The beginning of the year is one of the main times when people are motivated and looking to create new positive financial habits that will lead to a better financial life. If there were only a handful of financial habits for you to focus on developing this year, what would they be? What are those few things that you should focus your time on?
A keystone (or capstone) is the top middle stone in an arch. This stone is vital in that it locks the entire structure into position and allows it to bear weight. An arch cannot support itself without the keystone. The keystone needs to be in place to keep the structure sound and to keep it from falling apart.
Similarly, a keystone habit supports other habits and makes them stronger. A keystone habit can help you to reach goals in many areas of your life, not just the area that the habit itself is focused on.
Here are 3 keystone financial habits to focus on, no matter where you’re at in your financial journey.
1. Review Your Spending Weekly
I’m not even asking you to budget. I’m asking you to track your spending and review where your money is going. What’s the difference?
Setting a budget is telling your money where to go – it’s proactive. Tracking your spending is observing where your money went – it’s reactive.
We’d rather be proactive with our money rather than reactive, right? In most cases, yes.
However, most people don’t stick to a budget and not hitting the numbers that you budgeted for can be deflating. That’s why I think you should track your spending, actively review where your money is going, and evaluate whether or not that aligns with your goals and how you want your money to work for you.
The intention behind turning tracking your spending into a habit is to help you become more informed and more intentional with your money. This reactive exercise will actually lead you to becoming more proactive with your money and will help you to make sure that your money is working for you the way that you want it to.
I’m willing to bet that you’ll be surprised at how much you spend on things that you don’t really value and/or that you don’t even remember what they are. You should try to focus on spending as much money as possible on the things that you love while spending the least amount possible on those that you don’t, while continuing to be financially responsible.
Make tracking your spending as easy as possible so that you’ll stick with it by automating it. You can use a tool like Mint, Personal Capital, or Tiller Money to aggregate the transactions from all of your spending accounts and help you categorize them for easy review.
Once you have your tracking system in place, set an intention to categorize your transactions and review your spending weekly. Write down when and where you’ll do this. Put it in your calendar. Make an alarm clock notification on your phone for it.
You can even tie this exercise to a current habit to help make it easier on yourself. For example, “Every Saturday morning, I will pour a cup of coffee, sit down at the table with my laptop, and categorize my transactions and review my spending before I get ready to go to the gym.”
2. Track Your Net Worth Monthly
Tracking your net worth is something that I’ve written about numerous times on this blog, and for good reason. Net worth is the single best measurement to help you determine and track your financial health. The formula is essentially everything that you own minus everything that you owe equals net worth.
Of course, this will require you to get organized and know how to login to all of your financial accounts. I prefer to use a spreadsheet to track my net worth, but this is likely too manual of a process for most people. Instead, you can use a tool like Mint, Personal Capital, or Tiller Money that I mentioned above. Here’s an example of what a net worth statement might look like and the items that go on it: Personal Net Worth Worksheet.
You need to set an intention to this similar to the one that you set for reviewing your spending. On one hand, tracking your net worth could be harder to remember to do since I’m only asking you to do it once per month. On the other hand, if you’re only doing it once per month, then you should easily be able to find time for it.
I track my net worth on the last day of each month for consistency. Set a monthly calendar appointment with yourself to do this as well. You could even set another reminder a few days before the last day of each month if you need to so that you’re not hit with the surprise the day of. Regardless of what works best for you, this is a keystone financial habit that I think you’ll be glad you took seriously.
3. Consistently Increase the Amount of Your Money Going Towards Increasing Your Net Worth
That’s a long title for a section of a blog article. I thought about making this third keystone habit “consistently increase your savings rate”, but not everyone is at a point where they should be or can be doing that. So, rather than narrowing it down to that one action, you can focus on consistently increasing the amount of your money going towards increasing your net worth.
As we learned above, your net worth is everything that you own minus everything that you owe. That means that paying down credit card debt, building an emergency fund, saving for retirement, or so many other actions can fall into this habit. The key is consistently increasing the amount of your money that you’re putting to work for you.
Tracking your spending will open your eyes to how much of your money you’re “wasting”, which is money that you can direct to increasing your net worth. Additionally, being intentional about tracking your net worth monthly will help you to see the progress that you’re making and hopefully provide some motivation to continue to make even more progress.
You can start with taking some time to evaluate how much money you can apply to increasing your net worth at your last weekly spending review of the month. Maybe you’ve noticed that you’re spending $100 per month on stuff that you don’t really need and that you don’t find value in. You can then focus on applying that $100 towards a net worth increasing activity such as paying down high interest rate debt, building an emergency fund, or saving for retirement, depending on what stage you’re at in your financial life.
Again, the key is consistency. You need to have fun and enjoy your money, but if at least 15% of your income isn’t going towards net worth increasing activities, then you have some progress to make. As we learned above, setting an intention for how, when, and where you’re going to implement this habit will be key to success.
Build These Habits
Most New Year’s Resolutions don’t make it past Valentine’s day and I would venture to guess that most goals in general that people set fail. However, we haven’t set goals. We have laid out habits that we want to build and intentions to implement those habits. In turn, building those keystone financial habits will lead us to reaching our financial goals.
