodes, with the advent of internet banking, it’s never been easier. I’ve spoken about creating a budget in several previous episodes, so I won’t go through it again, but if you’re interested in more info on budgeting, check out episode 27 – Attaining financial independence doesn’t need to be hard, and episode 16 – Getting your debt under control doesn’t need to be difficult.
So you’ve created your budget. When you get paid, you put money to debt reduction, some aside in your bills account, some savings, and what you have left is what’s available to live off until the next pay day. Once your debts are gone, more can go to savings, accelerating your journey to Financial Autonomy.
The savings piece is important if you’re going to break your overspending 20’s bad habits. Your initial goal should be to get some money in an emergency account – aim for $5,000 as a starting point. This is what will keep you from running up credit card debt when the car needs urgent repairs, or you find yourself between jobs for a month.
Now let’s not skip over this bit too quickly, because this is the major habit change that you need to make if you find yourself in financial stress in your 30’s or 40’s because of bad habits picked up early in life.
If you can change from spending more than you earn and accumulating debt, to having a budget and spending less than you earn, with money in an emergency account, funds set aside for bills, and over time some savings, you will have transformed your financial life.
With this foundation stone set in place, you can now move forward to invest, perhaps buy a home, and start thinking about your Financial Autonomy goals, like perhaps planning a mini-retirement or making the jump to self-employment.
So what else to think about now that you’re in your 30’s or 40’s (or perhaps even still in your 20’s and just ahead of the curve!)? Another core financial concept that will make a lot of difference to you over time, is to understand the power of compounding.
Compounding is the financial jargon term for earning interest on your interest. Compounding matters a lot, especially for investments that run over a long time period. Your superannuation is likely to be your longest investment. So don’t just ignore it – check what investment option it’s in and ensure it is suitable for high long-term growth – short-term volatility doesn’t matter – you can’t access until at least 60 years of age anyhow!
But compounding isn’t only relevant for your super. Think about your other savings and investments. The sooner you get started, and the more time an investment has to benefit from compounding, the greater your wealth position will be, providing you with more options in life.
Check out the Risk vs Reward section in our Investing toolkit, and also episode 14 – How to avoid the most common financial mistakes
So let’s recap. If you’re in your 30’s or 40’s and your personal balance sheet isn’t where you’d like it to be, there’s a good chance that’s because of some bad habits you picked up in your 20’s.
Those bad habits are most likely:
- Spending more than you earn
- Using a credit card or other personal debt to enable this overspending
- Not having a budget
- Not having any savings or provision for emergencies and unexpected expenses.
Take a step back and reflect on whether any of these habits are your reality. If so, you can break these bad habits once you’ve identified them. Again, as highlighted by the Agatha Christie quote at the start – we all have habits that we don’t even recognise we have.
I hope today’s post provides the stepping off point for you to have a wonderful financial future in the years ahead, and gain the choice in life that you deserve.
Resources & Links
- My 68% return. The power of gearing – how smart borrowing can accelerate your journey to financial autonomy
- Attaining financial independence doesn’t need to be hard
- Getting your debt under control doesn’t need to be difficult
- How to avoid the most common financial mistakes – Part 1
- Investing: How to Get Started – FREE Toolkit
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