Instead of ushering in the new year with resolutions we won't keep past February, let's focus on what we can (and should) finally drop. This week, we’ll focus on quitting bad habits, toxic relationships, or whatever else is keeping you from living your best life. #iQuit
Bad money habits can be exceptionally hard to break, whether they’re ingrained from your upbringing or stem from a lack of knowledge about personal finance. Even when you have the best intentions and a strong financial plan, those enduring rituals will continually derail your money success. For instance, if you’re trying to get out of debt but constantly feel the need to splurge on expensive dinners out to keep up with your friends, it’s unlikely you’ll reach your goal.
Here are seven common ways people habitually mishandle money — and how to stop them.
Using shopping to deal with life’s ups and downs is common, Gretchen Cliburn, CFP, director of financial planning at BKD Wealth Advisors, says. But emotional impulse spending doesn’t actually fix anything. In fact, it tends to make things worse, she says. That temporary high you get from buying will inevitably wear off, often leaving you with credit card debt or piles of unneeded stuff.
To avoid making impulsive, emotional purchases, set some ground rules for yourself. For instance, buy items only from a wish list that you’ve made at a time of relative calm, not when you’re trying to distract yourself from anxiety or sadness. Or make yourself wait 24 hours before giving in to an unplanned purchase.
It’s also a good idea to opt out of emails from your favorite stores to reduce temptation, and to buy things only when you can pay cash. If necessary, find someone to discuss your goals with and to hold you accountable, Cliburn says.
While it’s admirable to extend a helping hand, lending money to friends and family members can hurt both your pocketbook and your relationship. It may be difficult for the person to pay you back, which could breed resentment and conflict. Over time you’ll be out the money and the friendship.
Beyond offering a loan, there are many ways to help a friend in need and preserve your relationship, Cliburn says. Look for ways to help your friend find solutions to her problems that don’t involve throwing money at them. For instance, you could offer to give her a ride until she gets her car repaired, or suggest ways to reduce her expenses by sharing your own frugal tips.
If you still want to offer money, consider it a gift. That way you won’t feel resentful when you notice your friend has been buying new clothes and shoes rather than paying you back. If you can’t afford to give the money as a gift, it’s best not to lend it all.
Always Picking Up the Check
For some people, being able to pay for a friend’s dinner or a round of drinks is a source of pride. But if you’re going into debt (or putting off more important expenses) because you’re always taking care of the bill, you’ve gone too far.
People who pick up the tab on a regular basis find that their friends or family members begin to expect such treatment, which can strain the relationship, Mela Garber, tax principal at New York–based Anchin, Block & Anchin LLP, says. Eventually, it’s hard to determine whether people are going to dinner with you because they like you or because they want a free meal. Want proof? “Just ask anyone who won the lottery how many of their old friends they still have after a year from winning,” she says.
Comparing Your Money Situation to Other People’s
Many of us measure success by the size of our homes or the cars we drive, but that assumption is just plain false. Big houses and expensive stuff only indicates how some people choose to spend money, not how much they actually have, Cliburn says.
Keeping up with the Joneses can be tempting — if your neighbor can afford that new SUV, you deserve one too, right? But keep in mind that many of your neighbors could be living above their means. Remember that 37 percent of Americans have credit card debt greater than or equal to their emergency savings, according to a Bankrate study.
To avoid living beyond your means, start by determining what’s important to you — just to you — Cliburn says. Set goals for what you want your life to look like in five, 10, 20, and 50 years. Perhaps you want to own a home in a specific neighborhood, or to retire comfortably. “Once you have identified what is most meaningful to you, make spending decisions based on that,” Cliburn says, instead of overspending to live up to someone else’s idea of success.
Spending All Your Income
Everybody has to pay bills and buy necessities each month, but it’s up to you to decide what to do with the money that’s left over. Choosing to spend it all — as opposed to making saving and investing a priority — can easily become the norm. That often means you have no “rainy day fund” when emergencies crop up, and no secure retirement waiting for you at the end of your career.
When people spend everything they earn, they often don’t have a budget, says Derek Gabrielsen, wealth advisor at Strategic Wealth Partners in Independence, OH. He calls this “the biggest mistake people make.”
Gabrielsen recommends writing up a budget that includes monthly allocations for emergency savings and retirement savings. A good rule of thumb is to aim for six months’ worth of living expenses in your emergency fund and saving at least 10 percent of your income toward retirement. And once you have a spending and savings plan in hand, stick to it. That’s one way to make sure you always reach your goals.
Depending on Credit Cards
By the end of 2015, Americans’ credit card debt reached about $900 billion, according to CardHub’s analysis of Federal Reserve figures. Contrary to popular belief, carrying a balance on your credit card can lower your credit score, even if you make payments on time. And if you’re making only the minimum payments each month, your credit score will keep suffering because your credit report will show unpaid balances every month.
Plus, when you make just the minimum payment it takes years to pay off your debt. Factor in interest and you’re paying way more than the initial sticker price for those purchases.
If you’ve become accustomed to living with credit card debt, take some time to understand exactly what you’re doing with your money. Read the fine print on your next credit card statement — particularly the section that shows how much you’ll end up paying if you simply pay the minimum payment every month. You may be shocked to see how expensive credit really is.
To break the cycle, stop using credit cards immediately. Set a strict budget and use the snowball method to strategically pay off your debts. If you need help, consider contacting the National Foundation for Credit Counseling, a nonprofit group that specializes in helping people get out of debt.
Ignoring the Obvious
If you avoid checking your credit card or checking account balances, or keeping track of other financial accounts, you are living in a money coma. You might think that if you don’t really know how bad it is, the problems will just go away. But they won’t.
“Refusing to keep up with your balances is like not going to the doctor because you know something is wrong,” Gabrielsen says, but “the only way to make things better is to look at the problem and figure out a plan to get out of it.”
It’s time to commit to being proactive rather than reactive. Get help from a friend, family member, debt counselor, or financial planner to assess your financial situation and develop a plan for improving it. To get started, make sure you know your credit score, the amount of debts you owe, and your monthly commitments. Here’s a good list of questions to ask yourself to get the conversation started. Once you open your eyes, you can take back control.