You take your financial security seriously. You listen to industry-leading podcasts and follow the financial gurus’ advice. You dream of financial freedom, yearn for cash flow confidence, and you know passive income is the key to getting there.
But you know that to build wealth, you’ve got to start saving money first. Sounds easy enough, right? Unfortunately, underlying bad money habits can impact your bottom line more than you think.
Working toward better money habits is one thing, but likely, you aren’t even aware of the bad money habits you already have. Meanwhile, they’re just under the surface, tricking you into wasteful spending, racking up your credit card debt, and preventing you from investing as much as you’d like.
Or maybe you have these areas under control, but you have teenagers or young adult children who still need to learn these lessons.
The first step in ditching these bad money habits is recognizing what financial changes need to be made. Taking an honest look at your money habits is essential to make a positive impact on your financial behavior, bank account, and investing potential.
Let’s break down the 7 most common bad money habits that are costing you money and holding back your investing potential.
1. Your spending habits exceed your income
You know the cycle. You spend a little more than you earn, then to cover ongoing expenses, you use your credit card to make ends meet. Unfortunately, this quick fix becomes more of a problem than a solution.
By relying too much on credit, you face fees and a high-interest-rate credit card balance that will seem impossible to pay off. This bad money behavior creates a vicious cycle that costs your financial future, the comfortable retirement you dream of, and hinders your ability to save money.
The best way to keep from spending more than you earn is to take an honest look at your spending habits and your long-term financial goals. Compare your annual spending to what’s in your bank account. Here are a few ways to reduce bad spending habits and start hitting your financial goals.
- Cut costs on essential items and reduce impulse purchases or trips as the primary ways to stop overspending.
- Review your subscriptions. Subscriptions to retailers are often out-of-sight, out-of-mind. Be intentional about reviewing and canceling any subscriptions that aren’t necessary.
- Keep credit card debt to a minimum. Late fees and interest charges on consumer debt can cost you more money than if you’d just saved up for the purchase.
- Tighten your budget and look for coupons and discounts as a way to make all your money count. Find all the “free money” you can in this sense.
- Look at your rent or mortgage and car payments. Are they excessive? Should you consider downsizing to right-size your budget? If your vehicle(s) are almost or completely paid off, do you really need to replace it soon or can you get more use of what you have?
- Find ways to make more money. Consider a part-time job or side hustle, especially if you can use that extra money to pay off credit card bills faster.
- Avoid Parkinson’s Law, which holds that a person’s or family’s expenses typically rise with rises in income so that they’re not getting further ahead despite the added income.
Making short-term sacrifices now will positively impact your long-term financial security. Eventually, you’ll find yourself practicing good money habits rather than allowing bad habits to cost you money.
2. You don’t have an emergency fund
Most folks have a checking account, are aware of their credit score, and shoot to make the minimum payment on all their bills on time. They probably have a savings account, too.
But did you know you should have a separate account just for emergency savings?
Nothing can derail a financial plan quicker than an unexpected expense and no planned way to cover it. Cue the emergency fund to the rescue!
Most financial experts recommend an emergency fund as the first, most important step to stop living paycheck to paycheck. They also say to pack your emergency fund with at least three to six months of expenses. This way, you’ll be ready when life throws you a curveball or something goes wrong.
Once established, there’s no need to regularly contribute to your emergency fund. Just be sure to review it at regular intervals and adjust the balance and your spending habits accordingly.
3. You know to save money, but how much money?
A rough guideline is to save 20% of your income; nevertheless, this might be too much or too little, depending on your current financial situation.
Before you arbitrarily decide to save 20%, you might have to make some adjustments to your bad money habits. Start by comparing your income against your living expenses and working to widen that gap.
It’s tempting to cut dining expenses, for example, and declare, “I’ll save 20% of my income by only spending $200 eating out per month.” You’ve got to experience what it’s like to only spend $200 a month on dining and see if that’s reasonable or sustainable. Only then can you determine whether or not that’s a new habit you can maintain.
When you have an idea of how much money you need each month, it’s time to build a budget. You calculate a reasonable savings percentage or value based on your income and essential expenses, then reduce expenditures while you increase your income until you reach your goal.
Another good money habit is to set up automatic savings deposits so that as soon as your paycheck hits, money is pulled into savings and you never have a chance to spend it. This is the age-old “pay yourself first” mentality, made easier by technology. Setting up automated transfers is a great way to make progress with your finances.
4. You’re overlooking money-saving tax breaks
An experienced financial professional can help you maximize your opportunities for tax breaks and make certain you’re using the right financial products for your taxable income.
Find a tax expert who can help hone your deductions and exemptions so that your tax withholdings aren’t too high or too low. They should also be able to suggest investment opportunities that will assist in building wealth and sheltering your income from taxation.
Check out tax-advantaged account options offered by the government, such as IRAs (individual retirement accounts) and 401k’s. Ensuring that your current retirement savings and taxable brokerage accounts are helping build your wealth should be a top priority.
Investing in real estate syndications as a passive investor is a great way to create passive income and become eligible for the tax benefits that only the wealthy typically qualify for. Learn more about this inside the BluSky Investor Club. It’s free to join and quite helpful as you start investing.
5. You’re unsure how to evaluate risk
Investing always entails a degree of risk, but it’s also a sure way to grow your money. There’s a method for investing money that will be beneficial to your financial health, no matter where you are on your road to establishing good money habits.
Stocks are a gamble, so don’t put all of your eggs in one basket. Exchange-traded funds (ETFs) and mutual funds are better alternatives since they’re less risky than individual stocks. ETFs can cost as little as $15, while mutual funds might require investments as low as $2,500. Plus, big firms like Fidelity and Vanguard provide fee-free trading alternatives with an investment account (which are simple to establish and maintain, by the way).
If you have some cash to invest and wish to grow your financial stability by investing in real assets, a modest rental property or real estate syndication might be a smart option for you.
Real estate syndications, for example, entail risk, but they also carry the potential for cash flow, appreciation, and tax advantages, not to mention the opportunity to positively impact entire communities with one transaction. In this instance, the risk/reward ratio is in your favor.
6. You’re taking early withdrawals from retirement savings
To put it simply, there’s too much volatility involved when tapping into your retirement savings accounts early. Although tempting, it’s best practice to leave your money invested unless you absolutely have to withdraw it. Your retirement accounts should never be treated like a regular savings account or payday advance option.
The costs of prematurely withdrawing far outweigh the benefits. In addition to paying hefty penalties, you’ll miss out on potential financial growth from those investments and it may take a long time to rebuild your balance.
When you take out 401k loans or early withdrawals, you’re almost guaranteeing you’ll never get to retire early. Compounding interest rates are complicated and it’s easy to get a false sense of security in the decades you have before retirement, but do everything you can NOT to fall prey to this bad money habit.
If you’re facing hardship and have no other option, consider discussing your early withdrawal options with a financial professional before you pull the trigger.
7. You need to exercise patience with diversification
Even when you’re watching a low-cost index fund or a Roth IRA underperform, don’t make any sudden moves. While it’s tempting to react by adjusting your portfolio, your financial goals will benefit you the most if you stay patient.
Those with good money habits know the market bounces around like crazy in the short term, but steadily rises over the long run. Avoid the temptation to react and exemplify your bad habits. Staying the course can be difficult, but your diligence will pay off in the future.
If you’re ready to learn more about how to manage your finances while you’re investing, a great step is to join the BluSky Investor Club. With helpful insights on anything involving U.S. real estate investing, the BluSky Equity Partners team can help you ditch your bad financial habits and start practicing good habits.
How to Ditch Bad Money Habits and Create the Financial Future You Deserve
Now that you’ve learned about these seven bad habits, take some time to examine your financial behaviors.
Do you have any bad spending habits?
Are any of them contributing to your financial stress?
What good could you do in the world with more money?
Are you successfully beating Parkinson’s law?
How differently would you feel about your finances without credit card debt, student loans, excessive online shopping, and due dates trying to drown you?
Just imagine how confident you’ll feel when you’ve got cash set aside, a working budget in place, well-funded retirement accounts, and additional funds to invest.
It’s time to start implementing sound financial habits and working toward your goals. The Blusky Investor Club is here to help you achieve your financial goals by providing the resources you need to build wealth for your family and live life on your own terms.
Further reading: How to Cultivate a Financially Successful Mindset