If you don’t know how to handle money, you’ll never have enough. Net worth doesn’t determine financial success. Just take a look at some of the rich and famous that have fallen into bankruptcy despite having millions in the bank.
Our problem with money stems from bad money habits. Not from a lack of it. With the right habits and tools, you can learn to manage your money.
Build good money habits to minimize money worries and build wealth. Keep reading to learn more about bad money habits, good money habits, and six sure-fire ways to transform your bad money habits into good habits for real this time.
What is a money habit?
First, let’s make sure you know what a money habit is.
According to Merriam-Webster, a habit is a “usual way of behaving; something that a person does often in a regular and repeated way.” Therefore a money habit is a repeated action associated with money. It’s all the little things about how you handle money without thinking.
Our habits take shape gradually throughout our lives. They’re malleable. The key is to audit yourself to see which habits you want to keep, and which ones need to go. Let’s go over a few habits that are probably labeled as bad versus good.
Bad money habits
Bad money habits are the ones that keep you broke. Living paycheck to paycheck. They’re not helping you reach your financial goals. Check out this list of bad spending habits to avoid:
- Not tracking your spending. Do you find yourself confused at the end of the month? Wondering where your money went. You’re not alone. Failing to track your spending leaves you vulnerable. You may find yourself spending more than you make, relying on high-interest debt, and ultimately, broke.
- Impulse shopping. All of those ads you see while scrolling your Instagram or Facebook aren’t random. They’re targeted and created to make you want things you never knew you wanted before. Don’t fall for it. Buying stuff just because you saw it isn’t helping. Try to shop with a list and avoid impulse shopping just because you saw something.
- Keeping up with the Jones. We all like stuff. But buying something just because someone else has it, is a recipe for disaster. Think twice before trying to keep up with the Joneses.
- Eating out more than you cook at home. Eating out is expensive. And it’s usually not that great. Spending extra money to eat out isn’t helping your financial situation.
- Racking up bad debt. Credit cards can be a fantastic tool to build your credit and wealth long-term when used responsibly. Do not be mistaken, though. They can have a dangerous effect too. There is a reason why 55% of Americans carry a credit card balance month to month. Relying on your credit card for every purchase without having the discipline to maintain best practices is a poor money habit.
- Spending your raises. It’s easy to fall into lifestyle inflation. Inflation occurs naturally. Without any effort from us. But lifestyle inflation is on us. Spending more, just because you make more is a bad cycle. You’ll never outearn these bad money habits.
- Wasting money on unused subscriptions. There’s nothing wrong with a subscription or two. The problem comes in when you don’t have enough money or you’re not using them. Spending money just to spend money is a bad money habit.
Good money habits
Good money habits set you up for success. They make you feel good about your financial decisions. They lead to financial independence and freedom. Here is a list of good money habits to work on:
1. Use a budget. If you fail to plan, you plan to fail. A budget will be the most valuable money habit on your finance journey. So go ahead and create a budget every month. Tell your money where to go with a spending plan.
Gone are the days of wasted money at the grocery store. Vacations on credit cards. Clothes you buy but never wear. Now you know what you what, need, and can afford.
Check out simple budgets to get you started: the anti-budget, the 50-30-20 budget, and the zero-based budget.
2. Live below your means. It’s not about how much you make, but rather how much you keep! Spend less. Wait to buy more clothes (try a capsule wardrobe). Don’t buy a home or car that you can’t afford. Don’t borrow money to pay for your everyday expenses.
Living below your means will save you money. It will allow you to invest, build wealth, and reach financial freedom sooner.
3. Build an emergency fund. When life happens, you need to be prepared. Unexpected expenses like home repairs, car problems, a family emergency, and even job loss, can place a significant burden on you and your family if you don’t have an adequate amount saved.
Many financial experts agree that saving at least 3-6 months of expenses will keep you protected. But don’t fret – if that’s too much, consider working through it slowly. Start with $1000 and work your way up.
4. Pay Yourself First. People who pay themselves first don’t miss out on compound interest. Instead of waiting to see how much is leftover in your budget to invest, make a budget and pay yourself first. Even if it is as little as $20, the rest will fall into place if you continue this habit over time.
5. Automate investments and savings. Savings automation removes the stress of saving. You’ll worry less and have more control. and lets you worry less about how to allocate your money. When you have more choices to make financially, your brain works much harder to make decisions, leaving you vulnerable to bad financial decision-making. While it still requires you to check in on your finances and adjust your savings periodically, this habit will have you saving a large amount of cash to build on your existing financial goals. Start saving money today.
6. Minimize expenses. Many people associate minimizing expenses with a frugal lifestyle and being cheap. This couldn’t be further from the truth. It’s more about maximizing how far you can push every dollar.
Much like the idea of living below your means, one of the habits you should develop quickly is finding ways to cut living expenses. You could do this by actively looking for coupons, cutting unnecessary costs, and downsizing.
Instead of buying new clothes, try a clothes style challenge and get more out of a small wardrobe. Or look for places to cut back on streaming services, eating out too much, or spending money on entertainment.
Pro tip: you want to strike the right balance between cutting expenses and enjoying life. Try not to go overboard and live unnecessarily below your means.
7. Practice delayed gratification. An excellent way to see financial success is to delay gratification. Have you ever made an impulse purchase that you immediately regretted once you did it? When you practice self-control or abstain from harmful financial habits, your reward in the medium to long-term will be much more valuable. Instead of buying that coffee every day, you could invest the money over several years or put that money towards a down payment.
8. Plan for major purchases. Use sinking funds. You can buy whatever you want. When you have the money. Look into opening a sinking fund where you build savings for multiple goals like vacations, car repairs, major discretionary purchases, furniture, etc. Once you have the money, you can make your purchase.
9. Pay-off debt. Debt makes you spend more money than you need to. Make a plan to get out of debt. This saves you money in the long run that you can invest more for your financial future.
9. Working on multiple streams of income. One of the keys to building wealth is investing and creating multiple streams of income. Relying solely on your earned income or 9-5 will also get you there at a slower rate than if you had multiple streams working for you.
Ways to transform your bad money habits
Habits tend to stay with us psychologically and don’t actually leave as one would think. Our brain does not distinguish the difference between bad and good habits. With the right triggers, they can creep on us. What is important is replacing the bad habits with good ones.
Here are some ways that you can transform your money habits:
1. Recognize the problem. Why does recognizing the problem matter? Once we are in tune with ourselves and can identify the root of our bad financial habits, we are in a better position to replace them. Reflecting on the problems is an acknowledgment that change is needed and the first step in tackling the habits that are hindering our financial growth.
How to get started: Start by evaluating your habits and triggers that you would like to change. Do you impulse buy when you are sad? What habits from your upbringing are not beneficial to your success? This is quite personal to you and may take some time, but it will be well worth it.
2. Increase your financial literacy. If you can recognize the source of your bad financial habits, the chances are that financial literacy is a solution to you being more knowledgeable of your overall financial picture. Financial literacy is the ability to understand and implement a number of different financial skills. This goes from everything to budgeting, investing, and more.
Lack of financial understanding is hurting many Americans in their personal finance journey. By developing this skill consistently, you are putting yourself in a position to replace your bad financial habits.
How to get started: We won’t all be Warren Buffet in a day. Building your financial literacy begins with educating yourself. Plenty of books, videos, and blogs can give you a basic understanding. Start from there and build!
3. Talk about money with friends and family. If you can reflect on the way you were raised with money, you may find that talking about money may be an uncomfortable thing to do. We often demonize money for various reasons but talking about money may help you manage stress and create a clear line of communication with the ones you love.
Remember: money is not inherently bad. Our intentions and actions with money are what make it problematic. We should begin to view money as a tool that gives us freedom.
How to get started: Simply speak to your family in a way that represents a collective point of view rather than your own. Avoid “I” statements to make dialogue much more open and collaborative.
4. Control your emotions. So many of our money habits come from our emotions. We buy things because we think they will make us feel better. Sometimes this is true. But sometimes it’s not. Learn to be in control of your emotions, not the other way around. Check out the book The Psychology of Money. “Financial success is not hard science. It’s a soft skill, where you behave is more important than what you know.”
5. Make a personal financial plan. It’s hard to know what to do when you don’t know where you’re going. Writing your long-term goals using the SMART pneumonic will help. You want your financial goals to be specific, measurable, achievable, relevant, and time-bound.
6. Set mini-goals to work on your habits one at a time. Nothing happens overnight. Give yourself time to build good habits. Set a goal to work on one at a time. Once it’s cemented into your daily routine, move on to the next goal.
There are good and bad money habits. They’ll determine your financial wellness. So take some time to work on them. Make it personal.
Develop a financial plan, have a budget, get in the stock market, pay off bad debt, and save a little. Managing money doesn’t have to be stressful. Money habits are personal. Start building better habits today.
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Theresa is a personal finance blogger. She writes content for busy professional women to take control of their money and investments. She enjoys reading, traveling, cooking, and writing. Her work has been featured on GoBanking Rates, Your Money Geek, Savoteur, the Corporate Quitter, Thirty Eight Investing, and more.