8 Steps to Building Better Financial Habits

Whether you're looking to pad your emergency fund, contribute more to retirement or save up enough to buy a new home, good habits may eventually help you make even the biggest financial goals a reality.
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There's a reason why we talk about "building" good money habits, as opposed to just "having" them.

That's because, like every noble goal -- from flossing regularly to hitting the gym more often -- getting in the habit of making smart money choices on a consistent basis takes effort at first, but it can ultimately pay off in a big way.

So whether you're looking to pad your emergency fund, contribute more to retirement or save up enough to buy a new home, good habits may eventually help you make even the biggest financial goals a reality.

Ready to rack up some good habits?

Start by considering these eight key money to-dos that can help put you on the path to a firm financial future.

1. Track your spending.
Keeping precise tabs on how much money is coming in and going out of your checking account each month should be a top money priority. And we don't just mean estimating how much you "probably" spent on dinner or "about" how much you paid for your last vacation -- we're talking exact numbers.

Bottom line: Without knowing how much you've spent, it's nearly impossible to know how much you have left to put toward important financial goals, like building up your emergency fund.

And a good way to monitor your cash flow is to create a budget, so you know at the start of each month exactly how much money you have to allocate toward food, housing, student loans, lifestyle expenses and future financial goals.

Another reason it's so important to build this habit as soon as possible: Part of the beauty of a budget is that it can evolve with your lifestyle. So as your circumstances change and you have different financial needs -- say, getting married and buying your first home -- tweaking your budget can become second nature instead of a major project.

2. Live below your means.
Put simply: Living below your means requires spending less money than you earn.

Easy enough, right?

The reality is that many people understand the concept, but have trouble with the execution. Once those rent checks, car payments and student loan bills start piling up, it can be hard to keep your outflow of cash less than your inflow -- which is how too many of us end up living paycheck to paycheck, or worse, saddled with hefty credit card debt.

Fortunately, a budget can do wonders for helping you live within your means. Once you have a solid framework for your monthly spending in place, it can be easier to see where you need to rein in any frivolous outflow -- like maybe forgoing that daily $4 coffee. You'll also want to take a look at whether you can pare back on any fixed costs, such as renegotiating your cell phone plan or perhaps reducing your electric bill.

The earlier you make a habit of living within your means, the better off you can be -- because the stakes only get higher as you age and take on more responsibility. And no matter how many raises you get or how well your investments are doing, you'll always have a finite amount of money -- and you'll never want to owe more than you can comfortably pay.

3. Pay yourself first.
Saving some money each and every month is as important a money to-do as routinely tracking your spending.

Of course, we also know that this is easier said than done -- unless you get into the habit of paying yourself first, which is the practice of saving a set amount of money from each paycheck before you do anything else. After all, money saved now is money to spend later. And, trust us, you're going to be glad it's there later -- like when it's time to retire.

One way to help make the pay-yourself-first process easier is to simply automate your deposits by funneling money straight into a savings account every time your paycheck hits your bank account.

We'll talk more about what exactly you should be saving this money for later, but in the meantime, it's important to recognize two tenets of saving: The more time you have to save, the less you have to save at any one time. Second, saving generally gets easier -- and more ingrained -- the more you do it. So once you make it a habit, you probably won't even notice the smart choice you're making for your future.

4. Contribute to a retirement fund.
Everyone needs money to live on in retirement.

That's why specific, tax-advantaged accounts have been created, so people can help maximize their savings for retirement in vehicles like IRAs and 401(k)s. When we talk about paying yourself first, this is one of the primary ways you can do it -- by contributing to your retirement accounts.

Of all your savings priorities, retirement contributions can be particularly easy to make automatic, if you have access to a company-sponsored retirement plan, like a 401(k) or 403(b). You can usually have your savings taken directly from your paycheck before you receive it, so you'll probably never even notice the money is "missing." But even if you don't have access to a plan through your employer, you can consider opening a Traditional IRA or a Roth IRA -- and set up direct deposits to automate these retirement contributions, as well.

There's another reason why this can be a good money habit to adopt early in life: A retirement account isn't simply a savings vehicle. It's an investment account, which means you may be able to reap the benefits of compound investment returns -- and be able to watch your money grow faster than it would in a traditional savings account.

5. Save for other future goals.
You aren't quite done paying yourself. Now that you've taken care of retirement, it's time to talk about the rest of your savings.

While we believe that everyone needs an emergency fund, the rest of your savings goals are probably as individual as you are. Do you want to own a home one day? Have a baby? Travel through Europe? Start your own business? All of these goals can require serious cash -- and now is the time to start getting it together.

Once you've identified your goals -- and picked two or three to prioritize first -- you can consider diverting money into separate savings accounts. This not only helps you keep track of your savings progress, but it also helps curb any temptation to dip into one account to bolster another.

And as we've discussed already, the sooner you start saving, the sooner you can achieve your future goals.

6. Get smart about credit cards.
Given all the horror stories you hear about ballooning credit card debt, it may seem like steering clear of plastic is the safest move.

But, in fact, it may be a better idea to get in the habit of using credit cards -- very wisely.

Aside from being enormously convenient when it comes time to place an order on Amazon, credit cards are crucial to building your credit history and credit score, which lenders use to evaluate your trustworthiness based on past behavior. If you have good credit, they're more likely to loan you the money for life's biggest purchases, like a mortgage, as well as give you a better interest rate.

Getting in the habit of smart credit card use as soon as possible -- meaning you only charge what you can afford to pay in full each month -- can be helpful because the length of your credit history is a major factor in your score. But it's also helpful for another reason: If you do make a misstep, you'll want to have plenty of time to fix it -- well before more major financial obligations, like retirement, need your attention.

7. Look out for your family.
We all want what's best for our loved ones -- and if the worst should happen, it's comforting to know they'll be protected. One way to help ensure they'll be financially secure should you pass away unexpectedly is to purchase life insurance.

It's important to do your homework here: Different families have different coverage needs, and life insurance policies aren't one-size-fits-all. For instance, you can take out a term policy, which covers you for a limited period of time, or a permanent policy, which never expires and has the potential to accumulate cash value.

Newlyweds and new parents, in particular, might want to give this to-do extra thought because they may be in a position in which someone else is dependent on their income. But even if you don't have your own family, you may have other important people in your life for whom you want to provide -- and the best time to take advantage of locking in a lower rate is when you're young and healthy.

Bottom line? As with any of these financial habits, it's better to start thinking of ways to help protect yourself today... so you aren't sorry tomorrow.

8. Recognize what you want isn't always what you need.
Now that your savings priorities are in place, you're using credit cards responsibly and you're learning to rely on your budget, it's time to focus on the rest of your money -- the green you spend on groceries, movie tickets and daily indulgences.

When it comes to forking over your hard-earned dollars, it's important to get in the habit of distinguishing between your wants and needs. On a global level, your basic needs are food, shelter and transportation. But day to day, these will be different for everyone.

Case in point: A new pair of rain boots might be something you want if you already have a perfectly good pair at home, but it becomes a need if your old pair has sprung a leak that soaks your socks on the walk to work.

Clearly, a need takes priority over a want -- so if you're looking to reduce your spending in order to, say, put more money toward retirement, your wants are the first place you should look to cut back.

Of course, we're not saying you can't spend any money on your wants. But the sooner you can get in the habit of identifying which expenses are and aren't necessary, the easier it can be to modify your spending as you change your goals.

Because that's what all of these habits are about, after all: getting you closer every day to the things you want most.

This post originally appeared on LearnVest.

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LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the people interviewed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed in this message are separate and unaffiliated and are not responsible for each other's products, services or policies.

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