10 Timeless Money Management Habits
Fashions come and go – but there’s a reason the timeless ideas persist. I’m generally pretty sceptical of fashion in most parts of life. It seems to me that most of the time they coincide with the most profitable production cycle the manufacturers can conjure up.
The same is especially true in the financial world.
Since I walked out of university back in 2005, I’ve seen a few fads and trends come and go.
Trend 1 – Plantation and Agricultural Investment Schemes
There were the ‘tax-effective agricultural’ schemes of the mid-to-late 2000s.
Where you’d borrow a chunk of money – at a high interest rate – then buy a flock of ostriches or forest of (flammable) trees in a remote place, because the ATO would throw some rather fetching credits your way.
They were very popular at the time, but fundamentally illogical assets, high commissions flying everywhere and people, occasionally, wanting to actually make some money from their investments brought it all undone.
Trend 2 – Structured Complexity
Another trend was the pushing of hyper-complex structured products to unsophisticated, everyday investors.
I distinctly recall sitting in a room with the Business Development Manager (BDM) for a big investment firm back in 2007. They were trying to get us to pitch their structured investment product to our clients.
I’d tried to read the Product Disclosure Statement (PDS) and was stuffed if I could work out how anybody – bar the investment firm, that is – made any money.
So I asked them. And the explanation was about as clear as low-grade mud. So we didn’t use that product with any of our clients. Or any of these structured ones, actually. If we couldn’t work out how they actually operated, how could we explain it to people?
This trend also ended badly – though I should note this wasn’t the firm I’m talking about. There was more than one running around at the time.
Trend 3 – Superannuation Borrowing
One of the more damaging fashions I’ve seen over the years has been the absolute feeding frenzy of people encouraging – luring – people into using their superannuation to borrow money, and buy a property.
Because you can borrow money in your self-managed superannuation fund (SMSF), it quickly became a honey pot for accountants, advisers, brokers, lawyers and property developers to funnel clients into these sophisticated investment vehicles.
That the money often went into off-the-plan properties with purchase prices artificially inflated due to the commissions flying everywhere made it all even worse.
This trend also ended badly. In fact, a colleague of mine who keeps up with the decisions out of the financial ombudsman (AFCA) believes these are the leading source of complaints and settlements.
So, you could say I’m professionally sceptical of many of the trends that come along each year.
Remember crypto? Or those inflated ape JPEGs? Gold bullion is a recurring one, while the occasional tax scheme comes along too.
The lesson?
Be sceptical of anybody pitching you a unique/on-trend/fashionable financial idea.
Because just sticking to the basics, the timeless fundamentals of money, will be enough to get you where you want to go.
What are these financial commandments? Well, prepare to be bored (boredom is an underrated discipline when it comes to money) – here they are!
1. Maximise Your Earnings
The first building block in your financial house is going to be your income. From your first job, through to your last one, the amount of money you earn – and keep – will dictate how much you can spend, save and invest.
So do what you can to grow your earnings over time. Either by investing in your education and experience, or setting up one of those mythical low-intensity side hustles – doing what you can to boost your income will open up your financial options.
2. Budgeting
While you’re growing your income, it’s also important to get into the habit of creating – and sticking to! – a budget.
Track your income and expenses to understand where your money is going. This helps you allocate funds for savings, bills, and discretionary spending.
This is a big topic, and I know that a lot of people straight up hate the idea of keeping a budget.
But trying to grow a secure financial future without a budget is like riding a bike with one hand glued to your helmet.
You could do it.
But, why would you?
3. Savings Habit
Your budget should start with a payment to your savings account. Pay yourself first, then make everything else fit into what’s left.
If you’re on a fixed wage, try automating your savings by setting up automatic transfers to a separate savings account.
If your income is more variable, you can automate a lower amount and schedule a regular session to transfer what you can afford into your savings.
Not only will this help you grow your long-term wealth (once you’ve filled your short-term needs, but you can also divert this amount to other, productive investments), it’ll make you feel far, far more in control of your finances.
Speaking of which…
4. Emergency Fund
Build and maintain an emergency fund.
This fund – for when things go wrong – is a critical part of your financial infrastructure. Instead of reaching for the credit card when the washing machine blows up, or using Afterpay to cover that new motor in your old car, you use this account.
Reaching into your savings to pay for these big, unexpected expenses is really empowering and, frankly, a mature way to run your money.
The first milestone is having a month’s worth of expenses saved (which you can work out, because your budget breaks it out for you).
Then aim for three months.
Then six.
And, finally, after you have the other building blocks in place, build towards twelve months of your expenses in your emergency fund.
5. Debt Management
Some people will tell you to avoid debt like it’s out to get you. I can appreciate this perspective, but the reality is that in the modern world – you’re going to need to take on some debt.
Few people are buying their home outright, or their car, or any other big expense.
So you’re probably going to have a mortgage, a credit card and maybe a personal or car loan too.
Instead of avoiding it (flagging that is generally better not to have debt), be wise about it.
Look into the snowball method of debt repayment – where you prioritize paying off high-interest debts like credit cards while making minimum payments on lower-interest debts.
Pay attention to the interest rates and fees involved with each loan.
Take control of your debt and then work as hard as you can to smash it down.
Do that and you have options in your financial future. Avoid it, and you’re stuck on the treadmill.
6. Live Below Your Means
Perhaps the most fundamental point on this list – spend less than you earn. And keep spending less than you earn. Forever and ever.
Avoiding lifestyle inflation will let you keep diverting more money to productive ends. That’s not just investing, of course. It might be going towards future, expected costs like school fees or a big anniversary trip.
But don't immediately increase your spending when you get a raise or windfall.
Keep your everyday expenses low and, again, you’ll be giving future you options and freedom.
A worthy reason to avoid some of those additional expenses that keep trying to sneak into your budget.
7. Invest in Compounding
Here’s a good place to open up the calculator on your phone, or computer.
Take 100 and multiply it by 1.05 (assuming 5% interest a year).
Then take that 105 and multiply it by 1.05 again. Take that 110.25 and do it again. And again.
Do that often enough and you’ll see the sheer power of earning interest on past interest. This is compound interest.
There are two factors to this powerful equation – the interest rate and how long it runs for. You can’t control the interest rate, but you can control how long you leave money invested for.
And while you can’t control the rate of return, you can set the portfolio up to give it a better chance of earning higher rates of return.
Invest in assets like stocks, bonds, and real estate to grow your wealth over the long term.
If you increase both parts of the equation, you’ll see phenomenal growth in your portfolio into the future.
8. Diversify Your Investments
I’ve been doing this for 16 years and I have not been able to think of a better analogy to explain diversification than ‘not having all your eggs in the one basket’.
Diversification – spreading your money across different asset classes, investments and accounts – reduces the chances of you losing the whole lot. Because if you park all of your money in one investment – pop all your eggs in the one basket – and that investment fails, then that’s all your money gone.
While if you instead put some here, some there, some over there and some over here – if one fails, then you’ll still lose some money – but not all of it.
There’s a downside to this kind of safety – real fortunes are earned by concentrating money into one, phenomenally successful asset. Think Zuckerberg and Facebook.
But that’s also akin to winning the lottery. Which most of us will never do.
Which is why the more prudent move is to accept that diversification won’t make you rich – but it will help you sleep better at night and avoid diving deep into the red when the financial world goes through one of its regular tantrums.
Diversify your investments. Spread your money across different asset classes to reduce risk. Avoid putting all your eggs in one basket.
9. Financial Goals
Some people are goal-oriented, but some aren’t. I get that. And, to tell the truth, the traditional way of setting financial goals – do X by Y date – doesn’t really resonate with me either.
But I can also declare that the people that achieve the most in their financial lives set goals for themselves. Then they chase them.
Now, the process of setting those goals will be different for everyone. I like this model Keith Abrahams has built, around 100 Life Goals, because then you can put a dollar value around them.
Some people like to build their goals around habits they want to embody, or experiences they want to have.
Either way – having goals makes it infinitely more likely that you’ll achieve the life you want.
10. Insurance
Possibly the least fun item on this list – and that for a list that has ‘budgeting’ on it!
But there are risks we can’t avoid in life. Death, disability, illness, accidents, big things can happen.
And they have a financial impact. So the sensible thing to do to minimise the financial impact of risks you can’t avoid is to pay for insurance to lay off that risk to a third party.
Sounds simple – but comes with a lot of complexity. And expense.
Regardless, protecting your financial situation with a portfolio of acceptable insurances is a fundamental part of money management.
These timeless money management concepts form the foundation of sound financial practices.
Whether you're just starting your financial journey or you've been managing your money for years, these principles can help you build financial security and achieve your financial goals.
General Advice Warning: This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.