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We are our habits, good or bad. Few habits though can be as detrimental as bad money habits. If you want to improve every aspect of your life, breaking destructive money habits must be your priority. We’ll show you how.
It Starts Early
Our money habits are formed earlier than you might think. By age seven, we have already developed ideas about money that we will carry with us for the rest of our lives. These habits are learned mainly by watching our parents.
If you’re reading this, you are probably considerably older than seven, and you may already have destructive money habits. But it’s almost never too late to learn and practice better habits.
1. You Have No Idea
You may know how much each paycheck is but not be able to name any of your other numbers. Think it’s not true? Quick, how much is your cell phone bill?
If you can’t answer those questions, you don’t have a stable financial foundation. We understand the reluctance to know your numbers. If you’re in debt, living paycheck to paycheck, have a less than ideal credit score and no retirement savings, it can be scary to face these things.
But you can’t break destructive financial habits without facing your numbers head-on. You can use Mint to track all of your income and expenses. Credit Karma can show you a close approximation of your credit score and many credit cards offer it now, you can find it on your paper or online statement.
You must know precisely what you are dealing with before you can make a plan to tackle your finances.
2. You Don’t Stick to a Budget
It doesn’t matter how sophisticated the budgeting program you use is or how minutely you break down your budget categories, or how often you tinker with your numbers if you don’t actually stick to whatever budget you create.
If this all sounds familiar, there is one method of budgeting that may finally work for you, the envelope method. The envelope method is a cash-based budgeting system; it is very low tech and simple which may be part of its magic.
You don’t need to do this for fixed expenses like housing or car payment or utilities. Those things cost what they cost so they are not areas you can really go over budget on (although one of the healthiest financial habits you can have is to keep your housing costs at 30% or less of your income).
The envelope method works for those areas we do overspend on, food, entertainment, clothing, etc. All you need to do is decide how much you can afford to spend on these areas each week or month and take out that much cash.
Grab a stack of envelopes; you don’t need anything fancy, plain old white ones will do. Or if you want to use the ultra-frugal method, recycle envelopes your junk mail came in and use those.
On the outside of each envelope, write the category, “Food,” “Gas,” “Beauty,” whatever your discretionary spending categories are.
Put the allotted amount of cash in each envelope, and that’s it.
When you run out of money from an envelope, you don’t have any more money to spend in that category for the week or month however you’ve broken up your budget.
Are you allowed to take money from a different envelope to replenish an empty one? Some personal finance writers say no. The point of the envelope method is to instill disciplined spending so “robbing Peter to pay Paul” detracts from that goal.
Others believe that so long as you are not spending more than you have budgeted overall, it’s okay to use an envelope with more cash than you need to cover the shortfall for one that didn’t have enough. This question is something you can decide for yourself.
The envelope method isn’t meant to be used forever. There are certain risks you take on when you use cash that you don’t have to worry about when you use a debit or credit card. You could lose or be robbed of the cash. Using a credit card gives you some consumer protections like extended warranties, free replacement if an item you buy is stolen or damaged, and chargeback refunds if you’re unhappy with a product or service.
But the envelope method can help teach you the discipline it takes to stick with a budget. After a few months of consistently doing so, you can stop using the envelope method. If you start slipping up, go back to it until you start controlling your spending again.
3. Someday Never Comes
Someday you will finally get your credit cards paid off. Someday you will start your emergency fund. Someday you will start investing for retirement. None of these things are going to happen on their own. There is never going to be a perfect time somewhere in the future to start doing these things.
All of these things happen because you make a plan to start doing them and then, well, start doing them. Many of us avoid doing these things because they seem overwhelming but like striving toward any goal, successfully reaching a financial goal is broken down into a series of small steps.
If you have credit card debt to pay off, the first step is to list all of the debts and their rates of interest. From there you can choose between the stacking or snowball methods to start paying them off.
If you need to start an emergency fund, calculate how much six worth of essential expenses would be so you know your goal number.
If you need to start investing for retirement, begin contributing to your employer’s 401k if there is one offered. If your employer doesn’t offer a 401k, you can open an IRA account on your own.
4. You Deserve It
You work hard for your money, and you deserve to treat yourself once in awhile. And we agree, you should treat yourself once in awhile. But we all have different definitions of how often once in a while is and what a treat is.
If your habit of treating yourself is happening too often, and your treats are too expensive, so much so that you are hurting yourself financially, you have to evaluate this behavior.
What triggers the urge for a treat? Do you do it when you’re stressed, angry, sad, or bored? That is emotional spending, and you have to find other ways to deal with unpleasant emotions.
Perhaps at one time, you were able to afford to spend this way but your financial situation has changed, and you have not adjusted your spending to the new circumstances. Or maybe, you’re just used to having what you want when you want it and don’t consider the consequences (see point #1 above).
We all should treat ourselves from time to time, but the amount we spend has to be within what we can comfortably afford. To achieve this, budget some money each week or month to spend on whatever you want, even if you don’t need it.
5. Self Worth
For some of us, our self-worth is bound up with the things we buy and do. In fact, it’s been shown that there is a link between conspicuous consumption and low self-esteem.
There is the “peacocking,” or showing off aspect of buying stuff but for some people, there is something deeper at play. Researchers found that the buying of luxury goods is a way to “repair self-threat.” So if you’re doing this, it’s not necessarily to impress other people but to impress yourself.
This is the reason advertising is so persuasive. If you feel bad about yourself and you see a commercial for a product in which all of the people using that product are happy, healthy, prosperous and having fun because of that product, you think it might work for you too. So you buy it.
If this sounds like you, what is the “self-threat” you are trying to overcome? And where can you derive a sense of self that is more lasting and less destructive?
Getting out of your own head is a good start whether that means volunteering, talking to a therapist, taking up a hobby, or just getting out and socializing with close friends more often. You are not the total of your possessions. Not to the people that matter anyway.
6. You Let Your Partner Handle It
No matter how much you trust your partner, you cannot let them handle the family finances alone. For one thing, it is too much responsibility for one person. For another, you have no idea what will happen in the future.
You may be right; your partner is the most wonderful, trustworthy person ever to have lived. But what if something were to happen to them? Would you even know where the passwords to your online accounts were,if they had life insurance, how much debt you might have?
No one should be in the dark when it comes to money. There is nothing wrong with a partner being the “point person” when in dealing with family finances. Maybe they enjoy it or are merely better at it than the other partner. But both partners have to be involved.
7. Credit Scores Don’t Matter
If you read anything personal finance related even on a casual basis, you’ll see a lot of articles talking about credit scores. But do you know why credit scores matter so much? They matter because one of the most expensive things in life is interest and having a very good credit score means you will be offered a lower interest rate when you borrow money for things like buying a home or an automobile.
If you have a credit score of 760 or above, you will be offered the best interest rate available. Just a 1% difference in interest rates will make borrowing money possibly thousands of dollars less expensive over the life of a loan.
You don’t need to obsess over your credit score day to day or keep trying to improve it once you hit the much prized 760. But when you start thinking about borrowing money, you should find out what your score is and if it’s less than 760, start working on improving it.
8. You’re Secure in Your Job
You may be the star employee where you work, always getting great reviews, raises, and promotions. This can make you cocky, and you start to feel as though you will never lose your job. But things happen that are outside of our control. You might get a new boss who doesn’t like you for whatever reason or whom you don’t like and are unhappy working for.
Your company could be bought out, and you could be replaced by an employee of the new company. Your company could have a string of bad quarters and be forced to make cutbacks. The company could go bankrupt.
Anything can happen, so it’s never a good idea to become too complacent in a job. It’s always a good idea to be on the lookout for new, better opportunities. Employees who stay in a job longer than two years have been found to make 50% less than those who move around more often.
Take advantage of opportunities to network with other people in your field. Go on job interviews every few months even if you have no intention of leaving your current position.
Interviewing is a skill that is improved through practice, and you want to stay sharp, so when you really do need or want a new job, you aren’t rusty.
9. You Live in the Past
We have all made financial mistakes. Sometimes we learned from them the first time, and sometimes it took longer.
We should not have racked up thousands of dollars in credit card debt in college that we are still paying off eight years later. We should have started investing with our very first “grown-up job” paycheck.
We should not have taken out a loan to buy a brand new car when the ten-year-old car we had still ran just fine. We should have bought Amazon stock in 1997.
There is nothing we can do to change the past. The best we can do is to learn from it. Chastize yourself, sure. You don’t get a pass for dumb mistakes. But don’t continue to beat yourself up for years afterward. It’s self-destructive.
Take those hard lessons and move forward, you can often even use them in areas of your life that have nothing to do with money.
10. You’re a Miser
This site is called Frugal For Less, so of course, we don’t advocate spending money in a reckless way. But it can be destructive to be too cautious with your money too.
Maybe your apartment is in an unsafe neighborhood, the heat regularly goes out in the middle of the winter, and the window sills are chipping lead paint. But hey, the rent is only 20% of your income, well under the recommended maximum of 30%, so you continue to live there.
You have a year of expenses in your emergency fund; you have no debt, credit card, student loan, car, mortgage, or any other kind, you have enough money saved for retirement to retire at 50 and live comfortably for another 40 years.
You have a good job and a few rental properties that bring in passive income. Sound great!
Your blood pressure was pretty high at your last physical. Your doctor made some recommendations, including cutting down on your sodium intake. If your blood pressure is still high at the follow-up, you’ll need to start taking medication.
You’ve started reading food labels, and you see the Ramen noodles, and frozen ready meals that make up the bulk of your diet are loaded with sodium, but they’re so cheap!
Your best friend from college is getting married, and it’s a destination wedding. You have plenty of vacation time, but the trip would cost you $2,000. You pass.
This is the exact opposite of always treating yourself but being too miserly can be destructive too.
Your money can be used for lots of things, and some of those things include living somewhere safe, eating food that doesn’t lead to you being put on medication and being with your friends for the important occasions in their lives.
No one lays on their death bed and regrets things related to money.
Money is a Tool
Money is a tool just like a hammer is a tool. You can use it to smash out windows, or you can use it to build a home.
If you recognize yourself in any of these destructive money habits, that is the first step to breaking them and replacing them with better habits that will help you reach all of your goals, financial and otherwise.