You take your financial security seriously. You listen to industry-leading podcasts and follow the financial gurus’ advice. You dream of financial freedom, yearn for cash flow confidence, and you know passive income is the key to getting there.
But you know that to build wealth, you’ve got to start saving money first. Sounds easy enough, right? Unfortunately, underlying bad money habits can impact your bottom line more than you think.
Working toward better money habits is one thing, but more than likely, you aren’t even aware of the bad money habits that already exist in your life. Meanwhile, they’re lurking in the shadows, tricking you into wasteful spending, racking up your credit card debt, and preventing you from investing.
The first step in ditching these bad money habits is recognizing what financial changes need to be made. Taking an honest look at your money habits is essential in making a positive impact on your financial behavior, bank account, and investing potential.
Let’s break down the 7 most common bad money habits that are costing you money and hindering your investing potential.
1. Your spending habits exceed your income
You know the cycle. You spend a little more than you earn, then to cover ongoing expenses, you use your credit card to make ends meet. Seems like a simple solution, however, by relying too much on credit, you face fees and a high-interest-rate credit card balance that will seem impossible to pay off.
This bad money behavior creates a vicious cycle that costs your financial future, the comfortable retirement you dream of, and hinders your ability to save money.
The best way to navigate spending more than you earn is to take an honest look at your spending habits and your long-term financial goals. Compare your annual spending to what’s in your bank account. Here are a few ways to reduce bad spending habits and start hitting your financial goals:
- Cut costs on essential items and reduce impulse purchases
- Keep credit card debt to a minimum. Late fees and interest charges on consumer debt can cost you more money than if you’d just saved up for the purchase.
- Tighten your budget and look for coupons and discounts as a way to make all your money count. Find all the “free money” you can in this sense.
- Find ways to make more money. Consider a part-time job or side hustle, especially if you can use that extra money to pay off credit card bills faster.
Making short-term sacrifices now will positively impact your long-term financial security. Eventually, you’ll find yourself practicing good money habits rather than allowing bad habits to cost you money.
2. You don’t have an emergency fund
Most folks have a checking account, are aware of their credit score, savings account, and shoot to make the minimum payment on all their bills on time.
But did you know you should have a separate account just for emergency savings?
Nothing can derail a financial plan quicker than an unexpected expense and no way to cover it. Cue the emergency fund to the rescue!
Most financial experts recommend an emergency fund as the first, most important step to stop living paycheck to paycheck. Pack your emergency fund with at least three months of expenses. This way, you’ll be ready when life throws you a curveball or something goes wrong.
Once established, there’s no need to regularly contribute to your emergency fund. Just be sure to review it at regular intervals and adjust the balance and your spending habits accordingly.
3. You know to save money, but how much money?
A rough guideline is to save 20% of your income; We know what you’re thinking. 20% seems like a lot depending on your current financial situation, but there are ways where you can make this work.
Before you can willy-nilly decide to save 20%, you might have to make some adjustments to your money habits. Stary by comparing your income amount against your living expenses and working to widen that gap.
It’s tempting to cut dining expenses, for example, and declare, “I’ll save 20% of my income by only spending $200 out-to-eat per month.” You’ve got to experience what it’s like to only spend $200 a month on dining and see if that’s reasonable or sustainable. Only then can you determine whether or not that’s a new habit you can maintain.
When you have an idea of how much money you need each month, it’s time to make a budget. You calculate a reasonable savings percentage or value based on your income and essential expenses, then reduce expenditures while increasing income until you reach your goal.
Another good money habit is to set up automatic savings deposits so that as soon as your paycheck hits, money is pulled into savings and you never have a chance to spend it. Setting up automation is a great trick to making progress with your finances.
4. You’re overlooking money-saving tax breaks
An experienced financial professional can help you maximize your tax break opportunities and make certain you’re using the right financial products for your taxable income.
Find a tax expert who can help hone your deductions and exemptions so that your tax withholdings aren’t too high or too low. They should also be able to suggest investment opportunities that will assist in building wealth.
Check out tax-advantaged account options offered by the government, such as IRA (individual retirement account) and 410(k). Ensuring your current retirement savings and taxable brokerage account is helping build your wealth should be your top priority.
Investing in real estate syndications as a passive investor is a great way to create passive income and become eligible for the tax benefits that only the ultra-wealthy qualify for. Learn more about this inside the Gibby’s Capital Investor Portal. It’s free to join and quite helpful as you start investing.
5. You’re unsure how to evaluate risk
Investing is indeed risky, but it’s also a sure way to grow your money. There’s a method for investing money that will be beneficial to your financial health, no matter where you are on your road to establishing good money habits.
Stocks are a gamble, so don’t put all of your eggs in one basket. Exchange-traded funds and mutual funds are better alternatives since they’re less risky than individual stocks. ETFs can cost as little as $15, while mutual funds might require investments as low as $2,500. Plus, big firms like Fidelity and Vanguard provide fee-free trading alternatives with an investment account (which are simple to establish and maintain, by the way).
If you have some cash to invest and wish to grow your financial stability by investing in real assets, a modest rental property or real estate syndication might be a smart option for you.
Real estate syndications, for example, entail risk. But they also carry the potential for cash flow, appreciation, and tax advantages, not to mention the opportunity to positively impact entire communities with one transaction. In this instance, the risk/reward ratio is in your favor.
6. You’re taking early withdrawals from retirement savings
To put it simply, there’s too much volatility involved when tapping into your retirement savings accounts early. Although tempting, it’s best practice to leave your money invested unless you absolutely have to withdraw it. Your retirement accounts should never be treated like a regular savings account or payday advance option.
The costs of prematurely withdrawing far outweigh the benefits. In addition to paying hefty penalties, you’ll miss out on potential financial growth from those investments and it may take a long time to rebuild your balance.
When you take out 401k loans or early withdrawals, you’re almost guaranteeing you’ll never get to retire early. Compounding interest rates are complicated and it’s easy to get a false sense of security in the decades you have before retirement, but do everything you can NOT to fall prey to this bad money habit.
If you’re facing hardship and have no other option, consider discussing your early withdrawal options with a financial professional.
7. You need to exercise patience with diversification
Even when you’re watching a low-cost index fund or a Roth IRA underperform, don’t make any sudden moves. While it’s tempting to react by adjusting your portfolio, your financial goals will benefit you the most if you stay patient.
Those with good money habits know the market bounces around like crazy in the short term, but steadily rises over the long haul. Avoid the temptation to react and exemplify your bad habits. Staying the course can be difficult, but your diligence will pay off in the future.
If you’re ready to learn more about how to manage your finances while you’re investing, the first step is to join our investor’s club. With helpful insights on anything involving U.S. investing, from equity to ETFs, the Gibby’s team can help you ditch your bad financial habits and start practicing good habits.
How To Ditch Bad Money Habits and Create The Financial Future You Deserve
Now that you’ve learned about these seven bad habits, take some time to examine your financial behaviors.
Do you have any bad spending habits?
Are any of them contributing to your financial stress?
What good could you do in the world with more money?
How differently would you feel about your finances without credit card debt, student loans, excessive online shopping, and due dates trying to drown you?
Just imagine how confident you’ll feel when you’ve got cash set aside, a working budget in place, well-funded retirement accounts, and additional funds to invest.
It’s time to start implementing sound financial habits and working toward your goals. Gibby’s Capital is here to help you achieve your financial goals by providing the resources you need to build wealth for your family and live the life you’ve been dreaming of.