The San Francisco Bay Area is booming! Unemployment is at an all-time low. Our freeways and expressways are jammed with commuters. In times like these — where recession concerns are on the backburner — I’ve been musing about money habits. In the spirit of the 7 Habits of Highlight Effective People, I’ve come up with my own 7 Habits of the Financially Savvy.
1. You Know Yourself
In many of Suze Orman’s books, she talks about an exercise where you dig into your money story. Think back to your childhood and the lessons you learned while growing up. Understanding your roots, and more importantly, your relationship to money is a key component to achieving financial stability. For example, if you know that you need to splurge every now and again, you plan for it with a special savings account; that way when you do treat yourself, it doesn’t blow your budget.
Being financially savvy means that you really understand your attitude and relationship to money. If you’re married and/or have joint finances with someone else, you’ve worked out strategies on how to work together rather than at cross purposes.
2. You Have an Emergency Fund
Those who are financially savvy know there are ups and downs in life. They put aside enough money to cover living expenses in case of an emergency such as a job loss. Some financial advisors like to see at least six months socked away. Here in the Bay Area that may not be feasible, especially with our high housing expenses. Whatever the right number is for you, you’re regularly saving. In my post The Savings Phenomenon, I talk about establishing a savings habit where you pay yourself first. Over time, you’ll find that you have a healthier relationship to money and less anxiety about paying your bills.
3. Eliminating Debt Is a Priority
While your savings grows, the financially savvy are tackling their debt in all forms, such as:
- Credit cards — if they are used for purchases, balances are quickly paid off each month. If a card carries a balance, then you’re paying more than the minimum monthly payment and you’re paying off higher-interest cards first.
- Student loans — in the U.S. student loan debt is over $1 trillion. Before taking out a loan, really consider the consequences. A recent Consumer Reports article speaks about the crushing debt and how the student loan system is a mess. If you do have student loans, use pay raises and bonuses to pay them down.
- Mortgage debt — owning a home can be incredibly satisfying. With homeownership comes responsibility, which includes being realistic with how much home you can afford. Be aware that refinancing, while it may help with short-term cash flow, means you’ll be paying more mortgage interest over time. Determine what’s the best financial goal for you: is it paying off the mortgage for your retirement years? or selling to pay cash for a home elsewhere?
4. Budgeting & Spending Is In Balance
I’ve found that the truly financially savvy are thoughtful about their purchases. Making a large purchase — such as a car or new roof — is a minor blip on their radar. Saving is a habit and so is planning. Dealing with the unexpected — such as major car repairs — aren’t celebrated but they don’t cause serious or lasting hardship. Bill paying is routine; it’s just another chore not a panic-attack-inducing event each month.
5. You’ve Got Retirement Planning Covered
According to Motley Fool (and many other financial professionals), there’s a retirement crisis in the U.S. Most Americans know they don’t have enough money for retirement yet still aren’t saving. The financially savvy have worked out a retirement plan, usually working with a financial professional. After crunching the numbers, you’ve got a plan and you’re working the plan. Remember, perfection is not required. It’s about being realistic and setting aside a nest egg for your retirement.
6. Keeping Up with the Joneses Isn’t a Motivator
Your neighbor comes home with a brand-new Tesla. Cool. But it doesn’t trigger you to buy one too. Being financially savvy means you don’t worry about what other people have or what they think about your financial situation.
7. You’re Happy
Happiness isn’t about the size of your bank accounts. Don’t get me wrong. Having enough financial resources to cover your needs is important. The point here is that you’ve reached a level of happiness with your financial situation and your path. Being optimistic about your future is priceless.
Is there a habit you’d like to add to my list?