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10 Personal Finance Habits That Create Wealth

coast fire fat fire retirement wealth Feb 10, 2024

A common question in our SimpliMD community revolves around how to create wealth. I invite you to join our tribe as a member to continue in your journey.

Building and maintaining financial wealth is an important part of ensuring a secure future. Financial habits such as budgeting, investing, and saving are essential for creating and preserving wealth. By understanding the basics of personal finance and implementing smart financial habits, individuals can make their money work for them and become financially independent. In this article, we will discuss the financial habits that create wealth so you can apply them in your own life to start building your own financial security.

Creating New Habits

Creating new habits can be a difficult process, especially when it comes to financial habits. We can all agree that our current habits are not always the best. It takes time and effort to build new and better habits that will help us improve our financial situation. But with a few simple steps, anyone can create new financial habits that will last for years to come.

To lay a solid foundation, it is important to set goals and determine the desired outcomes for your new habit. As you move forward, you can make these goals more achievable by breaking them down into smaller, manageable chunks.

Then, you can proceed to implement these changes into your daily life, forming new routines and committing to them until they become ingrained. Additionally, it is important to track your progress along the way and ensure that you stay motivated throughout this journey of creating new financial habits.

The following are critical habits that will help you arrive at financial independence.

1. Create a plan for your finances

It all begins with a plan.

Just like a business plan and budget is essential for the success of your micro-business, so is formulating a personal-family spending plan. That is because it will allow you connect you short term and long term goals to your financial habits.

A financial plan that includes a spending plan will take some effort on your part. Think of this like you are making a home-made pizza and each of these are the ingredients you must source to make your masterpiece. By putting these in place it will remove a lot of the stress associated with unstructured personal finances.

Let’s agree at the beginning of this conversation to use the terms budget & spending plan interchangeably as I walk through these tips. There are differences between the two, as I discussed in my last post, but whatever you call your plan, the bottom line is that you need a plan.

A budget can be a powerful tool, helping you to save money and stay on track with your goals. Your first step is acknowledging you need annual budget or spending plan. In my post Dare To Dream-Goal Setting For Physicians, I outlined a recommended process on how to integrate your short and long term goals into the budget. The prudent plastic surgeon provides a nice example of his personal financial plan for a young doctor if you want a template.

Start With 50-30-20

Have you ever wanted to budget your finances but don’t know where to start? The 50-30-20 budgeting method is a great way to get started. This method splits your income into three parts and can help you save money and live within your means. The 50-30-20 budgeting rule suggests that you should spend 50% of your income on necessities, 30% on discretionary items, and 20% towards savings or investments. With your high income I suggest saving 30% of income and using 20% on discretionary items.

First, you need to determine what your monthly income is from all sources. This will help you decide what your monthly expenses should be. Next, make sure that your monthly expenses are less than your monthly income. If they are not, then adjust them accordingly. Finally, make sure that all of the items in your budget are realistic and achievable for you and your family's lifestyle. An affluent lifestyle connected to consumerism for doctors and their family members is one of biggest budget killers and sadly can lead to paycheck to paycheck living regardless of how much money you make

2. Track your spending habits

Track your spending habits is a phrase that has become more and more popular in recent years. With the rise of online shopping and the convenience of buying anything at any time, it is important to be aware of where your money is going. There are many different approaches to tracking your spending habits, but I am going to highlight an easy app that can help you keep tabs on your money. The old fashion way to scouring your bank statements to monitor where all of your money flows each month. Your expenses fall in 3 broad categories: Fixed expenses, Adjustable expenses, and Debts. As you might guess fixed expenses and debts come like waves each month, whereas adjustable expenses are more irregular and less predictable. By the way, I am a big fan of automating savings/retirement funding as a fixed expense, rather than treating it like an adjustable expense.

The automated method for doing this is available through multiple sources like Mint, YNAB, Every Dollar, and Empower. For a brief review of each check out this link from NerdWallet. I love using Empower for tracking my net worth and it’s free.

You can utilize Mint and other apps to track all your financial information, ranging from credit cards and loans to investments and budgets. These apps also offer insights into how specific expenses impact your finances, such as your monthly grocery spending or annual clothing expenses. By connecting your spending sources to the app, you can automate the analysis and monitoring process. Understanding where your money goes each month is crucial for effective financial management.

The White Coat Investor has a nice review of budgeting apps here.

3. Use a spreadsheet to create your spending plan

A spreadsheet is a great tool for budgeting. It's simple, easy to use and you can use it on your computer, tablet or phone.

A spreadsheet is a great way to create a budget because it’s quick and easy to use. You can organize your budget in columns with different categories and then add the costs of each category in rows below the column.

The first step is to list all of your income sources on one row at the top of the spreadsheet. Add up what you make from each source, including bonuses and other sources of income such as rental incomes or dividends from stocks or bonds that you own.

Next, list all your expenses on one row at the bottom of the spreadsheet. Include every single cost that you have - rent, utilities, groceries, car insurance - everything! Then subtract your total expenses from your total income to see how much money you have left over for saving or spending on things like entertainment or travel.

There are many sources for budget spreadsheets. You can find them on the internet or you can create your own. The most popular sources for budget spreadsheets are Google Sheets or Microsoft Excel.

Google Sheets is the easiest to use since it is a free service and does not require any downloads. It also has a great user interface that makes it easy to use and understand. Microsoft Excel is more complicated than Google Sheets but it is more powerful in terms of what it can do with numbers, charts, graphs and formulas.

4. Set up automatic payments

There are many ways to set up automatic payments. You can do it through your bank, for example. If you have a credit card, you can set up automatic payments through your credit card company. There are also online payment processors that allow you to make automatic payments from your checking account.

Automated payments for fixed expenses (including choosing to pay your self first through your savings and retirement funding) is the best way to go. With your high income, you should have ample financial cushion to do this. I will add that you should be careful setting up automated payments for adjustable spending choices like netflix and other subscription services will continue to parasitically eat away at your money—long after you have forgot about them, as I will mention later.

5. Track your progress with an app or website

Budgeting is an important part of our lives. We need to make sure that we have enough money to cover all the expenses that we have, and also save some money for future needs. It is not always easy to keep track of how much money we spend and how much money we earn, which is why many people are using budgeting apps or websites.

A budgeting app can be a great way to keep track of your spending habits and see if you are spending too much on certain items or if you need to cut back in certain areas. These apps will also show you a detailed breakdown of your income and expenses so that you can better plan for the future. Some popular budgeting apps include Mint, YNAB, Mvelopes, Wally and You Need A Budget (YNAB).

Some people prefer using a website instead of an app because they feel like it's more accessible from any device. Websites like Mint Online Budgeting offer similar features

 

6. Get rid of the things you don’t need

The first step in managing your expenses is to figure out what you need and what you don't.

What you need:

-Food and drink

-Clothing and footwear

-Utilities (electricity, gas, water)

-Household items (toiletries, cleaning products)

Getting rid of expenses you don't need is a good way to save money. You might be surprised by how many unnecessary expenses you have in your life. Here are some tips on how to get rid of them.

1) Cancel unused subscriptions

2) Switch to cheaper phone plans

3) Find cheaper home insurance

4) Cancel gym membership

5) Sell unused items on Craigslist

If you are using a budgeting app like Mint, monitoring your subscription services is built into it. If you want the app to monitor and cancel any of your non-used subscription services you will have to upgrade to mint premium. Rocket money is a personal finance app that is well known for managing subscription services, and it also has net worth, budgeting and spending features built into it. I personally tried out this service recently and found it to be very easy to identify some subscriptions that I had forgotten about, and the services were easily canceled for me with one simple click. I will add that much like Mint, you will have to upgrade to a paid premium version to continue after the trial period is over. One fascinating element with Rocket Money was their offer to negotiate a lower rate for my home media and phone plan (in my case xfinity), and they did it in exchange for a % of the share savings. I accepted their offer, and at the time of writing this, it is still being negotiated. We’ll see what comes of this.

 

7. Create a savings plan

We all know that saving money is a great way to prepare for future expenses. But for some people, it can be difficult to save when you're living paycheck to paycheck.

If you have a savings goal in mind, but aren't sure how much you need to save each month, use the 50/20/30 rule. This rule says that you should spend 50% of your income on necessities like housing and food, 20% on wants like entertainment and shopping and discretionary items, and 30% on savings. With your high income, choosing to save 30% of your earnings is within your reach-but it starts with having the discipline to create a annual budget and then following it. What you do with those 30% savings is the subject of another blog post. But I do like the white coat investor’s approach with an investment policy statement. This hard wires your decision trees and allows you to kick back and let your money flow automatically to the right pot. Each generation has it's own phase for saving for retirement as outlined below

 

8. Pay off debt as quickly as possible

Debt is a burden for many people, and is especially normative for you in the first half of your career Your conditioned acceptance of living with large debts such as educational loans, large mortgages, fancy cars, and business loans makes it easy to normalize it as part of your personal finances and it makes adding in host of other consumer debts much easier. Your high income makes you a low risk for loan companies, thus they roll out the red carpet for you. I encourage you to radically eliminate debt from your life by denying it’s “normalcy” and choosing a path the will lead to freedom, autonomy, and independence financially by getting rid of your debt.

There are many different ways to pay off debt, but one of the most common methods is to use a debt snowball.

The debt snowball method is when you prioritize paying off your smallest balances first, then move on to the next smallest balance and so on. This way you will see progress and it will motivate you to continue with your plan. You should also try not to take out any loans or use credit cards during this time, as it can make it more difficult to get out of debt in the future.

9. Stay motivated by seeing the progress you are making at growing your net worth

One of the most important things that you can do for yourself is to monitor your net worth. There are many reasons why you may want to monitor your net worth and there are many ways that you can do it through the various financial apps that I mentioned previously. Some people also like to track their net worth because they want an idea of how much money they have in comparison to how much debt they owe. This is a way for them to see if they are getting closer or further away from being debt free. There are other people who like tracking their net worth because it gives them an idea of what their retirement savings might look like in the future or when they might be able to retire. I like using the free tools with Empower for tracking my net worth and retirement planning.

Once you start monitoring your net worth, you can join the Pentamillionaire club. Check out my post on this here.

10. Understand What your Financial Independence number is.

Doctors are used to a robust lifestyle and will take you some to reach a net worth that will result in you no longer having to work any more. With the formation of some basic financial habits early in your career, financial independence or financial freedom is reachable for most physicians.

Check out this FI Calculator from the physician on FIRE if you want to see what your number should be, and how close you are to it.

 

Financial Independence is the basis for whole FIRE movement. To check out that whole world, I suggest checking out Physician on FIRE for a very down to earth and balanced view of this. whole topic.

Financial goals are one of the main reasons why people track their net worth is because they have personal and professional goals tied into their finances that they want to achieve.

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