What are the bad money habits that keep you poor and unable to have healthy finances? Let’s find out, so you can tackle them and unlock your financial freedom!
Saving money and having a good financial situation is possible, no matter what your current income or financial state is. What’s probably holding you back from enjoying this freedom are your decisions and habits.
Dave Ramsey once said: ‘‘Poor is a state of mind; broke is I’m passing through’’.
So, what can you do to change that mindset? Start by making better decisions with your money. Regardless of your income, there are certain habits that can keep you poor or lead you to wealth.
Let’s tackle the 12 bad money habits that keep you poor, so you can turn them around!
Do you know how to distinguish between needs and wants? You might be used to spending money on a daily basis for things that are not necessary, and that might be holding you back from getting in a better financial situation.
If you’re trying to save money or get out of debt, you need to revise your unhealthy, bad spending habits. These are a few expenses you should consider getting rid of:
- Eating out all the time. I get it, it’s a lot more fun to eat out, but you would be shocked to see how much more you’re actually spending on food by not cooking. Try and limit dining out to one or two times per week, and bring lunch with you to the office, and you’ll see the difference on your bank account at the end of the month!
- Buying expensive coffees every day. I’m a huge fan of caramel macchiatos and cold brews, but I’ve learned to consider them a splurge, not a daily need. A better money habit would entail making coffee at home, which can be equally good and so much cheaper.
- Buying new clothes often. Try and invest in a few good quality, neutral pieces that you can use often and never go out of fashion, and you won’t need weekly retail therapy sessions.
- Renting a luxury apartment. Do you really need that extra bedroom, or living in a condo with shared facilities which cost you a pretty penny every month? Consider if it’s worth it or if you could downsize and save the extra money.
- Buying luxury groceries. I personally love Whole Foods and could buy everything in there, but uff… it doesn’t come cheap. Try and shop at your local supermarket, and buy in bulk whenever possible at places like Costco.
Not tracking your expenses
Tracking your expenses might sound boring and time-consuming, but doing it on a daily basis is one of the most important financial habits.
Tracking your expenses is the only way to identify unnecessary spending and hold yourself accountable, which is especially important if you’re trying to get out of debt or you are trying to save for a long-term goal.
By tracking your spending you might even find monthly subscriptions that you’re paying and totally forgot about, as well as other small expenses that you can easily get rid of – it’s often the 5 dollars or under purchases that add up and don’t allow you to save money on a low income.
Plus, tracking your expenses regularly will help you identify any credit card or identity theft quickly, so you can immediately alert your bank and block your cards.
You can easily track expenses by using an online spreadsheet. You should identify a few categories for your expenses, for example food, transportation, and clothing.
What Fran and I do is we quickly take notes on our phones whenever we pay for something, for example if I buy a croissant I’ll add $3 food. Then once a week or so we insert the expenses in our spreadsheet, and we go over our bank accounts and the spreadsheet at the end of the month to identify unnecessary expenses.
Otherwise, if you are serious about not only tracking your daily expenses but building a budget you can use an app such as Mint or Wally, which I’ll tell you more about in the next paragraph.
Not having a budget
Having a budget (and sticking to it) is the only way to make sure you spend less than what you make, and one of several good money habits you need in your life.
You would think that it’s something pretty easy to keep track of, but it’s really easy to go over our monthly paycheck when we use credit cards for most of our daily expenses.
Having a budget will help you:
- Work towards your dreams and long-term financial goals. Wouldn’t it be nice to buy a new car, or go on a nice vacation? A budget helps you save and keep track of your progress , as well as saving for retirement.
- Build an emergency fund, which we’ll see it’s quite a priority.
- Take stress out of your life. I know firsthand how being constantly worried about money is really stressful, and can hold you back from reaching your full potential in other areas of your life. When you know exactly how much money is coming in and out of your accounts, you’ll be able to sleep better at night, trust me.
It doesn’t have to be overly complicated, and if you’re just starting out I highly recommend using a budgeting app such as Mint or Wally. These free or freemium apps will not only track your cash flow, but allow you to create custom budgets based on your lifestyle and track your progress.
Not paying credit cards in full
Not so fun fact. The average American carries a credit card balance for over two years and owes a whopping $6,375!
Credit cards have such high-interest rates that it’s pretty easy to rack up thousands of dollars owned in just interest.
I have nothing against credit cards, but unless it’s a REAL emergency situation, you need to make sure you pay your credit card balance in full every month. Don’t just pay the minimum payment, pay the full amount.
Plus, not paying your credit card balance in full every month is a poor money habit that actually damages your credit score, so it makes your whole financial situation even worse.
And that brings me to the next money habit…
Using debt for discretionary spending
There is absolutely nothing wrong with owning and regularly using credit cards – if you know you can pay your credit card balance in full when the next bill comes.
In fact, you can actually make money by using credit cards responsibly. Many credit cards offer a sign-up bonus that is literally free cash, and by choosing credit cards that offer cashback, you can get up to 6% back on selected purchases.
The problem arises if you’re a compulsive shopper, or if you regularly use credit cards for non-necessary purchases that you cannot afford. With their high-interest rates often in the two digits, credit cards should be used as a last resort, and not for products or services that you don’t ab-so-lu-tely need.
If you don’t have the cash to buy some new clothing or to afford a meal out, don’t put it on a credit card – that’s such a bad financial habit! Wait until you can actually afford it without taking on debt.
Not having an emergency fund
Negative money habits are not only related to spending – it could also be something you’re not doing with your money, like building an emergency fund.
An emergency fund is simply an amount of money set aside for when unexpected emergencies arise. It’s debatable how much money should be in your emergency fund, but there seems to be a consensus that 3 to 6 months of expenses is the way to go – some people even suggest a 12-month fund. Of course, start with what you can and get there over time!
Just to clarify, an emergency fund is NOT a savings fund for a new car, for buying a house, or for paying for college – it’s a fund that you should touch only in the case of a real emergency (for example if you lose your job or you have a medical emergency).
Not having an emergency fund can have terrible consequences on your financial situation, because if an emergency arises and you’re unprepared, you could get into debt by taking loans with really high interests.
On a personal level it can add awful amounts of stress to an already bad situation, so spare this by starting that fund!
Not making your money work for you
But as you save for your emergency fund or for additional savings, should you just keep your money under your mattress? Nope, absolutely not.
While most accounts give you 0.01%, high-interest savings accounts can offer up to 1% interest, so you’ll be making money while saving it.
Another thing you can do for making your money work for you is investing in the stock market – but only AFTER you’ve paid off debt and created that emergency fund.
Many people are scared of investing because they think it’s something extremely complicated, or they think you need to have a ton of capital to start – but that’s not the reality of things.
In some investing platforms you’ll need as little as 10 dollars to get started, and you can add more funds as you go. There are also multiple ways beginners can invest without going in completely blind:
- You can invest in ETFs. The Exchange-Traded Funds help you build a diversified portfolio and minimize the risk, as it’s basically a bundle of assets you’ll be investing in, but that can be traded just as stocks do.
- You can copy trade, meaning that you’ll be able to copy the positions of another trader (or traders), and make the same investments they make automatically. You don’t necessarily need to invest as much money as they do; you’ll just copy the percentage of their movements.
- You can use a robo-advisor, a sort of financial advisor that provides guidance in finances and investments based on algorithms.
Not saving for the future
It’d be fun not to ever have to think about the future, wouldn’t it? If you’re making money now, why not enjoy it now? Well…there’s a good reason why that is not a very smart idea.
No matter how far in the distance your retirement may be right now, that time will eventually come, and for you to be prepared and able to maintain your level of life, you need to start saving for it like…yesterday!
When you invest in retirement accounts like 401(k) or IRA your money earns you interest; the sooner you start saving, the more money you’ll have when the time to enjoy it has come.
If your retirement savings account is already settled, there are still other factors why you should save for your future. Either the down payment for your dream house, being able to pay for your kids’ college, or being prepared for any medical bills that may come up during the years.
Living in the present is a great mindset for enjoying life, but not for your finances and overall peace of mind, so next time you sit down to plan your budget, consider the percentage you can save for your future.
Making impulse purchases
We all make impulse purchases from time to time. Impulse buys are connected to our emotions – in fact, in 2020 the top impulse purchases were toilet paper and canned food, purchases made when people felt scared they’d remain isolated without supplies.
Sometimes when we feel down, a way to cope with our emotions is going for a little retail therapy, and sure – that new dress makes us feel better, at least for a little bit. Until we start feeling guilty for having spent money on something we didn’t need.
Impulse purchases often happen also when we see items on sale – we feel like it’s such a good deal and we can’t pass it up. Unfortunately, impulse purchases can add up quickly, and they’re one of the poor spending habits you need to get rid of. So stop buying stuff!
But, what to do? First of all, don’t ever go shopping when you’re feeling emotional, that way you’re taking temptation out of the equation. If you see something you like, online or in person, give yourself 24 hours to think about it – many times, you won’t feel the need for the item anymore, even the day after.
And lastly, make a budget and stick to it – don’t make excuses for yourself.
Passing up free money
If you’re in the US and your employer offers you 401(k) matching contributions as part of your contract, always say yes. Repeat after me: ALWAY SAY YES! It is literally free money!
An employer might choose to match your 401(k) contributions dollar-for-dollar (100% of the contribution), or they might offer a partial match.
In either case, you want to make the most out of your employer 401(k) match. To do so, start making 401(k) contributions as soon as you start working for the new company, and contribute enough to get the full match.
And whatever fluctuations you might see in the markets, don’t withdraw money from your 401(k) account!
Not canceling subscriptions
If I asked you how much money you’re paying per month for subscription services, what would you say off the top of your head? I’m talking about all kinds of subscription-based products and services – Netflix, Spotify, wellness apps, meal kits, subscription boxes, magazine subscriptions…
Okay, maybe there are subscriptions that you actually use on a regular basis and are worth keeping, but did you know that Americans spend an average of $237.33 a month on subscription services?
That’s a LOT of money that could be used to pay off debt, or could be saved or invested! The worst part is that many people subscribe to a service and then forget about it but keep paying for it. That’s not a very smart money habit, and subscriptions are some of the top things you need to stop buying to save money.
The Trim app uses software that analyzes your expenses patterns simply by connecting the app to your bank account and credit cards. When the app identifies a payment as a subscription, it will send you a message asking you if you want to cancel your subscription.
If you agree, the app will cancel the service for you – as simple as that! And the best part? Trim is free to use for identifying and canceling your subscriptions (other services in the app are offered for a fee)
Not investing in yourself
Not investing in yourself is probably one of the most important habits that are keeping you poor.
You might be thinking: But education costs a lot of money! Well, I’m (not) sorry to tell you that that presumption is wrong.
First of all, there are plenty of ways to educate yourself and gain a new set of skills that don’t require thousands of dollars in student loans. From online courses to part-time workshops, books, and the unlimited source that is the internet, you can improve your knowledge.
This will help you be more prepared to tackle a new job or promotion, or to be more aware on how you manage your finances.
Indulging yourself when needed is also incredibly important, like buying that new mattress that will help you rest better or investing in a good pair of shoes that won’t hurt your feet. Sticking to a budget and prioritizing your money goals doesn’t mean that you have to live uncomfortably or suffer, at all!
Invest in yourself so you’re at your best; that way everything else will be much easier.
Taking control of your financial life is possible, one habit at a time. It’s important that you’re consistent and keep a positive mindset throughout this journey. This will gain you much more wealth and, equally important, peace of mind when it comes to money.
Ditch that poor state of mind and meet your new, thriving bank account. You’ve got this!