Break These Bad Money Habits and Build Wealth

Break These Bad Money Habits and Build Wealth

Break These Bad Money Habits and Build Wealth
Reading Time: 5 minutes

The financial goal of the average American is to save money, build wealth, and retire comfortably. What stands in the way of reaching that goal are bad money habits that lead to negative savings, mounting credit card debts, and a steady decline in financial health. If you identify with any of these bad money habits, it’s time to break them and start building wealth.

But sometimes people may not even know they have bad money habits. That’s understandable because habits are what we do unconsciously. In some cases, people write them off, feeling like everyone else must be doing the same. 

Others may be well aware of the need to change their bad money habits into good habits, but they may not know where to start or exactly where to make that much-needed change. To help you improve your financial health, we’ve compiled a list of bad money habits and what to do about them.

Not Knowing Where Your Money Goes

This is the most common situation for salaried professionals. You may have a steady income and no major financial worries, but at the end of each month, you may have no clue how you spent your money. 

Sure, you know that you’re making the rent or mortgage payments. But do you know how much you’re spending on food or travel? Do you know how much you spend on shopping every month? Or, in the age of streaming, are you aware of your monthly expenditure on those subscriptions? What about your expenses for going out?  

Remember, you can’t manage your spending until you start measuring it. The longer you delay, the more chances you miss of building a stable future. 

What to do: Make a budget of your income and expenses for a month. 

Spending More Than You Earn

This is the bad money habit that triggers everything else. If you consistently spend more than you earn, your credit card bills will start piling up, and you may have to take out loans. You’ll also be unable to save for your future, and your quality of life will gradually decrease.

If left unchecked, this could ruin any hopes you have of a financially stable future. Part of the reason why people spend more than they earn is to keep up with their peers. But this is dangerous, as your bills will soon pile up, and it will be obvious that you’ve got real financial problems. 

Once you understand how much you spend every month, you’ll know how much of it can be eliminated. Some of it could be easy to spot, like unnecessary purchases of clothes. Some could be more difficult to notice, like ordering food a few times a week. 

What to do: Give yourself a limit on how much you can spend every month and don’t exceed it unless it’s an emergency… a real emergency.

Not Building An Emergency Fund

What stops people from building an emergency fund is that a) they believe nothing like that will happen to people their age, b) they think that they don’t make enough to save for an emergency, and c) they’re in perfect health, so there’s nothing to worry about.  

These are all problematic assumptions. If the past 18 months have taught us anything, it’s that even the unlikeliest of things can and will happen. There will be emergencies and unless you’re prepared, all your financial plans will go out the window. In addition, you can start building an emergency fund with as little as you can manage right now.  

It’s also important to realize that we’re not just talking about health emergencies. Layoffs and furloughs can also come out of nowhere. Even if you’re exceptionally talented, it may take a while to land a job with the remuneration you deserve.  

What to do: Calculate how much you would need for six months of expenses and start building a fund exclusively for that. 

Using Credit Cards To Pay Your Bills

Credit cards are overused primarily because they’re easy and convenient, but they should only be used for emergencies and not for your usual payments. Using credit cards to pay your regular bills like rent, utility, or food is a clear sign that it’s time to take your finances more seriously.

The fundamental thing you should understand about credit cards is that they’re expensive. If you rely on them to pay your bills, you’ll end up paying exceptionally high interest, not to mention additional fees. You will create a vicious cycle. 

Once you start using your credit cards for bill payments, you’ll end up relying on them for the same payments for months on end. Then, of course, you’ll have to borrow more money to just stay afloat. 

What to do: Don’t use your credit card to pay your regular bills. 

Not Saving For Your Future

Another common bad money habit is ignoring your future needs. People assume that their career growth will take care of that or that they’re too young to worry about those expenses now. Perhaps most important is the societal pressure to live in the moment. 

If you were to ask people in their forties or fifties, most will tell you they wish they had started saving earlier. This is from individuals who do have savings for the future and are thinking about retiring. What they’re saying is that if they had started earlier, they could have retired sooner.

Importantly, they know that if they had been serious about savings in their twenties, their retirement fund would have been much larger. That would have meant a better quality of life in their golden years. 

The earlier you start saving, the better your future financial condition will be. That’s the power of compounding. The longer you engage in a good money habit like saving or investing, the results will be bigger. The hundreds of dollars you manage to save now will turn into thousands when you need them most.

What to do: Automate it so that when your salary is transferred, part of it goes into your savings account. 

Impulse Purchases

Yes, we’re talking about everything from adding that extra dish to your meal to buying shoes at discount sales. A single impulse buy may not seem like much at the moment, but those spur-of-the-moment purchases can add up to a significant amount by the end of a month. That’s the money you can safely set aside for your emergency fund or savings account.

Brands and online marketplaces spend billions of dollars to tempt you. While it’s reasonable to buy things you need, the fundamental idea is that you should have planned for those purchases. If you come home with things that you had no intention of buying, then it’s time to break this bad money habit.

Here’s what you need to know. Just because there’s a sale somewhere or an online shopping festival doesn’t mean you have to participate. Instead of saying “I need this,” start saying, “I already have something similar.”

What to do: Put a cap on how much you can spend on shopping every month. Remove your credit card from online marketplaces and food delivery apps. Having to take out your card and key in the information is a much-needed barrier that gives you time to pause and think. 

Not Investing 

Here’s a little-known secret about wealth creation: earning money doesn’t make you rich, investing does. 

Even those who manage to save their money and build an emergency fund may not be acting in their best interests if they don’t invest that money. Bank interest rates, while stable, are usually nothing to write home about. It will take an exceptionally long time for bank interest to produce results.  

The solution is to invest a portion of your income in equities. Now, if just the thought of the stock market sounds too complex, remember that over the last few months, even inexperienced teenagers have entered the market. 

There isn’t much to learn. You don’t even have to spend hours researching companies and their past performances. You can choose an index fund as your primary investment vehicle. They usually give better returns than most banks and, over the years, you’ll watch your regular investment grow into a nice financial nest egg.  

What to do: Start investing in an index fund or in the equities of companies that have consistently given good returns.

Conclusion And Recommendation

Like the money you invest and save, bad money habits also compound. The earlier you can spot and break them, the better off your overall financial situation will be. The good news is that you don’t have to break all of them at the same time. Identify a couple of bad habits from the above list and take the required action. That will start a virtuous cycle of good money habits.


Money-Saving Resources

Should Couples Have Joint or Separate Bank Accounts?
The $1,000-a-Month Retirement Savings Rule of Thumb
Roth IRA Contribution Limits for 2022
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