What is financial discipline & why do you need it?

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The word “discipline” can bring about some hefty connotations. Thoughts might travel to a terrifying teacher or a stint in doggy boot camp for Fido and his ever-lifting leg. But in life, there’s another instance where a little bit of discipline can bring a lot of positive gains.

While this article isn’t about how to avoid detention or save your favorite living room furniture from stains (sorry…), it is about achieving a level of money discipline so refined, it sets you up for future financial independence.

From getting clear about financial goals to building a budget, setting aside savings, slowing down spending and planning solid investment strategies, here are seven ways to achieve financial discipline.

Related: Tips for becoming financially independent

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What is the Meaning of Financial Discipline?

Financial discipline is the act of setting specific monetary (spending and saving) goals and measuring oneself against how well they are achieved. Once that financial discipline is established, a person can take further steps to becoming financially independent.

Financial independence means having enough money to pay one’s living expenses without being dependent on people or a particular employer. It provides a financial runway that’s flexible enough for a person to make decisions based on short and long-term needs instead of the immediate state of their finances.

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How Can Financial Problems be Improved?

Financial problems can bring about a level of stress that might be difficult to shake. Sitting and worrying won’t necessarily change the state of a person’s finances, but putting together a financial plan is a tangible step in the right direction.

By confronting their current financial realities and committing to practicing money discipline, a person who’s struggling with stressful financial problems can improve their overall outlook and make progress toward a more stable financial future.

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1. Getting Clear About Financial Goals

It could be difficult to get disciplined about money without embarking on a vital first step: setting financial goals. Writing down specific short-term, mid-term and long-term financial goals can help whittle things down even further and illuminate a plan for how to proceed.

Here are some common examples of financial goals (though real goals will vary depending on a person’s individual priorities and plans):

Short-Term Financial Goals

  • Paying off credit cards and charge cards
  • Paying off student loan debt
  • Setting a spending limit for the month
  • Setting up an emergency fund
  • Saving a certain amount each month

Recommended: Smart-Short Term Financial Goals to Set for Yourself

Mid-term Financial Goals

  • Saving money for a trip abroad
  • Setting aside funds for a major gift
  • Putting away money to buy a big ticket item like a boat or car
  • Saving up for an important home renovation

Long-term Financial Goals

  • Setting aside money for retirement
  • Saving for a dependent’s future college tuition
  • Putting away money for a down payment on a house
  • Investing in stocks and bonds for future returns

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2. Creating a Convenient Budget

Building a monthly budget isn’t necessarily at the top of everyone’s bucket list, but seeing spending habits and current expenses in black and white can make it easier to get a handle on overall finances. Whether it’s written out by hand, using an online spreadsheet, or finding software that helps turn financial data into a trackable budget, there are many ways to build a budget.

Once someone finds a system that works, they can better understand how much money they’re making versus how much they’re spending, saving and possibly investing. The transparency that comes with creating a budget can bring them closer to becoming financially disciplined.

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3. Paying Down Existing Debt

Debt comes in many forms — from student loan debt to car loans, medical payments, mortgages and credit card debt. It might seem fairly obvious, but tackling existing debt as a step toward financial discipline can make it easier to start the subsequent steps like saving money, making investments and planning for a brighter financial future. Adding the debt paydown directly into the budget ensures it’s consistently covered each month.

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4. Opening a High Yield Savings Account

Even if it’s as little as $20 a month, setting something aside for savings in spite of one’s current debt-to-income ratio ensures some funds will start to add up. By opening up a savings account and setting up a recurring deposit, a pivotal piece of financial discipline can practically go on autopilot.

According to the FDIC, the national average interest rate on savings accounts as of Nov. 15, 2021, is 0.06% APY. In the case of certain high yield accounts, however, interest rates can reach 1.50% – 2.00% APY. By putting money into a high-yield savings account, it’s simple to earn even more money just by setting funds aside in the first place.

Recommended: Different Types of Savings Accounts You Can Have

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5. Establishing an Emergency Fund

Just 41% of Americans would be able to cover a $1,000 emergency with money from their savings. This could include a major medical event, car accident or emergency home repair, to name a few. To help cover such expenses on the fly, 37% of Americans would have to take on credit card debt, a personal loan, or ask family or friends for financial help.

Establishing an emergency fund isn’t just a step along the path to financial independence, it’s a way to weather unforeseen expenses without having to worry about day-to-day expenses being paid for or financial goals being met.

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6. Cutting Back on Spending

Despite the best of intentions, overspending happens. Whether it’s a pileup of holiday gift purchases, a particularly eventful summer, or a lavish trip overseas, spending more than what you earn is bound to occur from time to time. If it happens constantly, that’s another story.

Cutting down on spending is a tangible way to practice sound money discipline. There’s no one-size-fits-all approach to doing so, but by building a budget, hunting for bargains, creating ironclad shopping lists, using promo codes and coupons, and thoroughly tracking spending, it can be easier to cut back and get one step further to financial independence.

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7. Seeking Sound Investment Strategies

If you’re searching for a head start to financial independence, familiarizing yourself with a wide variety of investment strategies can help get you on the map. Depending on your individual financial situation, weighing the risks and benefits of certain account types, penalties, fees, and the ability to access funds can help you select the right investment strategy. By researching different markets and understanding your personal risk tolerance, you can select investment strategies that directly align with your current and future financial goals.

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Focusing on Financial Planning

The term “financial planning” might feel more like a unicorn you only get to meet when you’re floating high on a cloud of financial independence, but it’s actually another sound step along the way. These days, financial planning isn’t designated for the already-wealthy, it’s becoming accessible and essential for people at every stage of life. In fact, in the age of digital transformation, financial planning can even be automated.

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The Takeaway

Financial discipline or money discipline is the act of setting specific financial goals and tracking their achievement. By practicing financial discipline, a person who’s struggling with stressful financial problems can improve their outlook and make progress toward a more stable financial future.

A few ways to practice financial discipline include setting short-term, mid-term, and long-term financial goals, building a budget, paying down debt, opening a high-yield savings account, cutting back on spending, establishing an emergency fund, setting sound investment strategies and finding a financial planner.

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