Break those bad spending habits! It’s time to handle your money the smart way.
Being good with money can mean different things, depending on who you ask. Adulting’s tough enough without having to worry about financial freedom or wealth plans… or any of that jargon your financial advisor sprouts. Fret not, we’re here to talk about positive money habits so you have a healthy, sustainable relationship with your personal finances.
5 good money habits you need in your life
1. Don’t listen to the debt devil on your shoulder
Not all debts are made equal. Good debts are loans that allow you to grow your money by investing with leverage. When you buy a house, you take out a mortgage loan. That’s good debt – it allows you to own a property you can’t fully afford with cash.
What makes it “good”? The returns on the property are more than the interest paid (and the cost to maintain it). Basically, this good debt allows you to make a profit with smaller capital.
However, you’ll want to steer clear of credit card debt – that’s bad debt. Those often come with interest rates as high as 24% each year. Warning: they can snowball and become practically impossible to pay off if you let them roll on. This kind of debt doesn’t grow your net worth. Even worse, it fuels bad shopping habits (say no to spontaneous buys you don’t actually need!).
2. It’s all about the money, honey
But we’re not just talking about cash. Do you know what you spend on and what comes in from your investments? Keeping tabs on your finances isn’t easy. Anyone can agree – that quick taxi ride or bubble tea treat is easy to shrug off. But these invisible extra spending moments add up at the end of the month.
Once you’ve figured out your spending budget, take a look at your savings. If you aspire to spend $6,000 for yearly vacations, build a system to set aside those funds. For example, you can save $500 a month for 12 months. Or keep a portion of your bonus and save a lower amount each month.
Just like spending, savings need to be monitored so you’re not shooting in the dark. Is your savings rate appropriate for your lifestyle? Having milestones and keeping track of them helps you stay motivated.
3. Got spare change? Invest it
We’re talking about inflation. Just think about it: 20 years ago, $100 could buy you so much more than it can today. It’s a fundamental concept of economics that can’t be ignored. If you understand inflation, you’ll have a better perspective of what your money will look like when you’re older.
In Singapore, the average inflation rate is comparatively low: 0.57% in 2019, and expected to hit 1.48% in 2026. What does this mean? In about 50 years, the value of our money will shrink to half of what it’s worth today. But don’t panic just yet! Here’s the solution: invest.
Investing excess funds you don’t need now will allow your money to grow alongside – and even beat – inflation. If you keep an eye on inflation rates, you can gauge how much your money should be growing to surpass inflation. Tip: investing earlier will give you a head start in reaching your financial goals.
4. It’s not just you, it’s your family too
Doing well managing your money? Keep at it! However, not everyone in your family will be interested in that. Since you’re on the way to good financial habits, you can step in to help them avoid making mistakes.
Bad money habits affect the entire family. For example, your parents may not understand how to retire comfortably. And if they’re not insured, it’s essential to get them covered. This ensures they don’t have to dip into their retirement nest egg if hefty medical expenses arise. It also protects your wealth if you need to help out with unforeseen expenses.
5. Don’t make insurance the bad guy
Some people have a false sense of security, thinking they’re well-insured if they just purchase an insurance policy and leave it as that. But the biggest mistake you can make is not updating it. The coverage you had as a student may not be right when you have new purchases and more responsibilities later in life. If you’re not well insured, you’re putting yourself and your dependents at financial risk.
Creating a list of potential life events is a great way to identify your needs. Make sure you review this list with your financial advisor to determine the coverage you require.
Here are three essential types of personal insurance plans:
- Whole life insurance: this gives you or your family a payout if something unfortunate happens.
- Term life insurance: you get coverage on your life, but not a payout at the end of a specified period. Your coverage ends once you cancel or surrender your policy.
- Health insurance: in case of hospitalisation, this covers your medical bills.
But don’t just sign up for the first plan you see. Insurance is a long-term commitment, and surrendering your policy often means losing a chunk of what you’ve put in.
So you’ve ticked all the boxes? Great job! If not, it’s never too late to start developing positive money habits.