Establishing Financial Habits that will Endure

Establishing Financial Habits that will Endure

“All we have to decide is what to do with the time that is given to us.” As I navigate life, this quote from the movie, The Fellowship of the Ring, consistently comes to mind. At a crucial point in the movie, it shows one of the main characters encouraging one of their companions to not be discouraged amidst feelings that they had made poor decisions in the past. Rather, be encouraged that they can still be intentional with the meaningful time they have left. Now in my late 20’s, fully transitioned into my full-time working years, I can’t help but ask myself what healthy financial habits can I develop now that will carry into my 30’s and for the rest of my life. When I look back 30 years from now, are there steps now that I will wish I had taken in this season? In being proactive with the time I do have what will cause me to be thankful when I look back? When I think about the different areas that my financial decision-making encompasses, the topics that come to mind are cash-flow management, employee benefit maximization, and household risk mitigation.

Cash flow management is a topic that affects everyone, and transcends every financial decision we make. In developing healthy habits that can endure a lifetime, creating an awareness of one’s financial goals and how they directly coincide with regularly managing one’s resources is vital. Although managing the household cash flow applies to everyone, it still must be customized and tailored to each individual and family. As I reflect on this, I challenge myself to be aware of the steps I am taking to better understand how I am allocating what has been given to me. What I have found to be most effective for me personally is to first analyze what I value and prioritize most in life, and then go from there from a planning standpoint. Similar to time, we tend to allocate our resources according to what we value most.

To start, we must take the time to establish these goals, first individually and then as a household. After regular savings goals have been established and regular automatic transfers have been set up accordingly, taking the time to set a monthly spending limit for necessities and discretionary expenses is both critical and helpful. It is important to set a plan that can be consistently adhered to while allowing you to pursue what you enjoy. I refer you to my colleague, Jared’s article regarding automated saving strategies and techniques. While tracking expenses regularly based on pre-established categories is not for everyone, and there are many strategies out there, this strategy is one that can really shine a light on where our resources are being allocated. A key to cash flow management is in maintaining one’s monthly spending goal, and keeping it consistent when household income increases to avoid ”lifestyle inflation”, where expenses increase to the same or similar degree as income does. Of course spending levels may certainly change through different life stages, but it is important to be cognizant how this affects pre-established savings goals. Taking the time now to create awareness of one’s spending and implement management of one’s cash flow is crucial. After doing this consistently, a habit will be created that can hopefully last a lifetime and impact future generations.

Hearing the words “Employee Benefits” can bring so many thoughts and topics to mind. The available benefit documentation and pertinent plan documents that coincide with working for an employer that offers benefits can be overwhelming to review and understand. They can have the initial appearance of small novels, but diving in directly, or bringing questions immediately to human resources is the best way to mitigate the initial information gap. Having a holistic understanding of the employee benefits that are offered, and the available options, is critical in making healthy decisions that can positively impact one’s situation amidst future potentially adverse circumstances. After all, we don’t know what we don’t know, so the only way to better understand one’s options is to either take the time to dive deeper, or to get assistance. Note that many employers offer a match for contributions to employer-sponsored retirement plans, and may provide and even pay for group health, life, disability, life, and long-term care insurance. To take healthy steps to develop a solid financial foundation moving forward, consistently pay attention to open enrollment for benefits and the available options. Understand the benefits portal and its capabilities. When you do so you’ll be going a long way to ensuring that you are making the most informed decisions based on your situation.

 Related article by Echo Huang, CFA,CFP®, CPA - Avoid Lifestyle Inflation

A question I often hear is, “what steps can I take now to prepare and protect myself from the unknown?” In establishing a spending plan like the above, work to first create an emergency fund consisting of 3-6 months (I prefer to adhere closer to 6) of your necessary expenses. This is a critical buffer to have in the event unexpected circumstances arise. Maintaining liquid savings available on hand can help reduce the stress of having to decide which other sources to tap into when additional cash is needed, which may bring negative ramifications as well. Other topics that directly relate to planning for the unexpected are taking the time to consider different forms of insurance (such as life, health, and long-term care depending on the stage of life that one is in), and having an estate plan. As to insurance, the recommended coverage amounts are dependent upon each individual situation, one’s personal values and dreams, and one’s overall comfort level. Work with a professional that will take the time to understand your situation, and who can make recommendations accordingly. It can be difficult to think about the idea of planning for death, but the reality is that we never know when will be our last day. That being said, it is important for everyone to plan for the unexpected to make sure that if today was their last day, everything they own would be distributed according to their wishes, with family members having a better understanding of their wishes upon one’s death or amidst the inability to express one’s wishes.

There are many steps that we can take now to set the tone for developing healthy financial habits that can endure over time. Three of the most important are having a solid understanding and grasp of one’s household cash flow, analyzing the employee benefits that are available to make informed decisions accordingly, and being prepared and aware of the impact of adverse events such as death and disability. Mastering these steps are critical to the development of a healthy financial foundation. When we look back 30 years from now, what are some steps we wish we would have taken now to develop financial habits that will endure for the long-term, and for which we will always be thankful?

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