Developing Good Financial Habits

April is National Financial Literacy Month and is an excellent opportunity to establish and maintain healthy financial habits. Bad habits are often linked to a lack of education, and in America, less than 30% of young adults achieve a scored above 70% on recent financial literacy tests, and the average score was just 58%.

Bad money habits can have damaging, long-term consequences for financial security. Developing healthy financial habits can do wonders for helping to achieve our long-term goals like saving enough for retirement or paying for a college education.

Here are two tips on how to create financially sound habits:

Need vs. Want

Sticking to a spending plan or budget and avoiding impulse buying is crucial for building a healthy savings plan. It’s important to know how much money you are bringing in, as this helps you understand and account for your monthly spending.

Add up all of your expenses that you would consider a need — this includes your monthly savings amount, rent, car payment, cable and internet bill, food, etc. By including your savings amount in your need category, you create a habit of paying yourself first. Subtract that total from your income, and what is left over is your free cash flow.

The remaining money is the amount you have at your disposal for your “want” expenses. At the very least, make sure you are not spending more than that.

At the end of the month, if you still have money left over, stick it in your savings or investment account. This removes the temptation to spend it and lets you start the next month fresh again. If you consistently have money left over, then consider increasing your savings amount.

Retirement Planning

Saving for retirement is one of the best financial habits you can create for yourself. Another benefit with 401ks and other retirement plans is that the money you contribute is usually pretax, which effectively lowers your taxable income, reducing your tax liability.

If your employer offers a matching contribution to your 401k based on your contribution level, it’s especially important to contribute enough to take advantage of this benefit, and contribute as much as possible up to their match-maximum.

Your employer is basically offering you free money that you shouldn’t be turning down. For instance, an employer may offer a retirement savings plan to which you can contribute up to 5% of your salary, and they will match up to 3% of that. If you don’t contribute at least 3%, you are in effect saying no to a 3% raise.

If your employer does not offer a retirement savings plan, look into opening a self-directed retirement account such as an IRA, so you can benefit from tax-advantaged retirement saving.

IMPORTANT DISCLOSURES

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC