Wealth doesn’t necessarily lead to good spending habits. Some millionaires have so much debt that they’re living paycheck to paycheck. On the other end of the spectrum, some people had a modest income their entire life, but they lived frugally, invested their savings and surprised everyone by leaving behind millions when they die.
Whether you make $8 or $800 an hour, spending habits can be the difference between amassing wealth and worrying about your next paycheck. But how do you identify and incorporated good financial habits into your life? It could start with introspection.
Start monitoring your spending habits
Learning how to control spending can be easier if you know how, when and why you’re currently spending your money. Creating a financial diary where you record every purchase you make during the following weeks or months can lead to unexpected insights and could be an excellent way to start.
Budgeting software can help with tracking, and there are free options that link to your financial accounts and automatically import transaction. However, you could simply use a notebook and manually record each purchase—doing so may even make you more aware of your spending.
Find patterns in your behavior
Start looking for trends once you have at least several weeks’ worth of data. If you’ve been diligently recording your purchases, you may already have some ideas of what triggers you to spend money frivolously. If you used budgeting software, it could also be easy to categorize and sort your purchases.
Try to identify spending or behavioral trends in the data. For example:
- Does stress or boredom lead you to shop and partake in “retail therapy.”
- Are you likely to be rushed in the morning and wind up buying coffee or breakfast while on the go?
- Do you tend to sign up for free trials and then wind up with monthly subscriptions?
- Do you frequently pay late fees because you accidentally missed a bill?
- Are there services you’re paying for but rarely use?
There may be others that are unique to your situation, and recognizing these habits could be an important step in changing them.
Look for ways to replace or end bad habits
Once you’ve found a few patterns that you’d like to break or change, you can look for ways to replace or end the habit.
Research shows that habits are often made up of a cue, routine and reward. For example, being stressed may be your cue, shopping online is your routine and buying something is your reward, even if it only temporarily relieves the stress.
You may not be able to get rid of the cue altogether, but once you recognize it, you could try to replace your routine and reduce spending. For instance, rather than shopping online, you could transfer the money to a savings account and build up an emergency fund.
The growing savings account could be your reward. Plus, your new money habit can lead to building long-term wealth and having an emergency fund could also reduce stress—a win-win.
Other money-related habits might not follow the same cue, routine and reward. As a result, you may have to change your lifestyle rather than replace the routine. Frequently buying breakfast and coffee out could be one example, as there may not be a specific psychological cue that leads to these purchases. Waking up earlier or preparing meals and a coffee maker the night before could help you break the habit and reduce spending.
Continue the process
Learning how to control spending and build good financial habits can take time, and in some ways, the process never ends. You may find old habits creeping back in or develop a new habit that doesn’t align with how you’d ideally like to spend your money.
Everyone slips up occasionally, but if you regularly scrutinize how and when you spend your money, you’ll be on the right track. Over time, the good habits you instill could save you money and lead to building wealth.