Contrary to popular belief, it's not about how much money you earn but how you manage it. Back when I was a financial advisor, I encountered people who had never made more than $100k per year but had accumulated millions of dollars in savings by developing good money habits. Conversely, I met people who earned $2 million annually but needed help with overspending and debt.
In this article, we will focus on the habits preventing you from having control over your money and, in turn, your life and how to overcome them.
​"You must gain control over your money, or the lack of it will forever control you." - Dave Ramsey |
1. Living Beyond Your Means:
Living beyond your means is the most common financial habit that keeps people poor. It refers to spending more money than you earn, often relying on credit cards or loans to fund your lifestyle. While it may seem like a temporary solution, living beyond your means can lead to debt and financial instability cycle that can be difficult to break.
The root cause of living beyond your means is often poor money management skills. Many people fail to create a budget or track expenses, leading to overspending and debt. Others may be influenced by societal pressure to keep up with the latest trends or live a particular lifestyle, even if they can't afford it. Alternatively, many people fall victim to lifestyle creep. This is where an increase in income leads to an increase in spending that doesn't always pace.
Living beyond your means can have serious consequences. It can lead to high levels of debt, including credit card debt, personal loans, and even mortgages you cannot afford. High levels of debt can affect your credit score, making it more difficult to obtain loans, credit cards, or even rent an apartment. In some cases, it can even lead to bankruptcy.
Creating and sticking to a budget is crucial to avoid living beyond your means. An excellent starting framework for a budget is the 50/30/20 rule, where you spend 50% of your income on needs, 30% on wants, and save 20%. Start by tracking your expenses for a month or two to identify areas where you can cut back. Consider prioritizing your expenses, focusing on your needs rather than your wants. It's also important to avoid relying on credit cards or loans to fund your lifestyle.
Breaking the habit of living beyond your means can be challenging, but it's crucial to achieving financial stability. It requires discipline and a willingness to make changes to your lifestyle. By developing good money management skills, you can take control of your finances and achieve financial success.
2. Not Having an Emergency Fund:
Another financial habit that can keep you poor is not having an emergency fund. A lack of savings can leave you vulnerable to unexpected expenses, such as medical bills or car repairs, that can quickly drain your finances. Your first goal should be to have at least $1,000-$2,000 saved for an emergency. After that, focus on keeping 3-6 months of expenses in an easy-to-access account.
An emergency fund is critical to financial stability because it allows you to prepare for unexpected expenses, build wealth over time, and achieve financial goals such as purchasing a home or retiring comfortably. Having an emergency fund is also an essential step on the path to financial success.
One of the main reasons people don't save enough is that they don't prioritize saving in their budget or even keep a budget at all. They may assume they don't have enough money to save or feel they must spend all their income on bills and other expenses. However, even if you can only save a small amount each month, it's essential to start building your emergency fund.
Another reason people don't save enough is that they lack a clear savings goal. Saving can seem pointless if you don't have a specific plan in mind. Setting a savings goal, such as an emergency fund or a down payment on a home, can motivate you to save.
The lack of savings can have severe consequences. Without savings, you may be forced to rely on credit cards or loans to cover unexpected expenses, leading to high levels of debt and financial instability. Additionally, you may not have enough money to retire comfortably if you don't save for retirement.
To avoid this habit, it's essential to make saving a priority in your budget. Consider setting up an automatic transfer from your checking account to a savings account each month. This can help you save money without having to think about it. Additionally, ensure you have a clear savings goal and consistently work towards it.
3. Ignoring Debts:
Ignoring debts is a habit that can have serious financial consequences. You may miss payment deadlines and accrue late fees and penalties when you ignore your debts. Additionally, unpaid debts can negatively impact your credit score, making obtaining loans or credit cards more difficult.
People ignore their debts because they feel overwhelmed by the amount they owe or don't plan their debt payoffs while accumulating them. A perfect example of this is student loans. Many college students will completely disregard their loans until their payments are due. It's crucial to create a plan to pay off your debts. You can start by listing all your debts, including the amount owed, the interest rate, and the minimum payment. We built a debt payoff calculator here that can help with your debt pay-down schedule.
Once you have a clear picture of your debts, you can create a repayment plan that works for you. One option is the debt avalanche method which prioritizes paying off the debt with the highest interest rate first. This can help you save money on interest charges over time. Alternatively, you can use the debt snowball method, which focuses on paying off the smallest debt first, providing a sense of accomplishment and motivation to continue paying off your debts.
It is essential to create a plan to pay off your debts and stick to it. Consider consolidating your debts or negotiating with creditors to develop a repayment plan that works for you. By taking control of your debts, you can achieve financial stability.
4. Not Investing:
Investing is an important habit that can help you build long-term wealth. However, many people avoid investing because they think it's too risky or complicated.
Not investing prevents you from building long-term wealth and achieving your financial goals. Many people avoid investing because they feel overwhelmed by the perceived risks and complexities of investing. However, investing doesn't have to be complicated, and plenty of resources are available to help you get started.
One of the main reasons investing is important is that it allows your money to work for you over time. Investing in assets such as stocks, mutual funds, or real estate can earn returns on your investment and build wealth over time. Additionally, investing can help you reach your financial goals, such as saving for retirement, paying for your child's education, or purchasing a home.
One key to successful investing is to start early and be consistent. By investing regularly over a long period, you can take advantage of compound interest and potentially earn higher returns on your investment. It's also important to diversify your investments, which means spreading your money across different types of assets to reduce risk.
If you invest for the long term in an S&P index fund, your wealth will grow over time. The easiest way to start is to open a brokerage account on an app like Robinhood and invest in an index fund like VOO or SPY. Check out our article here for more advice on what to invest in.
The key is to educate yourself, start early, be consistent, and diversify your investments. By investing wisely, you can build wealth and secure your financial future.
5. Impulse Buying:
Impulse buying is a habit that can quickly drain your finances. Making purchases based on emotions rather than needs can lead to overspending and debt. Before making a purchase, take a moment to consider if it's something you really need or if it's just a fleeting desire.
Impulse buying is a habit that can quickly drain your finances. It refers to making unplanned purchases based on emotions rather than actual needs. Impulse buying often happens when you see something you like and feel a sudden urge to buy it without considering if it's something you need. This can be anything, such as food, clothes, or just buying random stuff at Target.
If you habitually buy things on a whim without considering if it is a genuine need, it can quickly lead to overspending and debt. Therefore, learning how to distinguish between wants and needs is essential. A need is something essential to your daily life, such as food, shelter, or clothing. A want, on the other hand, is something that you desire but don't necessarily need. Before making a purchase, take a moment to consider if it's something you really need or if it's just a fleeting desire, and do this with every purchase.
Another strategy to avoid impulse buying is to create a budget and stick to it. This can help you prioritize your spending and avoid overspending on non-essential items. If you see something you want to buy but it's not in your budget, consider saving up for it instead of making an impulse purchase.
Be mindful of marketing tactics that are designed to encourage impulse buying. Retailers often use techniques such as limited-time offers, flash sales, and other marketing gimmicks to create a sense of urgency and encourage customers to make impulse purchases. By being aware of these tactics, you can resist the temptation to make unplanned purchases.
Impulse buying is a habit that can quickly drain your finances and lead to overspending and debt. By learning to distinguish between wants and needs, creating a budget, and being mindful of marketing tactics, you can avoid the urge to make impulsive purchases and make better financial decisions.
6. Not Seeking Help or Getting the Wrong Advice:
In our society, it can be somewhat "taboo" to discuss finances. This is a dangerous practice, and our goal at Money Done Simple is to help put an end to this. Not talking openly about finances prevents people from seeking help because they are afraid to approach a financial coach or friend for advice. In addition, there are many people out there on social media that give bad financial advice and can easily lead you astray if you listen to the wrong resources.
Not seeking help is a financial habit that can lead to missed opportunities and costly mistakes. If you have a friend you know is good at saving and budgeting, ask them for help and advice. Listen to resources like Dave Ramsey or Suzie Orman. There are many options, but be sure to research before trusting anyone.
Also, consider working with a financial advisor. If you do this, make sure they are a "Fiduciary." A fiduciary is someone who acts in your best interest. A financial advisor can be or can not be a fiduciary, so make sure you check this prior to working with one.
Another benefit of working with a financial advisor is that they can help you stay on track with your financial goals. A financial advisor can hold you accountable and help you stay focused on your financial objectives, even when you may be tempted to deviate from your plan. Remember that financial advisors charge fees that can, in many cases, impact your returns significantly over time.
Alternatively, you can consider a financial coach. Unlike a financial advisor, a financial coach does NOT invest for you or take a fee from your assets. A financial coach charges a one-time payment to help provide a framework or resources to manage your finances. If you are considering a financial coach, you can get your first session for free by contacting us here.
In conclusion, not seeking professional help is a financial habit that can lead to missed opportunities and costly mistakes. A financial advisor or financial coach can provide valuable guidance and advice to help you achieve your financial goals and build long-term wealth. Working with a financial professional allows you to make informed financial decisions and stay on track with your financial objectives.
Conclusion:
Financial habits play a crucial role in shaping our financial situation. While good habits can lead to financial success, bad habits can keep you poor. By avoiding the habits outlined in this article and developing good financial habits, you can take control of your finances and achieve financial stability. Do not live beyond your means, create an emergency fund, focus on your debts, be sure to invest, do not impulse buy, and seek advice. Remember, it's never too late to start making positive changes to your financial habits.