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We believe managing your finances effectively is essential for long-term financial health and stability. However, many people unknowingly engage in habits that may hinder their financial well-being. By identifying and addressing these bad money habits, you may be able to gain control of your finances and work towards a more secure future. Here are 10 common bad money habits to kick.
Spending Without a Budget: Many people equate financial planning with investments alone. However, if you have an income and bills, you need a budget. People often underestimate their spending by 15-20%. Keep track of your expenses for a month, including non-regular bills, groceries, and entertainment. Set aside money each month for emergencies and unexpected one-time expenses.
Carrying a Balance on a Credit Card: Credit card interest rates can range from 18-21%. If you treat yourself to a nice dinner and charge it to your credit card, you could still be paying for it 20 years later. For instance, a $5,000 balance at an 18% rate would take 26 years to pay off with minimum payments, and the interest would amount to more than $12,000. Try to pay off your balance each month. If you use your credit card for an emergency (like a car repair or medical bill), refrain from using it until it’s paid off.
Ignoring Interest Rates: Stay updated on current interest rates, including money market rates, CD rates, mortgage rates, and credit card rates. Ignoring these rates could result in lost income on money market accounts and CDs, or higher mortgage payments. Stay updated on interest trends that impact your personal finances.
Not Investigating Disability Insurance: We think anyone earning an income and supporting themselves needs disability insurance. If an event keeps you from working for weeks or months, disability insurance could mean the difference between living on a little less or having to move in with parents or friends. While coverage can be expensive, check your employer’s plans. If you don’t have disability insurance, ensure you have savings to support you for a few months.
Failing to Recognize How Much Little Purchases Add Up: Small amounts, like leaks, can drain your wallet. Analyze everything, including nonessential snacks and out-of-network ATM charges [RB1]. Ask for a receipt for every dime you spend for a month, lay them out on a table and analyze where you are spending.
Not Taking Advantage of Employer Match: Not contributing to your company retirement plan up to your employer’s match is like leaving free money on the table. This is usually an additional 3-5% of your salary, plus a few decades of compounding interest. Make sure to contribute at least enough to get the full company match.
Waiting Last Minute to Fund Your IRA: Many people wait until April to put money in their IRAs. When April comes, they often don’t have the money. Contributing $4,000 per year at a 5% interest rate for 15 years would amount to $89,000. In contrast, contributing $1,000 per year would only amount to $22,000. It’s much easier to fit regular contributions into your budget, whether weekly, bi-weekly, or monthly.
Paying Everyone Else, Then Saving Whatever is Left: If all you have saved is scraps here and there, that’s what you’ll have in retirement. Pay yourself first. Set aside money for retirement, college savings, and major purchases before you start paying your bills.
Not Managing Your Investments: If you’re saving money, make sure your nest egg is diversified. Different asset classes have different returns. Some choices in your 401(k) may be better than others. If you don’t have time to manage your investments yourself, consider outsourcing.
Getting Emotional About Your Investments: People often fall in love with their investments and don’t sell when signs point to it. From 2000 to 2002, some people’s investments were down 50-80%. It’s important to make rational decisions based on market trends and avoid letting emotions guide your investment strategy.
Important Disclosure: Mike Bergen is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.
