Financial Habits that Improve Your Financial Health

Building a habit takes 21 days and transforming that habit into a lifestyle takes 90 days. We’ve all seen this concept circulate on Instagram, WhatsApp, and even in books like Atomic Habits. It instils hope after all, who wouldn’t want to believe that your life can change in just a few weeks?

But what does this idea have to do with investments? Habit formation is important when it comes to investing because it is all about consistency and discipline. The key lies in making investments a habit – the one that you nurture over days, weeks, and months.

In this blog, let’s learn about some good financial habits that can help you achieve your financial goals.

Why Good Financial Habits Matters?

Good financial habits are important because they help you manage your money wisely, avoid debt, and build wealth over time. These habits make sure you’re in control of your money, rather than letting the money control you.

Financial Habit 1: Start with a Clear Budget and Stick to it

The foundation of good financial habits begins with budgeting. Creating a clear budget allows you to know exactly where your money is going each month. It’s easy to think, “I earn enough, I don’t need to track every penny,” but the reality is that even small, unmonitored expenses can add up quickly. Like ordering, takeout a couple of times, a week might seem insignificant, but over the course of a month, it could add into your savings.

By setting up a budget, you allocate funds for necessary expenses (like rent, utilities, and groceries), and more importantly, create categories for saving and investing. Stick to this budget, and you’ll avoid the trap of living paycheck to paycheck. With modern apps or even a simple spreadsheet, budgeting becomes a day-to-day practice.

Financial Habit 2: Invest Before you Spend

If you receive your salary on the 1st of every month, immediately transfer a set percentage into your savings or investment account before you start paying bills. Whether it’s 10% or 20%, this ensures that you are prioritising your future over current consumption. It’s like building a safety net before you even think of spending, helping you grow your wealth over time. Even if unexpected expenses arise, you’ve already taken care of your financial future first.

Financial Habit 3: Focus on Paying Off Credit Card Debt and Personal Loans

High-interest debt, such as credit card balances and personal loans, can cripple your financial progress. Carrying a balance on a credit card often leads to paying more in interest than you’d ever want. If you have a credit card balance of ₹50,000 at 18% interest, just paying the minimum due could take years to clear, with you paying thousands in interest. Focus on paying off these debts as soon as possible by allocating extra cash towards them every month. 

Financial Habit 4: Build an Emergency Fund

An emergency fund is essential to avoid financial setbacks when unexpected expenses pop up, such as car repairs, medical bills, or even a job loss. A general rule is to save at least three to six months’ worth of living expenses. If your monthly expenses amount to ₹40,000, aim to have between ₹1.2 lakh and ₹2.4 lakh saved in a separate account. This fund gives you the confidence to handle emergencies without resorting to credit cards or personal loans, helping you stay on track.

Financial Habit 5: Start Investing Early (Short-Term, Long-Term, and Retirement Fund)

Investing early is key to building wealth. The earlier you start, the longer your money has to grow through the power of compounding. Even if you start with small amounts, investing for short-term goals (like a vacation or buying a car), long-term goals (buying a house), and retirement can make a big difference.

If you invest ₹5,000 a month starting at age 25, the accumulated amount by retirement would be significantly larger than if you started at 35, to the extra decade of compounding. Whether it’s bonds, stocks, mutual funds, or retirement plans like the Employee Provident Fund (EPF) or National Pension Scheme (NPS), start now to give your investments the time they need to grow.

Financial Habit 6: Stay Disciplined with your Investments

It’s easy to get caught up in market fluctuations and emotional decision-making, especially when investing. However, staying disciplined is one of the most important habits to develop. Avoid panic-selling when the capital market drops or jumping into high-risk schemes out of fear of missing out.

If you’ve invested in stocks, ETFs or mutual funds, stick to your long-term plan and avoid constantly checking your portfolio or reacting to short-term market swings. The goal of investing is long-term wealth creation, and consistency is key. Set a strategy and stay the course, reviewing and adjusting periodically.

Financial Habit 7: Keep Improving Financial Literacy

Continuously improving your financial literacy is crucial. The financial world is always changing with new investment options, tax laws, and market trends coming into play. By staying informed, you’ll be able to make smarter decisions about where and how to invest your money.

Reading books like Rich Dad Poor Dad or The Intelligent Investor, attending financial workshops, or even following reputable financial blogs can help you stay ahead. Understanding concepts like inflation, asset allocation, or how different investment vehicles work ensures that you’re not just relying on others but taking charge of your own financial future.

Benefits of Compounding Habits

Compounding habits, like compounding interest in investments, grow stronger and more impactful over time.

• Wealth Creation
  Compounding habits play an important role in building long-term wealth via the principles of compound interest. By regularly investing, your initial capital grows not just from the principal but also from the returns generated over time, resulting in exponential growth and a more robust financial foundation.
• Broader Perspective on Wealth
  Consistently practising financial habits broadens your understanding of wealth beyond mere accumulation. You will start to appreciate financial literacy, personal development, and the role of money in your life, leading to a more comprehensive understanding of wealth management
• Better Relationship with Money
  Building compounding habits leads to a healthier relationship with money. Rather than seeing money as a source of stress or worry, you start to view it as a means to reach your goals and improve your quality of life, leading to more deliberate and mindful financial actions.

Conclusion

The journey to financial well-being is a marathon, not a sprint, making patience and perseverance very important to arrive at the destination. Just like a marathon runner needs to maintain a steady pace and stay focused on their goal; you should embrace a long-term perspective in managing your finances and stay put at it. Every step you take matters, regardless of its size, on the journey toward enduring financial health.