We all develop bad money habits over the course of our lifetime. Spending and saving habits change and evolve, and our priorities can change between different life stages. For example, a college kid in a fraternity might consider a weekly carton of beer a high priority, whereas a mother with three kids might view diapers as slightly more important.
It’s never easy to break bad money habits. They can have a terrible impact on our quality of life, and can prevent us from achieving our goals, such as home ownership or awesome holidays.
If you really want to make the most of your earning potential, and live the life that you deserve, it is absolutely critical that you break bad money habits as young as possible. This takes great effort and discipline, but over time the difference can be significant.
We’ve done some research into the bad money habits that we see the most, and listed them here so that you can take note, compare to yourself, and avoid making the same mistakes as everyone else.
1. Not paying off your credit card debt every month.
So many young people get their first credit card at 18 years old, before they’re built up sensible saving and spending habits. Even into their early twenties, the vast majority of people don’t fully appreciate the power of compound interest and the damaging effects it can have on your financial situation.
It is absolutely critical that you pay off your credit card debt every single month, no excuses. This is the kind of lingering debt that can really sneak up on you and sucker punch you, often taking years to recover from.
The key to clever credit card management is to never buy something that you can’t afford. This might seem like common sense, but far too many people enjoy it. It’s very easy to give in to temptation and purchase something now, rather than waiting until you’ve earned it.
The best piece of advice for anyone starting out with credit cards is this – if you can’t get money out of your account right now to pay for this item, then you can’t afford it. Use a credit card not as a stopgap, or a replacement income, but as a way to earn points and bonuses. This is the truly great benefit of credit cards. Be one of the smart people who get all the benefits without paying a cent, and let others’ poor spending habits pay for your gains.
2. Not having a saving goal.
Are you just saving money for the sake of it? If so, sit down and think about why. What are you saving for? A rainy day, or something a little more positive? Psychological research has shown time and time again that having a positive goal can make saving much, much easier. Rather than setting aside money for a negative reason, such as a broken-down car, save money for a house, or a holiday, or to buy stock in a company that you like.
The key to disciplined, consistent saving is a goal. Have two saving accounts – one with $1000 – $5000 for emergencies, and one that’s the “treat yo’self” account. Christmas becomes very awesome when you can afford presents for everyone and also buy something for yourself that you’ve had your eye on for a year.
3. Failing to invest.
Sound investments are the difference between the rich and the poor. The rich let their money work for them, whereas the poor work for their money. Once you’ve got a good savings buffer to handle any emergencies or other issues that crop up, consider making some small investments.
There are dozens of micro-investing platforms such as Robin Hood that allow you to invest spare change. With the power of compound interest, these investments can grow into considerable fortunes over the years.
Investment requires level-headedness, discipline and patience. Do your research, and pick the right place to start. For beginners without much knowledge, an index-fund is a safe option. Index funds track the performance of several hundred companies. As a general rule, if the economy improves, so does your index fund. Vanguard Investments is a great place to start with index finds.
4. Failure to Diversify.
So you’ve decided to invest. You pick a cracker of a company that you absolutely love, and pour your savings into it, expecting to make a solid 10% every year for the foreseeable future. Two weeks later, the stock price has plummeted 20% and you’re seriously out of pocket, with little hope of making any gain back in the near future.
This happens far too often, even to people who really should know better. The key to safe investing is diversifying. Never put all your eggs in one basket. Instead, spread them across all the baskets. This way, you’ll get all the gains, and not get hit as hard by major losses. Index funds are a good start for diversification – the success of your investment depends on hundreds of well-managed companies, and insulates you from that single poor decision by a CEO that carves a stock price right down.
5. Compulsive Spending.
Compulsive spending is a direct consequence of poor discipline. Ever seen something you like and bought it? Well, while that seems like the right thing to do, it’s terrible for your personal finances.
Every time you see something you’d like to get your hands on, put it in a “to-buy” list and sit on it for a month. If, at the end of four weeks, you still want that item, then it might be a sound choice. Online shopping is terrible for compulsive spending, so it’s best to only get into Amazon or eBay when you have a specific item in mind that you’d like to purchase (after waiting for 30 days, of course).
6. Paying Bank Fees.
Does your bank charge fees? If it does, strongly consider changing banks. There are plenty of financial institutions now that charge nothing for a normal transaction account. They make plenty of cash by charging interest on your money when they lend it out. They don’t need to dip your hand into your other pocket for money.
If you ever get charged an overdraft fee, call your bank and ask them to reconsider. They will almost always cave and refund it, with a warning to not let it happen again. If it does happen again, just repeat the process. If they don’t refund the fee, you can always take your business elsewhere or let them know you’ll be expressing your displeasure on social media.
7. Scrap all useless subscriptions.
Still paying for cable even though you have Netflix? Haven’t visited the gym since January? Cancel all of these subscriptions. There are people out there paying for services they haven’t used in years, and that is just poor financial management.
Go through all of your subscriptions and analyse all the money leaving your account. Chances are, there are plenty of ways you can save a bit of cash without feeling the pain.