Personal Finance to Building Good Financial Habits

Why do I spend so much? : Breaking down reasons for bad spending habits

The first step towards developing better spending habits is to study and understand your spending patterns and the personal reasons driving those behaviours. By doing so, we can be more aware of our spending risks, tendencies, and be better informed in how to prevent them in the first place.

1. Financial Literacy

In many cases, unhealthy spending habits usually stem from a lack of financial literacy. Things like figuring out your short- and long-term goals, building budgets for them, tracking your finances, and understanding financial concepts like mortgage, inflation, investments.

Finance in itself is already a sensitive and complicated topic which may not be everybody’s cup of tea. On top of that, more and more financial decisions nowadays are made by consumers as saving and investment options grow diverse and complex.

All this can make thinking about money and budgeting a stressful and daunting matter that may be uncomfortable to discuss... still, it’s important to realise that understanding the basics can go a long way in helping you achieve your financial goals. Being aware of your finances and budgets doesn’t necessarily mean that you have to live a frugal life. It also isn’t a one-time thing, but should be regularly updated and reflect your needs accordingly.

The idea is to apply financial skills in ways that allow you to still live comfortably (and occasionally even indulge!) as you build your financial standing. It has been shown in many studies that having a sense of stable financial security is strongly correlated with life satisfaction and happiness.

2. Our Past with Spending

Our spending habits are usually also a reflection of the people around us, especially family, since when we first gain financial independence, most of our knowledge surrounding money comes from watching what our parents spend on.

Maybe an individual grew up in a household with an unstable financial situation, and as a result developed hoarding tendencies. Or maybe an individual’s parents used to consistently spend lavishly and consider that the norm. Everyone’s situation is extremely unique to themselves and their background. So when it’s time to become financially independent and grow your financial stability, it’s important to consider your specific situation and also remember to continue to re-evaluate from time to time.

3. Retail Therapy – A Guilty Pleasure

The term “retail therapy” is quite well-known, but what is it about spending money that makes us feel good? Spending will usually trigger the release of dopamine, often known as the “happy hormone” because it results in feelings of happiness and pleasure. This is one of the biggest reasons why so many people engage in it–splurging on ourselves makes us feel good as long as it is not in conflict with another goal, such as saving money.

But otherwise, shopping can also become addictive and dangerous when it crosses a point where money spent is significantly more than money earned.

Another reason is also because when people feel down, it is usually as a result of something that was out of our control. By engaging in the activity of shopping, we feel that we’re restoring our personal sense of control over our lives. Research has found that the inherent decision making aspect in shopping helped restore feelings of personal control and reduced sadness, regardless of whether the situation was hypothetical or real.

What are your Financial Goals?

Financial goals refer to what we want to do with our money. It reflects our values (i.e., the things we care about in life) – which could be people, possessions, causes or a lifestyle that we aspire towards.

Financial goals can also change depending on our stage of life (e.g., where we are in our careers), or our priorities in our existing life circumstances

How do I set financial goals?

• Financial goals need to be SMART (specific, measurable, achievable, realistic and time-bound), to allow us to make specific plans to achieve them

  • Example: “I want to accumulate $50,000 for a HDB downpayment in the next 5 years”

  
  

• Use your stage of life (i.e., point in career) as a reference point

  • Starting out in our career

    • A good time point to lay a strong financial foundation and plan ahead.

    • This is where you should: Aim to build up your savings and emergency fund, get basic health and life insurance while the premiums are low, and invest in suitable products with your spare income

    
    

  • Mid-career

    • This is where you may be starting a family or you may have a growing household. You may also be supporting your parents and/or in-laws.

    • This is when you should: Aim to buy a home you can afford, make informed financial decisions based on your family’s needs and goals, build financial reserves (so as to cover for expanded family or cater to new commitments e.g., an additional child), and have adequate insurance coverage

    
    

  • Preparing for retirement

    • This is where you may need to send children to university, or take care of aged parents. You should: Aim to prepare ahead for retirement needs (calculate how much you need for your desired lifestyle and healthcare when you retire), and set aside budget for your dependants’ needs

    
    

  • Retiring well

    • This is where you have stopped work and would ideally be self-sufficient (i.e., have an adequate retirement income stream).

    • You can aim to: invest in low-risk investments to generate a regular income for yourself, ensure you are debt-free before retirement (e.g., fully paid for housing loan), and spend your retirement funds sensibly (i.e., spend within your means and beware of financial scams)

    
    
  
  

• This specifically entails minimising the habit of buying without need, and finding ways to repay debts effectively. This can also involve substituting financially unhealthy habits with financially healthier habits. Cover the bases of setting up an emergency fund, address spending and debt issues to facilitate successful attainment of financial goals.

• Track your progress, as your success will motivate you to continue

  • For example, when you set a goal to reduce spending, you could track your monthly expenditure to ensure it is within the budget you have set. When you see that you have made progress, you will be motivated to keep going.

  
  

• Familiarise yourself with financial resources to help yourself make sound and informed financial decisions. Financially literate people can make sound financial decisions that incline them towards achieving their financial goals (i.e., to grow and manage finances appropriately, which contributes to their financial well-being.

• Have an awareness of how your personal characteristics (e.g. discipline) may hinder or facilitate your ability to achieve your financial goals

Reminder that financial goals are something to reflect on regularly as times change!

Financial goals change as our stage of life and our priorities change. Take stock of your goals from time to time.

As your life circumstances or priorities change, there may be times when a particular goal is no longer important to you. Let go of it, to allow yourself more energy to pursue goals that are more important to you.

We will also need to adjust our financial goals in response to major life changes (e.g., job losses, divorce, retirement, major illness) or external change (e.g., market changes in commodities and stocks, burglaries and accidents, loss of assets due to natural disasters, etc)

Setting a budget

Budgeting is a process where we create a plan to organise our financial resources. Having this organisational process can give us a clearer overview of how we are spending our money, and assist us in determining beforehand whether we can proceed with financial purchases without landing ourselves in a situation where we spend more than we have or are willing to spend. Whilst it might be easy to keep on top of our spending when we have very few purchases, having an organisation process can alleviate a significant portion of our mental load as our responsibilities and spendings grow over the years.

How do I set up a budget?

Setting up a budget largely depends on your current life goals. There are no hard and fast rules as to what portion of your income should be allocated to what kind of spending. Some people might choose to save 20% of their income....

..whereas others might be able to save 50% of their income. Each saving and spending strategy largely depends on what the individual needs and wants to achieve. Thus, figure out your identified goal and organise your financial resources to work towards your goal.

Identify your life goals

Identifying your immediate short-term goals, mid-term goals, and long-term goals (in terms of years it might take to achieve) can assist your planning strategy.

Short-term goals could be wants such as going to an opera show within the next month, mid-term goals could be plans to travel overseas for a long trip the year after, and long-term goals could be plans that take more than 5 years such as purchasing an apartment.

Figuring out your goal provides a clear idea of how much financial resources you need to save or use to generate more income to bring the goals into a reality.

Nonetheless, here are some steps of what you can take to start crafting your budgeting strategy.

Step 1:

Determine your total expenditure – A good start to crafting your strategy can start with tracking how much you are currently spending per month. Some applications make it easy for us to keep track and manage our spending.

Step 2:

Categorise your expenditure into Needs vs Wants – Some might already know the expenditure of their necessities per month. This can include their spending on food, rent, transport, or other things such as their insurance or their telephone plan. Wants include any activities that you deem to be omittable to your life such as buying that new Switch game or catching your idol’s concert.

Step 3:

Figure out your financial resources available after subtracting your Needs from your income – Categorising your expenditure into Needs vs Wants helps to give a clear overview of what resources you have at your disposal. From here on, how you plan to break down your resources is up to your identified goal.

Step 4:

Segment your financial resources to achieve your goals – Figure out the amount of savings you would like to allocate each month. Your savings can be used to achieve your life goals, or for unforeseen emergencies such as a sudden retrenchment or repairing your phone after accidental damage that renders it unusable. Some might choose to separate their budgeted savings into ‘emergency funds’ and ‘savings for life goals’, whereas some might choose to just lump them together into a broad category of ‘savings’. Regardless of category, find a strategy that is suitable for your current situation.

Step 5:

Identify your financial resources for your own Wants spending – At this point, you would have accounted for most of your Needs. The remainder can be used as a rough gauge of how much leeway you have per month to spend on your Wants. Depending on your situation, you might choose to channel the remainder of your financial resources into more savings or spend it to treat yourself and your family. Having step 5 allows you to provide an overview and help determine if our new Want purchase would be within reasonable means of our life plans.

Tips and Further considerations of budgeting:

Savings

Figure out if you would like certain savings to be accessible to you anytime, or if you are planning to have savings that work towards long-term goals. If there are savings that are long-term in nature and you do not foresee the need for withdrawal, consider investing this financial resource to generate more income. On the other hand, if you foresee your savings to be used, take note of withdrawal penalties for different saving plans.

Needs vs Wants

Working towards a long-term financial goal might seem difficult and out of reach. Having the discipline to reduce the expenditure on your short-term. Wants can expedite your effort toward attaining your long- term goals. It might not be easy to cut out bubble tea from your life, but having a reduction in consumption can go a long way.

Tips and habits to build

Using applications to keep track of expenditure is a convenient and easy way to have a clear image of what you are spending your income on. In addition, some might prefer to have monthly reflection sessions to re- evaluate their spending, or even their life goals to constantly update their budgeting strategy. Many spreadsheets are available online to help your budgeting journey instead of creating one from scratch

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