Small Business Advice

15 better money habits to start in 2022

Working on your finances is an ongoing process, but there's always areas to improve. Here's the 15 better money habits you should consider adopting this year.

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While it’s natural to be hung up on how much you earn, oftentimes it’s your financial habits that will determine your ability to build wealth – not just the numbers on your paycheck. Learning how to save, building your credit score, and properly managing tax can quickly set you up for success. In this article, we look at 15 better money habits that may help you achieve your financial goals.

Better money habits: Saving & increasing income

You may already know that earning more can allow you to save money more efficiently with the right know how. For that reason, growing income is a no-brainer. Beyond that, getting your spending in check can help you to channel more money into savings. Below are some better money habits that you can start now to grow income, budget and save.

1. Review your regular expenses

Tracking and reviewing your expenses at least once a month on your bank account will help you see where your money is going. From that, you can weed out any unnecessary expenses and make spending cuts as required.

For example, if you’re a coffee person, consider sticking to black coffee to avoid pushing your java bill through the roof. Similarly, eating homemade meals will get you more bang for your buck. And if you find that your phone bill is always too high, consider using a mobile virtual network service.

Of course, you’ll still have expenses even after cutting down on spending. When buying things, use discount coupons. And if you can, buy items when they are in season. They’re usually cheaper then.

2. Create a budget

Budgeting is vital to good personal finance and achieving financial freedom. With a money allocation plan in place, you’ll easily avoid spending more than your budget. It essentially helps you set boundaries. For example, you can put a spending limit for monthly groceries. Plus, a budget will help you buy only what you need and avoid unnecessary expenses.

Speaking of unnecessary expenses, it’s not uncommon to make impulsive purchases when browsing the internet. You may see a recommended product and find yourself adding it to your cart, even though you had no prior intention to buy it. To avoid such purchases, remove your credit card information from your browser. That will eliminate one-click transactions, which are famous for encouraging impulsive buys.

3. Pay in cash where applicable

Many personal finance experts agree that paying in cash pumps the brakes on excessive spending. Credit cards, on the other hand, tend to encourage it.

That doesn’t necessarily mean that you should avoid using your credit card altogether. Instead, consider using a sharpie to write your spending limit on the credit card. Make it as bold as possible so that every time you go to swipe it, you’ll be reminded of the magic number that you shouldn’t exceed.

Couple that with the envelope system for even better money management. In this case, put your expenses into categories then allocate each category a specific budget. Assign a labelled envelope to each category and fill that envelope with cash for the respective purchases. Try as much as possible to not exceed the allocated amount. This will help you stay within your budget and save more.

4. Automate your savings plan

The problem with saving is that it’s easier said than done. But you can make your work that bit easier by automating the process. Once every month, a portion of your earnings will automatically go to the savings account.

Schedule the deduction as close to your payday as possible so that you don’t miss any payments. This money can act as an emergency fund, personal capital for a business or funds for a major purchase. In addition to automatic payments for savings, you can adopt a similar system for a brokerage or retirement account.

5. Set up a 401K plan

Planning for the future and retirement is one of those better money habits that you can start now. It’s as simple as setting up a 401k plan. If you’re formally employed and your company has this program in place, then make sure to frequently check that the account is actually getting contributions. Because according to the fund’s trustees, Social Security may run out of money as early as 20341. Even if you’re a current recipient, the Social Security benefits may be cut once the funds run out. You want to ensure that your 401k account has a decent amount by that time.

If you’re self-employed, you can set up your own 401k and use it as a retirement plan. There are multiple solo 401k companies that offer attractively low fees, a wide choice of index funds, and an easy-to-use platform. They include Fidelity Investments, Vanguard, and others.

6. Take up a side gig

With a growth rate of over 33%, the gig economy is expanding faster than the U.S. economy2. You would be right to say that we live in a gig economy. More importantly, the freelance world provides an excellent opportunity for increasing your income at your own convenience.

From writing jobs to ridesharing, graphic design and everything in between, the gig economy has something for everyone. The trick is choosing a gig that matches your skillset, and one that you can do on the side while maintaining your regular job. For example, if you find that you always have plenty of time to spare on weekends and holidays, you can look into ridesharing with Uber or Lyft.

7. Use a cash back account

As already mentioned, better money habits include saving on expenses as much as you can. One way of doing that is opening a checking account that has cash back rewards. These accounts give you back a portion of the money you spend on daily purchases. This money goes right back into your account, thus ensuring that you pay less on purchases and save more.

Besides, accounts with the best cash back rewards typically come with affordable terms. And that means you won’t incur any bank fees and charges when your account balance dips for one reason or another. Be sure to also look for accounts with no monthly fees, no NSF fees, and no hidden fees.

Better money habits: Credit scores

A good or excellent credit score can impact your financial life for the better. It determines your ability to access credit, not just for personal capital when starting and running a business, but also as a source of emergency funds.

And there’s more. Your credit score will play a role in the interest rates that you get for all types of loans. These include mortgages, car loans, personal loans and even business loans. In fact, insurance companies and landlords may run a credit check before setting premiums and rent rates.

The bottom line is, a good or excellent credit score will lower your financial burden by a lot. That will leave you with some money that you can channel towards savings and retirement plans. With that in mind, here are some better money habits that also double up as credit boosters.

8. Keep your credit card debt low

One of the best ways to build your credit score is lowering your credit utilization ratio. This essentially means keeping the credit card debt low while maintaining a high credit limit.

If, for example, you have a credit card limit of $10,000 and your average credit card balance is $4,000, then your credit utilization ratio would be 40% (calculated as 4,000/ 10,000 x 100%).

Your credit utilization ratio impacts up to 30% of your credit score. Ideally, you want to keep that ratio below 30% at all times for your credit score to rise. And of course, the less you use your credit card, the less debt and interest you have to pay, and the more money you have to save.

9. Prioritize repaying your student loan

Having a student loan impacts your credit score. The total amount as well as your repayment history go on your credit report. Missing just one payment can lower your credit score by up to 100 points3. But when managed properly, your student loan can help you build your credit score.

More to the point, interest on student loans can be quite high. While Federal student loans have interest rates ranging from 3.73% through 5.28%, private student loan rates go as high as 14.49% or even more4. This is even more than conventional bank loans.

By paying down your student loan, you lower the capital and thus interest on the loan. Over time, this translates to lower payments, which can free up some of your money. And of course, it will help you build your credit score.

10. Pay down lingering debts

Got a bonus? Or perhaps you earned some extra cash from a side hustle? Consider using it to pay down debts. If any of your debts have been sent to collections, make sure to prioritize them and look for ways of paying them off rather than paying them down. That will push your credit score upwards.

Simply paying your debts is not everything. You want to ensure that you pay them on time. Late payments go on your credit report and will knock your score down. The same applies to bills. If you delay and miss paying your bills, your credit score will decline.

In case you’re finding it hard to keep track of due dates for debts and bills, you can consider signing up for alerts. They’ll remind you in ample time whenever a debt or bill needs your attention.

11. Monitor and review your credit report regularly

Up to 34% of Americans have erroneous credit reports5. A mistake in your report can unjustly lower your credit score and expose you to unfriendly interest rates and lending terms. To avoid such possibilities, monitor your credit report as frequently as you can. Check to see that there are no errors affecting your score. You can also use the report to determine if you’re doing the right things to boost your score.

All the three major credit bureaus – Equifax, Experian, and TransUnion – provide one credit report for free per year. But you can still pull your report a few more times to examine it. You’ll pay a small fee, but it’s a worthy expense considering how important it is to have an accurate report.

Better money habits: Taxes

Proper money management includes tax management. If you only think about tax when the deadline is approaching, now is the time to change and make tax preparation a continuous annual process. As long as you’re thinking about it, you’ll find ways of lowering your tax burden and diverting the extra cash to savings. Here are some better money habits that can help with that.

12. File and pay taxes on time

If you miss tax deadlines for filing and paying returns, the IRS may impose two penalties: a late-filing penalty and a late-payment penalty. Penalty amounts vary each year but they can run into hundreds of dollars per month. And as you may have already figured, lateness penalties will eat into your income and savings.

In case you’re not sure, Tax Day for individual income returns typically falls on April 15th. But it may be delayed by a few days under special circumstances. For example, in 2020 and 2021 Tax Day was delayed because of the coronavirus pandemic while in 2022 the delay was mandated by a holiday in the federal capital. Either way, always make sure to have your returns ready before the 15th of April to be on the safe side.

If, for one reason or another, you can’t make the deadline, remember that you can request for an extension from the IRS. If granted, you won’t have to pay lateness penalties.

13. Don’t splurge the refund

A tax refund is a rebate that you get from the IRS when you pay more tax than you owe. It’s a common thing, and according to the IRS, there were over 70 million refunds in 2021 averaging $2,873 per refund6.

If you get a refund, you may easily think of it as free cash and go on a spending spree. In a real sense, a tax refund is money that you overpaid. Misspending it is basically misspending a portion of your income. Therefore, rather than splurging it, consider putting the full amount to good use.

You can put it into the emergency fund, add it to your personal capital for business or use it to pay off high-interest loans like credit cards.

14. Keep those receipts

The IRS allows you to reduce your tax burden by taking tax credits and tax reductions. The difference between the two is that while tax credits directly lower the amount of tax you have to pay, tax deductions reduce your taxable income, thus indirectly lowering your payable tax.

You only get tax deductions on expenses that you can prove, which makes it necessary to keep receipts. That said, you don’t actually need to file receipts along with your tax documents. However, the IRS may pick you for an audit, and that’s where your receipts will come in handy.

15. Consult a tax expert

This is particularly important if you’re not sure how to file your taxes. Checking in with a financial adviser can make the entire process a breeze. Plus, they will help you figure out all the deductions that you’re eligible for. In doing so, a tax expert can lower your tax liability by a significant margin.

Final Thoughts

When all is said and done, building better money habits is a process that takes time and encompasses various aspects of your finances. From income to savings, credit and tax – you will have to work on them at the same time. The good news is that all you need is discipline. Things like creating and following a budget, planning for Tax Day in advance and creating a retirement plan will go a long a long way in ensuring that you achieve personal financial goals.

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