7 Tips to Build Better Money Habits and Survive Economic Downturns

In today’s unpredictable economic climate, building better money habits is more important than ever. With 34% of American workers living paycheck to paycheck according to a 2023 Bankrate survey, it’s essential to reassess your financial practices to ensure they are robust enough to weather any storm. 

“Given the current economic climate, the truth is that without an increasing income, it would be difficult, if not impossible for one to stay financially stable,” says Mafe Aclado, a financial management specialist and General Manager of Coupon Snake.

Developing good money habits can help you not only survive but thrive, no matter how turbulent the economy becomes. By breaking free from toxic money habits and embracing strategies that can transform your financial health, you can build a more secure future. This article, featuring insights from financial experts, will unveil practical tips to help you cultivate these habits.

The current economic climate and how it impacts your finances

In recent years, the U.S. economy has been marked by a series of significant shifts that have directly impacted the financial well-being of many Americans. Understanding these shifts is essential for making informed decisions about your finances.

Inflation and high interest rates can “reduce the spending power of the individual's income, causing them to either suspend their savings goals to prioritize essential needs or, even worse, rely on their savings to make up the difference,” Aclado says. 

“Individuals should focus on maintaining a strict budget, reducing discretionary spending, and increasing their savings rate,” says David Blain, finance advisor and CEO of BlueSky Wealth Advisors. 

Here, we’ll break down some key economic factors that are relevant not only in the current economic situation but also in any financial climate.

• Inflation: Inflation affects money habits by reducing the purchasing power of your income, meaning that as prices rise, your money buys less than before. Regularly reviewing and adjusting your budget helps ensure you can manage any changes in the cost of living effectively.

• Employment trends: Job market fluctuations can lead to financial instability. Diversifying your skill set and exploring side income opportunities can provide added security.

• Rising interest rates: Higher borrowing costs make debt more expensive, emphasizing the need to manage and reduce high-interest debt and maintain a strong credit score. 

• Stock market volatility: Market fluctuations can impact investments and retirement savings. Understanding these trends allows for better investment decisions, particularly during downturns.

• Supply chain disruptions: Global supply chain issues have led to shortages and price increases, highlighting the need for strategic purchasing decisions and planning.

• Government policies: Legislative changes, including stimulus packages and tax policies, directly impact your finances. Staying informed can help you take advantage of opportunities and adjust your financial strategies accordingly.

This might also interest you: 9 Financial Tips Every Woman Should Know to Protect Themselves

7 tips for building better money habits

Building good money habits is essential for achieving long-term financial stability and resilience, particularly in today’s ever-changing economic landscape. In this section, we'll explore actionable tips that can help you develop better money habits, from budgeting effectively to managing debt and investing wisely.

1. Build an emergency fund

An emergency fund is your financial safety net, crucial for covering unexpected expenses like medical bills or job loss. “The ideal size of an emergency fund is typically six to 12 months of living expenses,” Blain says. Start by saving a portion of your income each month, cutting unnecessary expenses, and considering additional income sources to accelerate your savings.

2. Create a financial plan

Establishing a financial plan is essential for achieving both short-term and long-term goals. A solid plan provides a roadmap for managing your income, expenses, savings, and investments. Set clear financial goals—such as saving for a down payment on a house, paying off debt, or building retirement savings. Then, outline actionable steps to reach those goals, regularly reviewing and adjusting your plan as your financial situation evolves.

3. Stick to a budget

Budgeting is the foundation of good financial habits. It helps you manage your money by tracking income and expenses, ensuring you live within your means. Categorize your expenses—such as housing, utilities, groceries, and entertainment—to identify areas where you can cut back. Set realistic spending limits for each category and track your expenses using budgeting tools and apps, such as Mint and YNAB (You Need A Budget). 

4. Pay down high-interest debt

Managing debt, particularly high-interest debt, is crucial. “Focus on paying down high-interest debt first to avoid the compounding burden of increasing costs,” Blain says. Strategies include consolidating debt to lower interest rates, making extra payments toward the principal, and avoiding new debt to prevent further financial strain.

5. Practice smart spending

Spend less money than you earn. This involves making better choices by avoiding impulse purchases and differentiating between needs and wants. Implement a “cooling-off” period before making significant purchases to ensure they align with your financial goals, helping you keep your spending in check and prioritize what truly matters. One classic example of this is putting an item in your online cart then leaving it there till the next day, when you can make a final decision on whether to purchase it or not. 

6. Invest wisely

Investing is key to building wealth, but it’s important to do so wisely. Blain emphasizes the importance of reviewing and adjusting investment portfolios periodically to ensure they’re “diversified and aligned with long-term goals.” Start with small, consistent investments and take advantage of compounding returns over time to steadily grow your wealth.

Read this next: Real Estate Investing for Beginners: Your Complete Guide

7. Enhance your financial literacy

Improving your financial literacy is essential for building better money habits—and it’s never been easier to educate yourself. “We live in an era where information is easily accessible,” Aclado says. She recommends exploring websites and YouTube channels that offer practical financial advice tailored to your needs. 

Similarly, Blain advises turning to personal finance books, online courses, and reputable financial websites to deepen your understanding. Additionally, consulting a certified financial planner can provide personalized guidance. 

Identifying toxic money habits

“Common toxic money habits include failing to include savings as part of your budget, impulse shopping, high interest debts and failing to invest,” Aclado says. These behaviors can quickly lead to accumulating debt, living paycheck to paycheck, and being unprepared for financial emergencies. 

Here are some signs that you might be trapped in unhealthy financial patterns:

• Living beyond your means: If you regularly find yourself spending more than you earn, relying on credit cards to fund your lifestyle, it's a clear sign of a toxic habit.

• Budget avoidance: Not tracking your income and expenses, or avoiding creating a budget altogether, often leads to financial disorganization and stress.

• Lack of savings: If you don’t have an emergency fund or consistently prioritize spending over saving, it indicates poor financial planning.

• Impulse spending: Frequently buying things on a whim without considering your budget or financial goals is a red flag.

• Minimum payments on debt: If you’re just paying the minimum on your credit cards or loans, you’re likely stuck in a cycle of debt that's hard to escape.

• Over-reliance on credit: Using credit cards or loans to cover everyday expenses, rather than out of necessity, suggests a dangerous dependency on borrowed money.

• Neglecting financial planning: If you haven’t set financial goals or created a plan to achieve them, you’re likely drifting without a clear financial direction.

• Failing to invest: Avoiding investments out of fear or lack of knowledge, or keeping all your money in low-interest accounts, can stifle your financial growth and prevent wealth accumulation.