8 Healthy Financial Habits

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1. Embrace Living Within Your Means

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Spending less than you make is the most important financial habit. If you live within your means, your monthly expenses won’t exceed your net monthly income (your take-home pay after taxes and deductions), so you can avoid debt and build savings.

To determine if you’re truly living within your means, you need to track your spending:

• Record every purchase or expense over a month. Do this for a few months to get a more accurate picture of your spending habits.
• Add your expenses, then subtract that amount from your monthly net income. If your expenses are less than your income, you’re living within your means. If they aren’t, move to the next step.
• Analyze your spending. If you’re spending more than you’re earning, examine those spending habits to identify where you could cut back.

2. Budget Responsibly

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Many approaches can help you determine your monthly spending so that you can live within your means successfully. One of the simplest is the 60-20-20 rule, which recommends how to divide your income:

• Allocate 60% for living expenses, including housing, transportation, food, daily living, and health costs. If you have necessary expenses like insurance that you pay annually, divide them into monthly increments and include them in your living expenses.
• Allocate 20% for savings, such as an emergency fund, investments, or future goals, like a down payment for a home or vehicle.
• Allocate 20% for fun, like eating out, traveling, attending concerts, and going on dates – discretionary expenses you enjoy but can live without.

3. Adjust Your Expenses & Earnings

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If there’s ever a time you don’t make enough to cover your expenses, you might need to borrow money to make ends meet. Accumulating debt can be stressful and make it difficult to feel financially secure. If you can relate, consider the following ideas to free up funds:

• Reduce expenses. Look for ways to cut costs, starting with your discretionary expenses. How much do you spend on streaming services, fast food, and games? Identify opportunities to reduce those expenses, like canceling subscriptions you don’t use often. Next, see if you can reduce other expenses. Would couponing or meal planning shrink your grocery costs? When was the last time you shopped for better insurance rates?
• Optimize earnings. Reflect on your current employment status, skill set, and the job market for your industry and area. Are you being compensated fairly? Could you learn a new skill or earn a certification? Do some research into career and learning opportunities to raise your earning potential.

4.Create an Emergency Fund

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Even if you can cover your monthly expenses, you haven’t achieved true financial health if you don’t have an emergency fund. Emergency savings help preserve your finances when events like a medical emergency, job loss, or car accident threaten them. These tips can help you prepare:

• Make sure saved funds aren’t too easy to access. Keep your savings somewhere that lets you access them when needed but won’t tempt you to dip into them unnecessarily. (Think: a separate savings or money market account.)
• Set goals. Work toward saving enough to cover three to six months of living expenses. Anything else you want to save for, like a car, should be in addition to your emergency savings.
• Make saving simple. Arrange automatic transfers into your savings account for effortless, consistent progress.
• Earn interest. Speak with your financial institution to explore opportunities to earn interest on the money you save and get assistance with opening an appropriate account.
• Stay positive! Each penny saved is a step in the right direction. Don’t get discouraged if you can’t save much immediately. Even saving just $60 a month means you’ll have over $700 yearly.

5. Keep Debt to a Minimum

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Most Americans have debt, but how much you have determines if it impacts your financial health. Many financial institutions assess if you have too much debt by calculating your debt-to-income (DTI) ratio, which is your total monthly debt obligations divided by your monthly income. Lenders may have different considerations when analyzing DTI ratio, but generally:

• Below 36% is ideal.
• Between 36% and 43% is safe.
• Above 43% is considered risky.

7. Plan for Your Golden Years

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Experts say you should have half of your annual income saved for retirement by turning 30 – and double that amount by age 40. It may seem impossible to save for retirement when money is tight, but Social Security alone likely won’t be enough to cover your needs in retirement. The rest is up to you. Here’s how you can efficiently save for retirement:

• Open a retirement account. If your employer doesn’t offer retirement benefits, explore options with your financial institution or an investment company.
• Max out employer matching. Some employers match their employees’ retirement contributions up to a certain percentage. If yours does, contribute the maximum amount your employer will match.
• Start early. Generally, the longer your money is in a retirement account, the more it will earn. Start saving now, even in small amounts, to maximize earnings.