6 Bad Money Habits and How to Break Them
It’s not uncommon to find out you’ve been guilty of committing bad money habits. Whether you’re aware of them, or simply didn’t know better, here are some of the most common mistakes and how to fix them.
Treating Your Credit Card like Free Money
The secret to using credit cards without accruing mountains of debt is to have few and use them responsibly. There are many different types of credit cards, each with different terms, conditions, interest rates, and credit limits. Choosing the right card depends on your personal situation and you should only carry a manageable amount of debt on that card. Ideally, you should not use the maximum available credit and you should be able to pay off the balance in full each month. Try your best to not use your credit card to buy things you cannot afford to pay for. Serial credit card users have an “out of sight, out of mind” mentality that will inevitably catch up with them. Consider whether the purchase you are about to make is a want or a need and pay using cash of your debit card if you can!
Only Paying the Minimum on Your Credit Card Payments
If you need to charge more than you can pay off at once, or if you are trying to pay down old credit card debt, then try and pay more than the minimum to avoid falling into debt. It is important to always aim to pay at least double the minimum payment. You could end up facing decades of payments with a total that is double, or even triple, the original balance, due to the accrued interest.
Not Prioritizing High-Interest Debt
When it comes to paying down debts, many people are at a loss for where to start. For many, it is the number of accounts that need paying off that intimidates them, and so they start by paying off all of their smaller debts before acknowledging their larger, higher-interest debts. You might want to consider tackling your highest-interest rate debt first to help you get out of debt more quickly. If you don’t see a huge dent in your debt, then you can still contribute a small sum to your other, smaller interest-rate debts. TIP: If you put $500 towards a $4,000 credit card bill with an 18% interest rate, then you will save far more in the long run than paying off a $500 bill at 6% each month.
Failing to Budget
Budgets have only one rule – do not spend more than you earn. Simple enough, right? Yet, if you ask people if they plan and stick to a budget, most never have. The excuses run anywhere from not knowing where to start, to being too afraid to face their poor financial habits. If you learn how to create a budget – and stick to it – it can be a very rewarding experience. Once you have a detailed list of money going in and money going out, then you can see the sources/causes of your bad debt. A budget is not meant to limit you from everything you enjoy – instead, it will help you learn how to prioritize your spending so that you can afford more (like that long-overdue vacation) in the long run.
Saving your Savings for Last
For many people, putting money towards savings is an afterthought, and is only done if there is left over money at the end of the month. No matter how prepared, our lives can take unexpected turns (medical bills, home repairs, job layoffs) and it is important to have an emergency fund. Instead, commit to a monthly savings goal (i.e. 10% of every paycheck) and have that be the first payment you make every month. Then pay out any other expenses you have that month. If you still have money left over at the end of the month, consider putting in an extra payment towards any debts you have or give your savings an extra boost!
Co-signing a Loan
This might be an option you might want to consider avoiding (if you can). If you can’t, then make sure you do your homework on the loan. For example, know when the payments start and how long you will be responsible. If you can get your name off the loan in 3-4 years, then this may be a safe option for you.
Keep in mind, this type of loan balance or credit limit is added to your list of obligations and can throw your loan-to-debt ratio out of whack. When you try to apply for a new loan or credit card, your amount of debt could be deemed too high and be charged higher interest rates or worse, be denied altogether. And if the person you’ve co-signed for ever does miss or make a late payment, your credit score will be negatively affected. Once your credit score drops, your interest rates may be raised – this may cause you to fall into debt and financial hardship.
Seemingly innocent money habits can really affect you in the long run. Everyone has a bad habit or two, but when it comes to your finances, turning your bad habits to good habits can help you keep more of your hard-earned cash. Are you guilty of any of the above habits? Comment below!