Everyone has bad habits. It’s just a part of being human. I try to squash a bad habit as soon as I recognize one, and I’m sure you’re in the same boat. It’s easy to develop bad money habits early on in life, and it can be difficult to kick them even once you recognize them.
In a time where many people are living paycheck to paycheck, bad financial habits can potentially cost you thousands of dollars – money you could be investing for retirement or saving for a down payment on that dream home. Which of these bad habits are you guilty of? And how can you stop them?
1. Spending more than you can afford with credit cards
Most credit card interest rates are well over 15% (and that’s on the low side), which is bad news for cardholders who carry balances month to month. These high interest rates mean you’re paying more in interest and that your debt is adding up quicker. Worse yet, many people get stuck in a cycle of credit card debt – a habit that just seems to never go away.
Many consumers make what they consider to be “educated guesses” as to whether they can afford putting new expenses on their credit card because they just have to have that new Apple Watch, or just one more chai latte at Starbucks SBUX, -0.36% to get them through that afternoon slump. The problem is that people think they will be able to pay off those extra expenses at the end of the month, but they can’t really calculate their future expenses. Maybe there was a medical emergency that left them strapped for cash at the end of the month, leaving them unable to pay off the extra expenses they put on their credit card.
What can be even more challenging is if you’re living paycheck to paycheck, small emergency expenses can cause enough of an impact to make you late on your credit card payments. If you’re late once, then you can easily develop the habit of being late over and over again, until your credit score and amount of debt start hurting. Late payments negatively impact your credit score, and if your score drops low enough, then it can mean higher interest rates for you in the future.
Unless you’re entirely sure you can pay off your credit cards in full every month, you may want to seriously consider not using them. If you already have a high balance, and the temptation is too great to use them, then you can try leaving them at home, so that you can’t spend more on them while you focus on paying down the balances.
I’m sure you’ve been at a store making a purchase when the cashier asks if you’d like to sign up for their store credit card to get an additional 10% off your purchase. Or you’re browsing the web late at night and you see a travel rewards credit card that offers 50,000 points, which will pay for your next round-trip if you spend $3,000 in the next three months. Plus, you’ll get 2% cash back on all your purchases…but there’s also an annual fee.
In a lot of cases, credit cards offer huge sign up bonuses that will hook you, but the spending thresholds are high, and you might not be able to pay off the balances, or pay the annual fee, so aside from the sign-up bonus, the card may not be worth it.
Not only that, but opening up new lines of credit causes hard inquiries. The more accounts you try to open, the more this will negatively impact your credit. Eventually you’ll reach a point where you’ll start being denied because applying for many accounts raises red flags. If a sign-up bonus seems too good to pass up, take a moment and really consider whether you’ll actually use the credit card, whether the sign-up bonus and rewards are worth it, and if you’ll be able to pay the balance in full each month.
2. Not using a budget
One of the best habits you can develop with your personal finances is tracking your transactions so that you can very clearly see where you’re spending your money. Not using a budget sets you up for failure. The second you look at your zero (or negative) balance in your bank account, you’ll ask yourself “where did all my money go?” Tracking your expenses will help you understand where you’re spending your money, and how much you’re spending.
Try tracking your expenses for a month – you can use a spreadsheet, or one of many free budgeting programs that are available online. When the month is over, categorize and add up your expenses. There are common categories that people tend to overspend on, including:
- groceries
- entertainment
- eating out
Once you’re able to figure out where you’re overspending, try making a few goals. Try lowering how much you’re allowed to spend in your problem categories incrementally month by month. It’s OK to allow yourself money to play, but make sure you can afford to do so.
Once you’ve been tracking your expenses and paying attention to your spending habits, you’ll be able to allocate your money wisely, which can save you thousands of dollars.
3. Impulse buying
Have you ever heard you should never go grocery shopping on an empty stomach? That’s because you’re more likely to buy things that you don’t really need. When you go to the store, it’s always a good idea to bring a list with you. Stores are laid out to get you to spend more money – from grocery stores to clothing and furniture stores. Unfortunately, this leads to buyer’s remorse. I’m sure we’ve all felt it at one point.
It’s also easy to rationalize buying something you don’t really need when there’s a sale, because maybe, you’ll use it eventually. And then it just gathers dust and you spent good money for no reason. There are things that we want but we should make sure that there is room in our budget for these things, and we want to make sure too that we’ll be putting them to good use.
Impulse buying is something that can cost lots of money. If there’s not room in our budget for something that we don’t really need and we buy it, then that means there isn’t enough money to cover what we actually need. Or worse yet, we charge it to a credit card and can’t pay it at the end of the month.
One way to curb impulse buying is to carry only cash when you go out so that you only buy the things that you need. It’s also a good idea to take a step back and ask yourself two important questions: 1) “do I really have to buy this now?” and 2) “can I really afford this?” Once you’re able to stop making those impulse buys you’ll see your savings add up and that it’s easier to manage your finances. Then, when there is actually something that you want, you’ll be able to better afford it.
4. Withdrawing from retirement accounts
When a financial emergency comes up, some people raid their investment accounts. Sometimes, it can even become habitual. If you don’t have good credit, it can be difficult to get approved for a loan, and that 401(k) may be the only source you can turn to take care of your emergency. The tax penalties on withdrawing from retirement accounts can be high, and doing so loses you potential earning power.
As an alternative, you can open a high-yield savings account to be your emergency fund and not touch it unless there’s a true emergency. Some emergencies that can crop up when you least expect it are medical bills, job loss, car repairs, and etc.
One good habit you can get into instead is taking extra money you’ve earned every month and putting it away in your emergency fund. The recommended amount is three to six months-worth of expenses, but if that’s not manageable, set a goal, like $1,000, or even $500. If you manage to cut down on your spending, or pay off all your credit cards, you can take the extra money you’re saving and put it away in your emergency fund. Any bonuses you get at work can also be contributed. Also, if you have a direct deposit set up on your bank account, have a certain amount each paycheck allocated to your savings account so that you don’t even miss the money.
Say hello to more money
Bad financial habits aren’t always easy to correct. It requires a shift in the way that you think about money. You might have some bad financial habits right now that you can start working on. Pick one and work on it for a month. If you stay focused, you might find that it’s easier to break than it seems. The rewards? More money in your savings and less financial stress. Do it. It’s worth it.