Click into any investing Facebook Group or personal finance forum, and you see the same types of questions over and over again:
“How do I save more money so I can invest?”
“What can an ‘average person’ do to generate wealth?”
“I want to focus on my finances this year, where do I start?”
If you’re wondering about any of the above or something remotely similar, first you’ve got to identify the ways your habits and your lifestyle are preventing you from saving money.
Metaphorically speaking, if you want to fill the bucket with water, you’ve got to patch the holes in the bottom first!
You can follow top investing tips, read all the financial blogs, and listen to the top 10 best money-focused podcasts, but none of that will help you hit your investment and savings goals if your bad money habits are quietly draining your hard-earned cash.
The irony is, you don’t know what you don’t know. Usually, it’s easy to pick out what someone else is doing wrong, but hardest to scrutinize your own behaviors.
Typically, we aren’t even aware of our money habits (good or bad), much less how to break them.
With bad financial habits hanging around, every good financial habit you try to practice, whether that be following the stock market, investing in real estate, trading mutual funds, or attempting to build a robust savings account, will be undone.
So, to avoid a forever-frustrating personal finance loop, learn about these 9 bad financial habits, take an honest look at your personal financial life and implement boundaries, seek help from professionals, and start breaking these bad spending habits this year.
Bad Money Habits To Drop, Good Money Habits To Build
You have dreams of financial freedom – the beach, the sun, a cocktail in hand, and not a care in the world.
But all that is brought to a record-screeching halt when you log into your financial accounts each week. Despite your best intentions, bad spending habits are wreaking havoc on your financial life, but where are you going wrong?
There are 9 sneaky bad money habits you probably don’t even know are in your life right now that are circumventing and sabotaging your best efforts. You need better money habits infused into your personal life immediately so you can start saving money, quit over-spending money, and build wealth.
It’s time to embark upon a financial journey in which you identify your bad spending habits, ditch them, and implement good money habits in their place.
1. You spend more than you earn.
It’s not a surprise for me to tell you that credit cards and credit lines frequently lead to financial struggles. It usually goes like this: You start by spending just a little beyond your income. Then, to make ends meet, you rely on your credit card.
Even though you fully intend to “catch up next month,” it rarely works that way and you wind up trapped in a cycle of dependency on high-interest-rate debt. This is how one seemingly small moment of emotional spending can snowball into a financial disaster.
Excess spending can quickly derail savings goals, eat up your paychecks, and pour cash toward fees and interest over the years. So if you’re ready to begin investing, start to build good money habits by spending less than you earn.
Often, this means you need to sit down and evaluate your current bad habits in comparison to the good money habits needed to accomplish your long-term financial goals. First, look at your spending over the last year, your total taxable income, and how much money is currently in your bank account.
In some situations, reducing unnecessary spending and trimming monthly expenses might be a fantastic method to meet your financial goals. This might mean canceling retailer subscriptions (such as Amazon Prime or your gym membership), paying off credit card debt, and reducing the number of opportunities you have to spend money on discretionary items.
In areas where you must spend money, set a tighter budget, use coupons, search for used items on Facebook Marketplace instead of buying new ones, and look for discounts. These are great ways to save money that often equate to “free money” in a sense.
For some people, however, this personal finance examination and push toward better money habits may reveal that you simply need to earn more money. You might be facing the realization that you’re underpaid, underemployed, or both, in which case all the good money habits in the world will still leave you struggling.
If it’s apparent your income does not cover your monthly spending, tackle your credit card debt, and allow you to invest in a retirement plan, you need to find ways to increase your income. Even if you have the best money habits on Earth, a low income will leave you scraping by, no matter how much you trim your expenses.
The most straightforward way to make extra money is to take on a part-time job or a side hustle. Some people buckle down toward a promotion or upcoming bonus, while others get creative and sell services or goods online.
Taking swift action to make more money now will allow you to eliminate debt faster, increase your cash flow so you avoid debt, and shore up the monthly budget, allowing you to invest and grow your portfolio in the long term.
2. You’re carrying too much credit card debt and too little productive debt
While I just harped on paying off debt in bad money habit #1, did you know there’s such thing as productive debt?
Well, there is! One of the best-kept secrets of the wealthy is not that they are debt-free, but that they only carry productive debt. Productive debt is an amount owed on appreciating assets, like business investments, rental properties, or fine art.
So, while you should definitely reduce your credit card and consumer debt (unproductive debt) by following the good money habits I suggested earlier, simultaneously consider ways in which you could use other people’s money (the bank’s) to invest in assets that grow in value over time and generate passive income.
As an example, let’s pretend you take on debt to buy investment real estate properties. You do the math to triple-check that the rental income more than covers the minimum payment on the mortgage loan, allows you to establish a solid emergency fund for each property, and that there’s a little extra money left over to pad your personal finances as well.
By taking a calculated risk with productive debt on rental real estate in this example, you increased your income, became a real estate investor, and set yourself up to increase your net worth substantially as the properties appreciate.
While each person’s personal financial situation, money behaviors, and risk tolerance varies, always be on the lookout for ways to bolster your financial success by reducing the amount of unproductive debt and taking advantage of productive debt opportunities.
3. Your emergency fund is practically non-existent
If you don’t have an emergency fund, set one up today. I bet you can log into your bank’s online portal and open up a separate account right next to your personal checking account. There’s no reason not to have one!
Even if you have automatic savings deposits and a solid retirement plan, unanticipated expenditures may cause problems with your savings account, short-term goals, and financial success.
Any time you search for “best money habits” or anything similar on Google, the advice that comes up from EVERY financial professional out there is:
Have an emergency fund.
Now, how much money to have in that fund is another story – and I say it depends. If you’re in the beginning stages of creating a financial plan, things are tight, and you’re working hard to save money, then just build to $1,000- $5,000.
Once you reach that goal, you’re likely on track with better money habits across the board, and as your money management skills are improving, you can gradually increase your emergency fund balance to 3 months of expenses.
Most financial experts recommend storing 3-6 months’ worth of income in case of an apocalypse, pandemic, weather-related catastrophe, job layoff, or even a surprise medical event.
While you don’t need to contribute to this account at regular intervals, a great money habit would be to reassess the balance regularly, considering your financial security and personal needs at each time.
4. You don’t invest because you heard it’s risky
Investing is indeed risky, but it’s also a sure way to grow your money. I know it’s easy to think of a million excuses not to – you may think you’re too young, too old, don’t make enough, haven’t saved enough, or you might find yourself bartering with time or how much money you make.
Some people say they’ll start “next year” every single year or worse, that they’ll start when they make more money. The problem with these financial goals is that they aren’t goals at all – they are wishes without an action plan.
If you’re in that boat, your aspiration to make more money is undefined – how much more money? Inevitably, even when you get that bonus or are awarded that raise, there will be another excuse for you not to invest.
Investing is a positive money habit that requires calculated risk. As an example, real estate syndications carry risk, but they also have the potential for cash flow, appreciation, and tax benefits, not to mention that value-add multifamily syndication deals positively impact entire communities. In this case, the potential reward outweighs the risk.
No matter your position within your journey toward building good money habits, you can find a method of investing money that will be beneficial to your financial health.
Single stocks are risky, so don’t put all your eggs in one basket – consider exchange-traded funds or mutual funds instead. ETFs can cost as little as $15 and many mutual funds have minimum investment requirements of just $2,500. Plus, big brokers like Fidelity and Vanguard offer fee-free trading options with an investment account (which are free and easy to open, by the way).
On the other hand, if you’ve got a bit of savings and would prefer investing in tangible assets as a way to progress toward your financial goals, maybe a small rental property or real estate syndication would help build your financial stability.
As with any big endeavor, find a mentor who can guide you, take the time to learn what fundamentals make good investment choices, and invest an amount that won’t hinder your financial future.
5. You don’t know how much money you should be saving
A rule of thumb is to save 20% of your income; however, this may be too much or too little depending on your current money habits. When you look at the difference between your income and your living expenses, and you have less money than expected, you’ve got to make some tweaks before you can willy-nilly decide to save 20%.
That’s when you create a budget based on your income and your necessary expenses, set a reasonable savings percentage or value, and then trim costs and increase income until you reach that savings goal.
Financial independence can only be reached when your investments are generating enough cash flow to replace your income, but to get there your monthly budget has to be dialed in, your income has to support your savings goals and spending habits, and you must be investing.
It’s so easy to get ahead of yourself here. So take a step back, think about what you want out of this life and why you want it. Then, work backward from those dreams and financial goals to create a year-by-year plan that will generate your desired financial future.
Once again, the “next year” excuse doesn’t work – make a plan now! Determine what percentage of your paychecks will go toward investments (savings), bills (debt reduction), fun stuff (vacations or entertainment), and write it all down.
Continue to track your spending and savings monthly so you can see:
- if you’re on track and working within the parameters you set
- if the budget amounts are reasonable
It’s too simple to say, “I’ll save 20% by cutting my dining costs to only $200/mo.” You’ve got to experience spending only $200/month on going out to eat and see what that feels like. Only then can you decide if that’s a budget line you can stick to or that it needs adjustment.
6. You aren’t using tax breaks to save money
Most people aren’t using the correct financial products for their income level, you included. It’s probably time to engage a financial planner and do monthly reviews of your performance.
Your tax refund is frequently the simplest approach to find extra money each year. With a knowledgeable financial counselor, you can discover tax break possibilities and maintain your hard-earned cash throughout the year, allowing you to implement and hone your best money habits.
The government even provides tax-advantaged accounts that are ideal for individuals who want to build a balanced portfolio. They provide IRA (individual retirement account) and 401(k) choices.
Make sure you’re properly taking advantage of the tax benefits of student loans, mortgage interest, and especially those available through passive real estate investing. Missing out on these benefits can be costing you thousands.
It’s also a good idea to check your present retirement savings and taxable brokerage account to see whether they’re assisting you in accumulating wealth. If not, it won’t take long to fix, but correcting it should be your top priority.
7. Your credit score is lackluster
If old medical bills, personal loans, and credit cards from life’s unexpected expenses have negatively impacted your credit score, it’s likely you’re being charged higher interest rates across the board, higher rates on insurance, and that you’re being passed up by any credit card company (or anyone else) who might offer ways to consolidate or help you save money on interest.
Your credit score is a direct reflection of how good (or bad) you are at borrowing money and repaying it responsibly. As you’re correcting bad money habits by paying off unproductive/consumer debt, saving more, and spending within your means, your credit score will automatically improve.
That’s because when you practice positive money management, you’re less likely to miss a monthly payment and you’re more likely to set up automatic bill pay. In fact, you’re more likely to curb spending habits, arrange automatic savings deposits, and pay additional money toward your loan and credit card balances.
Having great credit doesn’t automatically lead to financial freedom, but it does correlate as a reflection of someone with good money habits.
8. You tap into your retirement accounts too early.
The most fundamental financial advice that will assist you in achieving wealth or preventing you from inadvertently draining it is to invest regularly.
But once you are invested,
Don’t pull money from your retirement savings unless you absolutely must.
Your retirement account isn’t a payday advance opportunity. Even if you use your retirement withdrawals to purchase financial products or invest in real estate or the stock market, you face steep fees and financial penalties. 401K loans are a terribly sneaky way in which you pay fees and interest to borrow your own savings while also missing out on the growth those invested dollars would have produced for your future.
The number one rule about your retirement savings accounts is that you should leave your money invested at all costs. Taking withdrawals or loans from your retirement money is just too dangerous and it can take you a long time to rebuild, so it should only become an option if you have no other way to handle the issues at hand with your standard taxable income.
If you’re facing true financial hardship over the course of a year, you may want to reach out to a professional in the financial world to discuss early withdrawal options.
9. You’re pushing for diversification too quickly
Letting impatience take the wheel is the quickest way to waste money while investing. While nobody likes seeing a low-cost index fund or a Roth IRA fall short, you must concentrate on the fundamentals and your portfolio’s long-term goals.
The good news is that it’s very easy to lose your discipline when things are going well, but the bad news is that you must conduct your research and avoid making changes to your portfolio in a reactionary manner.
Build strong financial relationships with professionals who exhibit good money habits like saving and investing more money than they spend, thinking strategically about building good money habits, and creating ways to build wealth. Ask good questions about saving money, about how to build better money habits, and about how they determine when and where to invest.
If you’re ready to learn more about how to handle your money while investing, the first step is to join the Goodegg Investor’s Club.
The Goodegg team is here to help you break your bad money habits and invest in financial products that can help you achieve your objectives. From equity to ETFs, the Goodegg team can assist you with any issues relating to real estate investing in the United States and creating diversification within your portfolio.
How To Implement Money Habits Of The Wealthy This Year
Now that you’re acutely aware of 9 totally detrimental financial habits, take some time to examine your personal behaviors with money. Are any of them sabotaging your financial stability?
Use this better money habits guide as a step-by-step instruction manual to improve your financial health over the next several months.
When you have savings in place, a working budget, well-funded retirement accounts, and excess with which to invest, you’ll know you’re on the right track!
It’s time to implement better financial behaviors and set yourself up to make your dreams a reality. The Goodegg Investor’s Club is here to provide you with all of the tools necessary to build wealth for your family and create the life you were meant to live.