It is essential to nurture a healthy relationship with money. After all, the wrong mindset can keep you from improving your finances and reaching your financial goals. However, by modifying your thinking, you can change your spending and saving habits to help you live a more fulfilling life.
1. Change the way you think about savings
If you are accustomed to thinking of your savings as something you will never touch, it can be hard to set up a savings account. After all, what is the point if the money is just going to sit there? But if you think of savings as an emergency fund you can access when needed, it can be much easier to start setting money aside. You will be grateful for the financial help if something unexpected occurs, like a car repair or a medical bill.
2. Step out of your financial comfort zone
Past financial mistakes can make you hesitant to try new things. But if you never step out of your comfort zone, you will never improve your financial situation. Instead of beating yourself up, view past mistakes as learning experiences. If you are not sure where to start, consider the following tips:
- Make a plan: Before you make any financial changes, figure out what you want to achieve and how you will get there.
- Begin with small changes: If you are used to spending $50 a week on coffee, try cutting back to $40.
- Be mindful of your spending: Once you start making changes, track where your money is going to see where you can make further cuts.
As you see your financial situation improve, you will be motivated to keep moving forward.
3. Adopt a wealthy person’s mindset
If you start thinking like a wealthy person, you can improve your finances and live a richer life.
Pew Research found that people who view themselves as upper-class are more content with their lives, healthier, and satisfied with their jobs. With that in mind, change the way you think about money and incorporate habits of the wealthy into your daily routine.
A few key things to keep in mind are:
- Wealthy people focus on long-term goals: Concentrate on things like retirement savings and investing.
- They are disciplined with their spending: Wealthy people are not impulsive shoppers. They think carefully about every purchase they make.
- They invest in themselves: They look for ways to improve their skills and knowledge.
These aren’t wildly different from the habits of people who are struggling financially. The key difference is that wealthy people have adopted a mindset that allows them to focus on long-term goals and make decisions that will build a better future.
4. Familiarize yourself with your current financial standing
If you want to improve your finances, it is important to understand your current situation. This means knowing things like:
- Net worth: Calculate the total value of your assets minus your debts. Add up the value of your home, your savings and investments, and any other assets. Then, subtract outstanding debts. If you need help, use a net worth calculator.
- Credit score: This is a number that lenders use to determine your riskiness as a borrower. The higher your score, the more likely you will get approved for loans and credit cards at a lower interest rate. You can check your credit score for free with Credit Karma or Experian.
- Debt-to-income ratio: The amount of debt you have compared to your income. Take your monthly debts (such as your mortgage, car, and credit card payments) and divide them by your monthly income. If you need assistance, try using a debt-to-income calculator.
These numbers provide a good jumping-off point for revisiting your finances.
Learn about good and bad credit
There are two main types of credit:
- Good credit means you have a history of making on-time payments and using credit responsibly.
- Bad credit indicates you have a history of late payments or defaulting on loans.
Your credit score is based on your credit history. The higher your score, the better your credit. There are a few things you can do to improve your number:
- Always make on-time payments
- Keep credit utilization low by using less than 30% of your available credit.
- Take out different types of credit, such as installment loans and revolving lines of credit, to show lenders you can responsibly handle different types of debt.
If you have any negative items on your credit report, try to dispute them. This includes business debt, collections, and late payments.
6. Reconsider your views on debt
Familiarize yourself with both the good and bad sides of debt. Debt is necessary for economic growth as it allows businesses to expand and invest in new projects. It also allows consumers to invest in large purchases, like homes and cars. However, too much debt can be a bad thing since it can lead to financial hardship for individuals and businesses alike.
By understanding debt’s role in the economy, you can make more informed decisions about your finances. Likewise, working toward credit card debt relief or other debt reduction methods can place you in a better financial position and open the door to using good debt to your advantage.
7. Start a path toward financial freedom
Once you have a good handle on your finances, it is time to start working towards financial independence. This is when your income exceeds your expenses, and you no longer have to worry about the lack of sufficient funds.
There are a few things you can do to start working toward a healthier financial future:
- Reduce expenses: Take a look at your budget and see where you can cut back
- Increase income: If you can find ways to bring in more money like a second job or a side hustle, you will be one step closer to more financial opportunities
- Invest: Investing grows your money while taking fewer risks than other things such as quick-fix, get-rich-quick schemes.
- Consider debt consolidation: If you have a lot of debt, you may want to consider consolidating it into one monthly payment. This can help you pay off your debt faster and reduce your monthly payments with a lower interest rate.
- Make a budget: This can be crucial in helping you achieve your financial goals.
To create a budget figure out your monthly gross income, which is your earnings before taxes and other deductions are taken out. Once you know the number, subtract your necessary expenses, such as rent, food, and transportation.
What is left over is your discretionary income. You can use this money to save for retirement, investments, or to pay off debt.
8. Don’t compare your income to others
Social media constantly bombards you with images of people who are wealthier than you. While there is nothing wrong with being ambitious and wanting to bring in more money, comparing your income to others can have a negative impact on both your finances and your mental health. It can result in you spending more money than you can afford due to the desire to keep up with the Joneses and everyone else.
9. Be thankful for what you have
Think about all the things you are grateful for, such as a roof over your head, food on the table, and spending precious time with family and friends.
Daily affirmations can positively affect your mental health and, in turn, your overall mindset. Research shows that affirmations help change destructive thought patterns and produce different, more desirable behaviors.