How To Build Good Financial Habits That Last Beyond New Year

If you’ve ever wondered why it’s difficult to keep New Year’s resolutions, research suggests that one of the reasons is that you haven’t built new habits. Another is lack of focus. So, if you started the year determined to get your finances in order, you may be finding it difficult. If you wanted to be consistent with your savings, or review your pension regularly, it might seem hard to stay committed.

Working towards better finances and a more stable financial future is vital for many reasons. Not only do you want to know you’ll be able to live the life you want, your financial wellbeing can affect your mental health too. If you didn’t resolve to create better financial habits at the beginning of the year, it’s not too late. If you started and your resolve or interest fizzled out like an out-of-date New Year’s firework, we’ve got the answers.

We’ll help you find the focus you need to build financial habits that will last more than a few weeks.

Finding the focus to create good financial habits

It’s hard to commit to something if you don’t have a good reason to do it. Keeping track of your finances now and in the future can often seem like a bit of a drag. It’s not always fun facing the fact that you can’t really afford something. But just because you can’t afford something now doesn’t mean you won’t be able to afford it in the future. And if you plan and act wisely, the chances of it happening increase.

Below are some of the reasons for, and outcomes of, building good financial habits. They are all valid and important reasons. However, just pick one or two that resonate with you. Then remember them when you are tempted to ignore all the good work you have done and give up on your newly acquired habit. Think about why you decided to commit in the first place.

Reasons for building good financial habits:

• You’ll have more control over your money
• It can lead to financial security and peace of mind
• You will be building wealth over time
• You’re more likely to achieve your financial goals (make sure you have some!)
• You can reduce debt and financial burden
• You’ll be developing discipline and resilience
• You can create a legacy for future generations
• You can plan for retirement
• It can help protect against inflation and market volatility

Compounding: how small actions can lead to big rewards over time

Some people seem to make building and maintaining wealth look easy. But it’s not all about how much they have. It’s about small, consistent habits that build into something larger over time. If you invest money and receive interest on it, this compounds. In other words, the next time your interest is calculated, it’s calculated on the money you initially invested plus the interest you previously received. If you consistently add more money to this pot, you’ll consistently receive more interest.

For example, if you put £100 per month away in a tin for 10 years, at the end you would have £12,000.

If you then put that £12,000 into an account that paid 2% interest at the end of the year, you would have £12,648.00 at the end of the 11th year. You will have made £248.00 in interest.

However, if you put £100 per month into an account that pays compound interest of 2% per year, at the end of 10 years you would have £13,259.68. You will have made £1,259.68 in interest.

The earlier and more consistently you invest, the more powerful compounding becomes.

These figures are examples only and they are not guaranteed - they are not minimum and maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this.

Maintaining good financial habits even during market dips

Some people try to predict how the markets will behave. They will avoid investing at certain times or invest more at others. It’s a good idea to save more money when you have extra you can afford to put away. However, it’s not a good idea to stop making regular contributions because you think there is market volatility or it’s ‘not worth it’. Making decisions based on emotions is not helpful. Continuing to maintain your good habits will pay off, as we have already seen. Consistent investing is less risky and more effective.

Good financial habits that lead to success

These are some of the approaches you can take to help you build good financial habits. Ideally, you’ll want to follow all of these. However, if you can’t, make sure you stick to whatever you have committed to. If you’re tempted to skip a month here and there or make an exception to your rule, remind yourself why you made the commitment in the first place. If you do skip a month or two, get back on track as soon as you can. All is not lost!

Set a realistic budget

Track your income and expenses and set savings goals. If you know how much you need to set aside for savings from your income, you’ll get used to living off the new amount.

Pay yourself first

If you’re planning to set aside a certain amount each month for savings you can set up a standing order to a separate account. This allows you to automatically move the amount you have decided on saving as soon as you receive it. That way you won’t be tempted to spend it or think you have more cash available than you do.

Review your investments regularly

Your Financial Adviser will make sure you have regular reviews, but you should do this too. Make sure your savings and investments continue to align with your financial goals. There may be periods of time in your life when you need to make adjustments.

Stay disciplined

Avoid making impulsive or reactive financial decisions, particularly in times of market volatility.

Reinvest interest or dividends

Rather than considering any interest payments or dividends as ‘extra’ cash, leave them in your savings account. This way you will take advantage of the compounding effect.

Do you need help building good financial habits?

Small, consistent actions have a huge impact over time. Staying on track with your financial goals doesn’t just mean you’ll have more money when you need it. The psychological benefits are real. They can lead to reduced stress and give you greater confidence making financial decisions going forward. And if you do falter along this path, just get back on track as quickly as you can.

At Paula Bicknell Wealth, we help our clients build great financial habits. There’s no one-size-fits-all. Your circumstances and needs are unique, and we’ll help you build a plan that suits you. If you would like to book a no obligation introductory meeting with us, please get in touch. We’re here to help!

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.