I believe that financial education should be taught to all students in school.
Good personal financial knowledge can make the difference between becoming rich and staying poor.
More importantly, it’ll also allow you to keep your wealth once you’ve made it.
Here are 5 money habits that everyone should adopt.
1. Track your expenses
Step one to changing anything is always to find out where you currently stand.
And although simple, tracking your expenses is probably the most effective technique to identify and reduce overspending, especially on unnecessary things.
In the past, you’d probably have to collect all your receipts and manually keep track of them.
Fortunately, there’re many smartphone apps that allows you to conveniently track your daily expenses, and a lot more.
2. Delay your buying decisions
One of the best techniques that any parent can use to reduce the amount of toys they buy for their child is to practise delayed gratification.
Very often, when you make a child wait 2 weeks before buying them a toy, they’d often not want it anymore.
And this method is surprisingly effective for adults too.
Impulse spending is a bigger problem for some people than others.
Every time you want to buy something that is non-essential, resist the urge to make a purchase immediately.
Instead, decide that you’ll wait 2-4 weeks before deciding again if you really want to buy that particular item.
In 9 out of 10 times, you’ll probably not want that item as much.
This has several benefits.
Firstly, you’ll obviously save a lot more money by reducing on unnecessary spending.
Secondly, it increases your satisfaction from buying something you really want, because the anticipation of getting is usually greater than the experience itself.
And thirdly, it builds your self-control and metal fortitude.
3. The cost of something is what you give up to get it
Economists measure things in terms of their opportunity cost instead of the upfront cost.
The opportunity cost of something is what you have to sacrifice in order to get that thing.
For example, consider buying a new $5,000 television.
Up until now, you might associate the cost of the television to be just $5,000.
But that isn’t actually the true cost.
Think about what you could have done with the $5,000 if you didn’t buy that new (and frankly, unnecessary) television.
Well, you could invest it in the stock market at an average return of about 10% per year.
In 10 years (the probable lifespan of your new television), your $5,000 could’ve given you almost $13,000 if you had chosen to invest it instead.
And that’s the true cost of your new purchase.
When you start seeing things in terms of their opportunity cost, you’ll end up making far better buying decisions ($13k for a new TV is way too expensive for me).
4. Don’t overspend
This seems like an obvious point, but overspending is one of the biggest problems facing many Singaporeans today.
Credit card debt has been steadily on the rise, and organizations such as Credit Counselling Singapore has seen more than a doubling of the number of debtors seeking help in the last 5 years.
(Source: More debtors seeking help from Credit Counselling Singapore, The Business Times, 28 October 2014)
First off, if you have any credit card debt, try to clear it off as soon as you can.
Paying interest on your credit card debt is one of the most pathetic uses of your money, because you’re essential paying for nothing.
Credit cards can be a good money-saving tool because of the rebates and discounts you can enjoy.
However, if this makes you overspend, then you should just lose the plastic, because it’s not worth it.
5. Listen to Li Ka-Shing
There’s a famous advice by Hong Kong billionaire Li Ka-Shing, and it goes like this.
Let’s say you only earn $2,000 a month.
You’ll have to split your salary into 5 parts – first ($600), second ($400), third ($300), fourth ($200) and fifth ($500).
The first set of funds is used for your day to day expenses such as food and transportation.
The second set of funds should be used for networking with like-minded people in your industry and people who’re more successful than you.
The third set of funds is spent on furthering your education, by buying books, attending seminars, and so on.
The fourth set of funds is used to reward yourself – by going on holidays or doing the things you enjoy.
Finally, the fifth set of funds is strictly for investing in assets or your business.
Of course, the proportions by which you divide your income have to be adapted to your particular situation.
You’ll probably find it very hard to survive on just $600 a month considering our high cost of living in Singapore.
However, the underlying principle still stays the same.
Split your salary into these five components: expenses, networking, learning, enjoyment and investment.
Image Credits: celebritynetworth.com