Financial Habits for the "New Normal"
We're living in unprecedented times. Restrictions to prevent the spread of COVID-19 have had a serious impact on economic activity.
Although these events have presented many challenges for Canadians, without this pause, we probably would've been continuing to do things the way we always have, mostly out of habit.
Instead, we've been forced to do things differently. Why not take this time to reflect on old habits and replace those that no longer serve you with new ones?
Checking in on Your Financial Habits
Ignorance may be bliss, but not when it comes to money. Unless you know where you stand financially, how can you plan where you want to go?
1. Calculate your net worth on an annual or even quarterly basis. Your net worth is everything you own (assets) less everything you owe (liabilities). By monitoring it regularly, you can see how it grows over time.
2. Review your budget regularly, especially when your personal circumstances change in a way that could impact your finances, such as a new job or a new baby, or when external events occur, such as COVID-19.
Living Within, Not Beyond, Your Means
Spending more than you make is a dangerously easy habit to fall into. By relying on credit to cover shortfalls, you wind up accumulating debt, which can quickly get out of control.
Before COVID-19, many of us had a "latte factor", shorthand for those little indulgences and extra spending that can add up without us really noticing. When we spend out of habit or routine, we rarely ask ourselves if we're getting value for our money. As we return to the "new normal", it's an opportunity to spend mindfully:
- Ask yourself which of your "wants" you actually miss and feel are still worth the money? What do you now realize you can live without?
New Habits to Consider
Track your spending so you know exactly where your money is going. Keeping track will not only help you budget, but the accountability will also help you make better spending decisions.
Pay yourself first, not last - and learn to live on what's left. This is the opposite of the old habit of spending first and trying to save what's left. Social distancing brought an opportunity to divert funds that would otherwise have been spent on discretionary items like travel, dining out and live events, to new goals such as an emergency fund. You can do this by setting up a regular, automatic transfer every time you get paid, to a separate savings or investment account.
Create and maintain a safety net. This year showed the importance of having an emergency fund of three to six months' worth of expenses in liquid savings. It was also a reminder to have appropriate health, life and disability insurance, in order to protect your family and your finances, in case anything happens to you.
Practice gratitude. Scanning your social media feeds and the resulting feelings of "FOMO" (fear of missing out) was a habit for many before the pandemic. However, spending too much time on social media platforms can lead to feelings of envy, bad moods and dissatisfaction with life. It can also lower self-control and lead to overspending to keep up with appearances.[1] Being grateful takes practice until it becomes a habit. Try using a gratitude journal, and every night write down three things that happened that day for which you're grateful. Or have a weekly check-in with friends or family with everyone sharing one thing they're grateful for that happened that week.
Finally, if you have children, try to be a good financial role model. Kids pick up on money habits in the home. They're watching, listening and learning from you. So try to get your own financial house in order in order to lead by example.
[1] The Internet Trap, Five Costs of Living Online, by Ashesh Murherjee
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