Building Financial Habits

Since it’s Father’s day this weekend, I got inspired to write about two topics — this sobering article about financial concerns amongst my peers and one important thing I learned from my dad which is discipline. Learning personal discipline has transformed the way I do things in my day-to-day life and it extends into my financial habits.

I’ll start with a story about growing up in Los Angeles. The day I turned sixteen I immediately went to the DMV to get my driver’s license. Somehow driving for me was (and still is) a form of independence. When you grow up in a city that is known for freeways and traffic, to be a teenager you had to drive everywhere if you wanted to hang out with friends, meet girls, and just be an angsty teenager.

Driving, however, gets incredibly expensive. Here’s a chart and table showing you the rise of gasoline prices during the time I started driving circa 2003:

Gasoline nearly doubled from the time I started driving to graduating from high school. For context, I drove a 2000 Volkswagen Golf which had a split of 24 city/31 highway miles-per-gallon. If I wanted to drive from my hometown of Burbank to Santa Monica it was ~24 — 32 miles(depending on traffic)…one way. Factor in idle traffic and I’m burning more fossil fuels than necessary to get to a sandy beach.

During this time every member of my family had a Shell gasoline credit card which charged the family account. So that’s three additional people who also had to drive — with legitimate reasons — outside of my yearning for teenage fun on the road.

One day my dad asked me to stop using the Shell credit card. I don’t recall ever arguing with him because he never told me to stop driving. He simply wanted us to re-think about our need to use the card. In reality, he saw we were driving way too much and charges started racking up so he took the cards from my sister and I. From that day forward I remember using cash or my debit card when filling up my car. I even stopped filling up my car with a full tank of gas everytime I went to the gas station. I knew if I had a full tank that meant I could go as far as my car would allow.

While driving gave me the sense of personal freedom and independence, I had to be reminded that this also came at a cost. Fast forward ten plus years and the freedom that I desire now, along with my generation, is financial freedom. While a grimly picture is painted by industry reports, studies and publications, I devised some personal hacks to build habits and discipline with my personal finances. Here are a few that I use:

Control the money flow

If you’re working a full-time job, then you’re familiar with signing W-9 forms and setting up your payroll. The first thing I did was sign-up for direct deposit, which I hope everyone does. However, instead of depositing into my checking, I direct it to a savings account. I do this for the following reason: I have less access to spending my paycheck because there are less instruments to do so. Most checking accounts today provide customers with a complimentary debit card, they almost never provide one with a savings account. To curb unnecessary spending on my debit card day-to-day I consciously transfer money between my savings and checking account. I like to think this is an act of giving myself an allowance. If I have bills to pay, which typically pull from my checking account, I make sure I know when the due dates are and I fund my checking prior to my account being charged.

Keep a running spreadsheet

I remember learning how to balance a checkbook at some point in high school or college. Fortunately with advances in modern banking this is now a thing of the past. The unfortunate part is it also leaves me without a good habit of checking my spending. Yes, I can easily access my bank account to see balances and charges online or via a mobile app. But I often wonder how different people actively track expenses or debt tied to their name. Here’s a peek into a spreadsheet I’ve iterated on the past couple years:

It’s not pretty, but it does the trick. I believe people should create a process that makes them comfortable. I can only imagine the process of balancing a checkbook twenty years ago must have taken a really long time. If I can sit down for fifteen minutes and update a spreadsheet today, then I believe I’m building a good habit and I’m being more efficient than a version of myself twenty years ago.

Manage the debt

“Arn wishes that he had approached debt a bit differently when he started out, and that he’d also had more financial education.”

This is a pretty powerful quote to me in the article. Common themes in the article are around:

  • Education [“Go to state school”]
  • Saving [“Save more cash in your 20s”]
  • Career Paths [“Minimum salary aspirations”]
  • Financial tools [“Investing in a 401k”]
  • Habits [“How to manage debt”]

The theme of habits is what really peaked my interest, but also a friend asked about how I manage my finances. The other themes inherently have too many factors to consider and I’m not qualified to speak towards them. But habits are subjective and vary amongst individuals, which I thought why not share mine in a post.

If you haven’t noticed, my spreadsheet is where I track my aggregate credit card spend. The one common consumer debt we share with practically anyone in the U.S. is related to credit cards. Americans carry an average of 3.7 cards according to a Gallup survey. Now I’m going to skip the part where I think everyone should know how a credit score is calculated, what APR stands for, and general good habits to have with credit cards (i.e. pay your bill in full each month). These are pretty much well covered all over the internet. A nifty hack I do use to my advantage is the ability to change the bill due date on my credit cards.

When you sign-up for a credit card, the process of being approved all the way to the opening of the account eventually lands on a date which starts the beginning of your billing cycle. Essentially, I took half of my cards and set the bill due date after the first of the month. The other half I set the bill due date after the fifteenth of the month. I did this to simplify the model of how I use credit cards and aligned it to my paycheck cycle.

For example, in the second half of this month I will carry three cards in my wallet and charge expenses across the different cards. By doing this I know spending $100 on each card will result in a $300 bill which I can mentally make note of on my upcoming paycheck. Now I know when I get my paycheck deposited I have to deduct from my paycheck the amount to cover the upcoming bill. When the first half of the next month starts, I just swap out the three cards I have with the other set of cards and I repeat this cycle. When I couple this with how I manage my cash flow, I essentially built a process to manage my finances.

Test and try different things

You may be thinking what I described above as a lot of work. In reality, it is a lot of work. However, I knew if I wanted to be good with money I needed to figure out a process and stick to it. The common advice of just saving $X/month of my paycheck just sounded too easy and I knew I could fall out of rhythm.

What I learned through my method is I can test different lifestyles. If I wanted to book a vacation, I can plan ahead and curb my spending for two weeks because I charged a card for plane tickets. If I wanted to update my closet, I could binge on some new clothes but then reduce my expenses the next two weeks. Ultimately, I’m constantly investing in myself and limiting myself because that’s how I determine what works and what doesn’t.

I like using the analogy building good money habits is like staying healthy and fit. When you work out and exercise to reach a personal goal, you feel great once you achieve that goal. Yet, it doesn’t mean you stop once you’ve hit your ideal weight or health goal; you keep doing what you did to maintain what you achieved. Just don’t forget to indulge and eat a donut or burger to celebrate.