Creating a savings plan, setting a budget, and investing for the future are important steps to building financial independence. In order to develop smart money habits, you need to change your money mindset.
When we fall into bad habits and misconceptions about how we handle our money, it leads to simple mistakes and errors in judgment that chip away at our ability to save and build toward financial goals. If you’re looking for ways to rewire how your brain thinks about money, savings, and paying off debt, here are five things to think about.
1. Coupons and sales don’t save you money if you end up buying more.
When looking to save money, people often turn to coupons, clearance racks, and Black Friday specials to score bargains. But these “savings opportunities” don’t necessarily save you money if they lead you into buying items you didn’t need in the first place.
There’s a way to use sales to help you save, but it’s important to be disciplined. If you’re shopping for a new washer and dryer, waiting for Black Friday could save you hundreds of dollars. But if those Black Friday sales also tempt you to buy a flat-screen TV you weren’t budgeting for, you’re ultimately increasing your total amount of spending—even if the TV is marked half off.
2. Your net worth offers a big-picture view of your financial situation.
When tracking your financial progress, including your monthly spending relative to your income, it’s worth using a money management tool to keep tabs on your overall net worth.
This net worth number balances your income, savings, investments, and outstanding debts to figure out your overall net worth at any given moment. It’s normal to have a negative net worth early in your adult life, but you should see those numbers making steady progress over time, as your savings increase and your debts are gradually repaid.
3. Money is a tool you can use to achieve other goals.
Saving money is important, but your ultimate goal with money shouldn’t be simply putting it away for safekeeping. At a certain point, a large emergency fund could actually contain money that isn’t being put to good use.
When used correctly, money can be a tool to help you generate other income and make progress toward financial goals. Whether it’s investing into a retirement fund, buying a second property, or even placing money into a high-yield savings account, you should find ways to use your money to achieve other financial goals, or at least to earn a little interest on the side.
4. Don’t repay debt quickly—repay debt wisely.
If you’re able to pay off more than the minimum balance on your debts, you could save a lot of money on interest in the future—but there’s a right and a wrong way to approach this process.
When paying more than the minimum, always make sure debts are being applied to the highest-interest loans and debts first. This can take a little extra work to make sure your payments are being applied properly—your student loan servicer, for example, may bundle multiple loan payments into a single payment.
But when you pay more than the minimum, you may need to go into your account and specify that additional payments be applied to the loans with the highest interest.
5. Always be on the lookout for better interest rates and financial products.
You may be really happy with the mortgage rate you got five years ago. The same goes for the rate you’re getting on your student loan payments. But things change over time, and shifting interest rates could mean there are better, more affordable options out there.
The same is true for investment firms and other financial products: Over time, new options may come out that offer lower fees to the consumer, which can increase your potential earnings from those accounts. Remember, it never hurts to shop around and make sure you’re still getting a good deal.
By changing your money mindset and paying attention to how your habits affect your financial picture, it’s possible to develop new skills and savvy that will serve you throughout your life. When it comes to spending and saving, always question your default habits. There may be simple opportunities to change your behavior and improve your financial outlook.