Breaking bad financial habits is the best way to increase your wealth and meet your financial goals, but it is easier said than done. The good news is that, once you know where to start, you can take steps to break bad financial habits and meet your financial goals.
How do Money Habits Form?
Before you can break your bad money habits, you have to understand how they became a part of your life. There is no clear-cut way for bad money habits to develop, and there is no one-size fits all scenario. There is evidence that how a person’s parents handled money when they were growing up affects their financial habits; however, as we grow older, our parents’ relationships with money become less of an influence, and we have to start looking inward.
Bad money habits can form from a single decision that becomes a recurring one. Once you’ve gone into a little bit of credit card debt, it is easy to dig a deeper hole. Studies also show that your peer group impacts your financial decisions more than you know. If your peers make bad financial choices, there is a stronger chance you will as well.
No matter where you picked up your bad money habits, it is never too late to break them!
Break These Bad Money Habits
1. Spending More than You Earn
Spending more money than you make is one of the worst money mistakes a person can make. This trickles down into every aspect of your financial life and makes having any sort of financial stability impossible.
You end up putting a lot of purchases on credit when you’re spending more than you earn, and, inevitably, you won’t have enough money at the end of the month to pay off your credit card in full. This leads to high credit card interest charges and an even more difficult financial situation.
There are two ways to rectify this money mistake. You can either cut expenses and use some of these savings hacks to spend less money, or you can earn more money. In a perfect world, you would do both at the same time. The most important thing is that you close the gap between what you earn and what you spend and, ideally, spend less than you earn.
2. Paying Your Bills Late
Life gets busy, and sometimes you end up paying your bills a little late. This may not seem like a big deal, but it is a bad money habit to get into. Paying your bills late costs you more money. You end up paying late fees or interest, and there are way better ways you could be spending your money. On top of that, paying your bills late can negatively impact your credit score.
The easiest way to make sure your bills are paid on time is by setting up auto-pay. You connect your bank account to the bill you’re paying, and every month the amount of the bill is automatically deducted from your bank account. You don’t have to remember when bills are due, or worry about missing a payment.
3. Living Without a Budget
Budgeting has a bad reputation and seems constraining, but it isn’t. A budget helps you live within your means and spend money on what is most important to you while also saving money for the future.
A budget should drive your financial decisions, so if you don’t have one, money may seem to disappear, leaving you with no idea where it went. Breaking this bad money habit isn’t just creating a budget. That’s the easy part. Sticking to a budget is much more difficult. The only way you’ll succeed at sticking to a budget is by creating a realistic one, and that takes work. You must analyze your spending, figure out what parts of your lifestyle are the most important to you, create savings goals, and do the math.
There are many different types of budgets to choose from. These range from the more flexible anti-budget to the stringent zero-sum budget. This kind of strict budget has its advantages. For many people, it’s much easier to control their spending when they know exactly how much they have to spend in any given category. However, for many people, a rigid budget like this is too hard to stick to. Figure out what budgeting style works best for you and then stick to whatever budget you create.
If this is your first time using a budget, you’ll make mistakes and fall off track until you get the hang of it. Don’t give up if you spend a little more in one category than you were planning.
It is worth sticking it out until you’re at the point where budgeting is your new money habit.
4. Not Setting Aside Money for Emergencies
Saving money for an emergency that may or may not happen in the future isn’t glamorous, but it is an extremely important part of being financially responsible. At some point in your life, something is bound to go wrong unexpectedly, and not having an emergency fund is one bad money habit you will wish you didn’t have. You should aim to save between 3 and 12 months’ worth of living expenses in an emergency fund to help pay your expenses if you were to lose your job or become seriously ill.
That sounds difficult, but you don’t have to save it all at once.Create a column in your budget for your emergency fund and add $50 or $100 every month until you reach your desired savings amount. You’ll be thankful later when that emergency comes up.
5. Carrying a Credit Card Balance
For a long time, there was a rumour going around that carrying a balance on your credit cards would help to increase your credit score.
That simply isn’t true, and carrying a balance on your credit cards is actually a very bad financial habit to have. It negatively impacts your credit score, and you end up paying interest every month you have an unpaid balance. The two ways to break this bad money habit are not spending more than you can afford to using your credit cards and setting up auto-pay to pay your card in full every month. The combination of these two good money habits will ensure you stay out of credit card debt and stop carrying a balance on these cards.
6. Avoiding Financial Goals
Setting financial goals can feel overwhelming, and a lot of people ignore them. This is a major financial mistake and impacts both your current financial situation and your future one.
Major life milestones, like buying your first home or retiring, require financial planning and goal setting. They may seem like distant goals, but you’ll never reach them if you don’t have a plan for how to get there. You even need to set goals for smaller purchases, like buying a new car or taking a vacation.
Setting financial goals motivates you to reach them and helps you budget properly. If you know what you’re working toward, you can make the necessary changes in your current spending to make your future financial goals a reality. Sit down and seriously think about the financial goals you want to meet. Write down your short-term, midrange, and long-term financial goals and how much money you need to achieve them. Then, rearrange your budget to make sure you reach your financial goals. You may have to make sacrifices now to meet your financial goals, but if you want them enough, it is worth it.
Your financial goals should closely align with your personal goals. When you’re creating your financial goals, take the time to set personal goals too. The two need to work together, or else you won’t be happy.
Conclusion and Recommendations
It’s easy to slip into bad money habits, but they can be difficult to break. You’ll make mistakes and slip up along the way, but saying goodbye to your bad financial habits is worth the effort.
Take it step by step. You don’t need to tackle all of your bad money habits at once. Choose the one you want to change the most (or the one you think will be the easiest for you to change) and work on that. Once you’ve replaced it with a good money habit, move on to your next bad habit. Repeat this process until all your bad money habits are gone.
One of the best ways to stay motivated and on track is having someone to keep you accountable. Tell your friends and family about the bad money habits you’re trying to break. They can help you stay on track and support you.
Setting boundaries with your friends and family is another important step toward success. They need to understand your new money rules, so they won’t pressure you into falling back into your old money habits.
Replacing your bad money habits with good ones will not only help your financial future, it will make your personal life happier and less stressful, since you won’t have debt and other financial problems hanging over your head.