Money Management 101: 5 Foolish Financial Habits to Break Now
Bad habits are hard to break, and bad money habits are no exception. From spending more than you earn to always forgetting to pay bills, common money management mistakes can end up costing thousands of dollars every year, in addition to making it more difficult to achieve your financial goals. Yet as anyone who has tried to give up soda or quit smoking can tell you, kicking a habit can be hard.
One reason some money habits are difficult to give up is because they’re the result of financial lessons we learned as children. “Money habits are formulated at a very young age for most people,” Ramona Pearson, a certified public accountant and personal financial advisor, told U.S. News & World Report. “I think how money works and what it means is deeply ingrained in our psyche.”
Yet even old habits can be overcome with effort. The process begins with recognizing you have them in the first place. Once you’ve identified your money foibles, you can start to think about ways to overcome them. Even if you think your financial habits are without flaw, here are five foolish habits you should work on breaking to improve your money management skills.
1. Operating on auto-pilot
Technology makes it easy to automate many aspects of your financial life, which is pretty awesome. No more late utility payments, scrambling for stamps to send bills, or hours lost balancing your checkbook. But too much automation can also be dangerous. If you “set it and forget it” with your money, you run the risk of missing payments or overlooking erroneous charges, mistakes that can set you back in a big way financially.
Automating your finances isn’t necessarily a bad idea, especially if you’re notoriously forgetful, but you should check in periodically to make sure everything is working as it should. “While I absolutely love my bills being paid on time, I don’t let myself use it as an excuse to stick my head in the sand about what is going on,” personal finance blogger Glen Craig wrote on Free from Broke. “You still need to review the statements to make sure you aren’t missing other big opportunities to save money.”
2. Only paying the minimum on your credit cards
Racked up a lot of debt? Making only the minimum payments on your credit card means much of your payment will go toward interest, not your principal. As a result, you could be stuck paying off your debt for decades. Say you owe $5,000 on a card with a 15% APR. If you make minimum payments of 2% of your balance, it will take your more than 27 years to pay off your debt and you’ll pay more than $7,500 in interest. (To see exactly how long it will take you to rid yourself of credit card debt if you only pay the minimum, take a look at your monthly statement, where card issuers are required to highlight this information.)
Not only will sticking to minimum payments leave you stuck in debt for longer, but it can hurt your credit score. Credit scoring agencies don’t like to see you using more than one-third of your available credit. Small payments won’t make much of a dent in your balance, which can in turn ding your FICO score if your balance is high relative to your credit card limit.
Procrastination is the enemy of success. Putting off important financial tasks, from paying bills to updating your investments, is a recipe for a money disaster. It’s especially costly when it comes to saving for retirement. The longer you wait to start contributing to your 401(k), the more you’ll have to save to build a respectable nest egg. Yet despite abundant evidence in favor of early saving, more than half of people between the ages of 30 and 49 surveyed by Wells Fargo admit they plan to make up for a shortfall in their retirement account balances by saving more later – a risky strategy.
Saving for retirement is “not something people can push off and hope to achieve later in life,” said Joe Ready, director of Institutional Retirement and Trust at Wells Fargo, in a statement. “If people in their 20s, 30s or 40s aren’t saving today, they are losing the benefit of time compounding the value of their money. That growth can’t be made up later.”
4. Succumbing to sales
It’s hard to resist the lure of a good deal, but constantly getting swayed by buy-one-get-one-free promotions, Groupon daily deals, and other marketing gimmicks isn’t so great for your wallet. If you’re always giving in to impulse buys, you’re probably wasting money rather than saving it.
“The reality of the matter is that big sales really don’t save you money if you’re buying things that you don’t need and wouldn’t buy anyway. You’re just spending your hard-earned cash on stuff that you wouldn’t buy if it wasn’t a big ‘bargain,’” Trent Hamm wrote in a blog post for The Simple Dollar.
5. Using credit cards as an emergency fund
Financial experts recommend having three to six months of living expenses, yet 15% of people surveyed by Bankrate said they’d reach for their Visa if faced with an unexpected car repair or other financial emergency rather than relying on their savings. Unless you plan on paying off your purchase immediately, counting on credit to get you through tough financial times can lead to even more problems down the road.
Interest rates on credit cards are often in the double-digits, which makes this an expensive way to manage financial curveballs. Plus, card issuers can (and do) reduce lines of credit or cancel cards, potentially leaving you high and dry in an emergency. And if you can’t pay off the balance promptly, you risk hurting your credit score.
“Credit cards are not designed to use for emergencies,” Howard Dvorkin, founder of Consolidated Credit and the author of Power Up: Taking Charge of Your Financial Destiny, told Wise Piggy. “It’s like using a hammer to do a screwdriver’s work. Something’s going to get broken, and in this case it’s the consumer’s finances.”