Bad Money Habits to Break
This article was recently published in CommunityAmerica's "Let's Talk Money" section of the Kansas City Star.
Do bad money habits constrain your financial progress? Many people fall into the same financial behavior patterns, year after year. If you sometimes succumb to these financial tendencies, now is as good a time as any to alter your behavior.
Spending more than you make. Living beyond your means, living on margin, balling on a budget, or whatever you wish to call it is a path toward significant debt. Wealth is seldom made by buying possessions. Before making random purchases, think to yourself: Does today’s flashy material item fit within my budget? Do I really need this, or will this become the garage sale junk of the future? Having a specific purpose for each dollar you earn – or creating a budget – is crucial to establishing financial peace of mind.
Saving little or nothing. Good savers build emergency funds, have money to invest and compound, and leave the stress of living paycheck to paycheck behind – but it takes time to fall into this pattern. Any dollar amount put towards savings is a step in the right direction. If you are unable to put extra money away right now, consider revisiting your budget, cutting back on unnecessary spending, or possibly picking up a second job.
Living without a budget. You may feel that you make enough money that you don’t need to worry about a budget. In truth, few of us are really that wealthy. In calculating a budget, you may find opportunities for savings, detect wasteful spending, or even realize you have extra funds just sitting in your account with no real purpose.
Budgeting Tip – Consider the 50/30/20 Method: When using this 50/30/20 budgeting system, you will allocate every dollar of your after-tax income to a specific purpose. To start, allocate 50% of your budget to needs such as housing, insurance, and transportation. From there, 30% of your income goes toward wants. This would be eating out, shopping, traveling, and more. Finally, 20% of your income goes toward savings and/or debt. This rule is intended to help individuals manage their income, with a primary goal of consistently being able to pay your bills while adding to savings or paying down debt.
Frivolous spending. Advertisers can make us feel as if we have sudden needs; needs we must respond to or ones that can only be met via the purchase of a product. See their ploys for what they are and think twice before spending impulsively.
Lending money to family & friends. You may know someone who has lent a few thousand to a sister or brother, a few hundred to an old buddy, and so on. Generosity is a virtue, and while we admire your kindness and completely understanding wanting to help your loved ones in times of need, it is important to keep your own financial situation at top of mind. Before lending any money, be sure to ask questions and learn more about the situation as there could be another option to get the funds such as a personal loan through a financial institution. If you must loan money to a friend or family member, ensure that you set a repayment plan with them ahead of time – including deadlines, interest, payment amounts, and so on. You should also turn the situation into a teaching moment, helping that family member learn the importance of basic money habits such as budgeting and saving.
Inadequate financial literacy. To many people, the financial world is boring. The Wall Street Journal is not exactly Rolling Stone, and The Economist is hardly light reading. You don’t have to start there, however. There are great, readable, and even, entertaining websites filled with useful financial information. Reading an article per day on these websites could help you greatly increase your financial understanding.
Not contributing to retirement plans. The earlier you contribute to them, the better; the more you contribute to them, the more compounding of those invested assets you may potentially realize. Check out our recent Retirement Planning blog to learn more.
DIY retirement strategy. Those who save for retirement without the help of professionals may leave themselves open to abrupt, emotional investing mistakes and other oversights. Another common tendency is to vastly underestimate the amount of money needed for the future. Instead of flirting with trial and error, see a professional for insight.
Visit our Financial Planning page to learn more and schedule a meeting with a CommunityAmerica Wealth Advisor.