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Bad habits are something we all have. Even when it comes to finances, bad money habits are no exception.
Whether big or small, bad money habits can eat away at your savings, and investments, and even jeopardize your financial freedom or retirement.
That’s why I’m going to show you the top 10 bad money habits that will drain your wallet. You may be doing some of these without even noticing.
Without further ado, let’s jump into the top bad money habits.
Spending more than you earn
I’m putting this at #1 because this is one of the most damaging bad money habits you can have.
Think about this for a second. If you’re spending more than you earn, you’re losing money every month, going into more debt. If this continues for a prolonged period of time, you’ll dig yourself deeper into debt.
If this is you, and you want to get yourself out of this cycle, one of two things must happen: increase your income and/or decrease your expenses.
Decrease your expenses
Decreasing your expenses is easier than increasing income, so let’s start with that.
Start tracking your monthly expenses if you’re not already doing it. This is the only way you’re going to get a clear picture of where your money is going. Start with recurring expenses like a mortgage, bills, food, and transportation.
Also make sure to track discretionary spending, which are things you don’t necessarily need but are nice to have. These can include subscriptions, eating out, and luxury clothing and accessories.
After tracking your expenses, take some time to look at where you can cut back.
I have a whole article on how to save money on a low income that gives you all the details and goes into more depth.
Increase your income
See if you can ask for a pay raise. If you’ve been doing good at work, and you have concrete evidence that your performance has been on point, take that evidence and ask your manager for a raise.
If that doesn’t work, the next best thing you can do is find work elsewhere doing the same job. You can usually negotiate your pay during the interview and hiring process.
The second way you can increase your income is to take on a side hustle or a part-time job.
These days with the internet, it’s easy to find work online as a freelancer or maybe even start your own online business.
There are also many things you can buy that will make you money. These are called assets and increase in value after being purchased.
Having a bad credit score
Having a bad credit score can negatively affect multiple aspects of your life including the ability to rent, receive a loan, and be restricted to higher interest rates.
Did you know that a bad credit score may also affect your ability to land a job as well? When you sit down for a job interview, your potential employer may ask if he or she can run a credit check.
According to the National Association of Professional Background Screeners (NAPBS), around 31% of employers run credit checks as a part of their hiring process.
Making sure you have a decent credit score should be in your best interest.
Here are some things you can do to increase your credit score or keep it high.
Set up autopay or set up notifications
By setting up autopay, your credit card company will automatically withdraw money from a designated bank account after monthly statements come out. This solves the issue of forgetting to pay off your credit card.
For those that prefer to manually pay, you can also set up notifications when your monthly statement cycle comes out. That way you know that the bill is due.
Not investing your money
Many people come up with excuses as to why they cannot invest their money in the stock market, including things like the stock market is risky, and not wanting to lose money.
However, did you know that not investing is costing you a lot of money, and it’s actually a bad money habit? Not investing is equally risky and let me show you why.
Let’s say that you save $200 every month for the next 20 years. You keep this money in a savings account that yields an interest of 0.21%, which is the nation’s average.
After 20 years, you’d be left with $49,178.34.
Let’s say that instead of stashing that money into a savings account, you invested it into the stock market – the same amount of money for the same period.
Given that the S&P 500 averages an annual yield of 9%, after 20 years, you’d have $123,905.17!
Investing in the stock market would’ve yielded more than 2.5 times compared to just keeping it in a savings account.
See what kind of gains you’d be missing out on?
Keep in mind, that’s with just investing $200 a month. But by investing more money, you’d be able to rack up much more due to the compounding effect of investing.
Not having an emergency fund
Did you know that 51% of Americans don’t have an emergency fund that can cover three months’ worth of expenses? Did you also know that 1 in out of every 4 Americans doesn’t have any emergency fund at all?
Not having an emergency fund for unplanned expenses and/or financial emergencies is one of the biggest money mistakes, and it’s a bad money habit you should break.
You never know when emergency expenses may come up. And without an emergency fund, even the slightest financial shock may turn into debt and set you back.
Saving money for some people may seem like a near-impossible task but putting even just a little bit of money aside at the end of each month will go a long way.
The amount of money you should have in your emergency fund is different depending on your situation, however, the general rule of thumb is around 3-6 months’ worth of expenses.
In case you lose your job, your emergency fund is there to cover expenses until you’re able to get a new one.
Emergency funds should not be invested in the stock market because it’s a short-term investment. You should keep this fund in an account that can easily be withdrawn from. Examples include a money market account or a savings account.
Not having a budget
A budget is a plan for your money. It takes into account how much money you make and where your money is going.
Not having a budget is a bad money habit because it means you’re not in control of your money. Budgeting isn’t about restricting yourself from life, but it’s about taking control of your money.
You can create a budget by first tracking your income and expenses. You can then see where you can cut back and where you should allocate more of that money to.
For example, if you don’t have an emergency fund but spend $100 a month on subscriptions, that can be something to consider cutting back on.
Not paying credit card bills on time
If you cannot pay your credit card balance in full at the end of every month, it means you’re overspending which is a bad money habit to have. Reevaluating your spending habits and finding the reason why you’re not able to pay it off should be your top priority.
Carrying a balance is one of the quickest ways to pile up debt, and it’s a trap you want to avoid at all costs.
Credit cards are not evil if they’re used properly. They carry lots of perks that we can all use to our benefit. For example, did you know that most credit cards offer phone and rental car insurance?
Check out this post that gives you some of the best tips on using your credit card wisely.
Ignoring 401k match
Ignoring a 401k match is a bad money habit because it’s free money you’re leaving on the table.
A 401k is a retirement plan offered by your employer to help save for when you retire. With each paycheck, you can have a certain amount of money deposited into your 401k account before taxes are deducted.
From then, you can use your 401k retirement account to invest in equity, often stocks and bonds.
Many employers offer a match up to a certain percentage. For example, if you opt to deposit 10% of every paycheck into your 401k, your employer will deposit the same amount, doubling the deposit.
If your employer provides a match, make sure to take advantage of this free money. Ask your employer’s human resources how you can get started.
Just because the money is deposited into the account, doesn’t mean it’s invested. Don’t forget to invest the money in your 401k, which needs to be done manually.
Not checking in with your partner
About one-third of couples report that money is one of the main reasons why they fight and also causes 22% of divorces. That’s why it’s very important to lay down the foundation of financial habits from the get-go.
Some people avoid talking about money with their partners to avoid conflict. But that’s a big mistake. If both parties have different spending habits, it will only pile up and lead to a bigger fight down the road.
Debt is one of the biggest causes of conflict in a relationship. If one person is debt-free, and the other person has more debt, this can spark arguments especially if spending habits differ.
Debts incurred after marriage are jointly owned by both parties, so both people need to be on the same page.
Another potential cause of conflict is one person making more money than the other. The person who makes more money can try to dictate where money is allocated and how it is spent.
Although this can make sense up to a certain extent, the couple must work as a team.
Practice communicating regularly. Communication is one of the most important aspects of any successful relationship. Talk about each other’s spending habits and sort out how each party wants the money to be allocated.
Listen to each other without judgment.
Using an out-of-network ATM
If you’re the type of person who frequently deals with cash, this one is for you. Using an out-of-network ATM frequently is a bad money habit because of the fees.
On average, banks charge between $2 to $3.50 to use out-of-network ATMs. That is a recurring fee you’ll be charged every time you use an out-of-network ATM.
If you find yourself frequently needing to use an out-of-network ATM, it’s time to change banks because those fees can pile up over time. Look for a bank that has ATMs that suit your financial needs.
Even better, go with a credit union or an online bank. They have better benefits than regular brick-and-mortar banks.
Lifestyle inflation
Lifestyle inflation is a bad money habit because it doesn’t allow you to take advantage of pay raises by paying yourself first. It’s when you increase your expenses whenever you get a pay raise or your income increases.
People generally spend a lot on clothing, dining out, childcare, and vacations. But increasing your expenses every time your income increases will only lead to you living paycheck to paycheck.
Did you know that people making up to $500,000 a year find it hard to save money? It’s crazy to think how people making that much money would spend it all.
But lifestyle inflation is real and it’s tempting. Let’s say you’ve been working hard, and your boss offers you a pay raise. You feel like you’ve achieved another milestone and all that hard work paid off.
Wouldn’t you feel like you deserve that brand-new car you’ve always wanted? Or perhaps go on that shopping spree and redesign your wardrobe?
Although we deserve recognition and reward for hard work, inflating your lifestyle as your paycheck increases won’t allow you to put money away for your future.
Paying yourself first should be a priority. And what I mean by this is investing in yourself and your future. You can do this by building an emergency fund, investing in your education, or investing in the stock market.
If all you do is spend more money, you’re paying everyone but yourself. Learn to take advantage of an increase in income by investing in yourself.
You don’t have to always keep up with the trend, or as they say, “keep up with the Joneses.”
Conclusion
We went over some of the most critical bad money habits you can have.
Bad habits can be hard to break. But you don’t have to break all of them at once. Start with baby steps, because even those baby steps will pay off in the future.
What are some of the bad money habits you have?