Habits are a part of Human beings’ personality. And, with money matters, good habits can pave the path to prosperity while the bad ones lead to financial ruins. Building habits is linked to dopamine; a brain chemical is released into the human body system when we humans experience a pleasure. So, if you find pleasure in spending money, you will likely get obsessed with this behavior. Though this could lead to negative results, this article focuses on how to change bad financial habits.
Some Examples of Bad Financial Decisions
Overcoming bad financial habits starts with understanding what those are. You may never know you are building up a disastrous habit during the initial stages. One of the examples of bad financial decisions is stepping outside of the home for work and stopping at a café for breakfast drink and a sub. Alternatively, you could have made yourself a good omelet-toast with a hot cup of coffee. But, gradually, you start doing this on your daily routine and form a habit.
Some of the common bad financial situations that cost us more in the long-term include buying more than what’s needed or what you can afford. Adding to the debts on a credit card while shopping or somewhere else and not clearing them on time hurts. You might even fall prey to fraud scams and schemes for earning quick money that loots all your savings. Withdrawing money from your retirement fund is another on the list that you will regret till the last days of your life.
Bad Financial Situations
Certain situations may cause panic, making you feel stressed and leading to some short-sighted, impulsive decisions. Though those decisions might seem right at the moment, they will worsen the conditions in the long run. Here are some of those bad budgeting decisions.
- Payday Loans: Payday loans market is expanding like a fire in the forest because of instant cash availability, but that comes with high-interest rates. A person in need of some quick is likely to take up this funding option. However, repaying the same (that comes with interests of up to 300% of APR) could completely break you.
- Spending too Much on Rent: Whether the salary arrives or not, the landlord’s always there at the door for his rent. If you are living in a metropolitan city, you are probably paying more than half of your salary as rent. This is an unacceptable situation, and you should either relocate or find a job that pays more.
- Not Paying Taxes: Many people choose this path to save some money. But by doing this, you are committing a crime that could land you in jail for tax evasion or at least a heavy fine. This will further build upon your financial burden while paying taxes on time could help you get easy monetary help when needed.
Some other ineffective financial habits include opening a joint account with an irresponsible person, not having a retirement plan, or health/house insurance.
Good Financial Habits
To overcome your bad financial habits, you must build or revive your good financial habits. And, for this, you need to differentiate between those good and bad ones. Here are some good financial habits that can help you:
- Create & Maintain a Budget: It feels extremely thrilling to receive a paycheck or salary and the thoughts of spending it on this or coming soon after. But very few think about maintaining a budget. Always make a spending plan by keeping funds aside for different needs like child’s college fees, medical insurance, essentials like grocery and clothing, and others. Everyone needs their budget plan, and once set, you will still be spending the money while saving a decent amount.
- Emergency Fund: Yes, an emergency fund is as important as health insurance as the former covers unplanned expenses. You can either keep the money liquid or in a short-term fund.
- Never Ignore Bills: These should be on the top of your spending chart. If you ignore bills and use your salary on other expenses even once, it won’t take time before forming into a habit. Thus, always try to make a habit of paying bills before the due date. Add a reminder on your phone if you tend to forget things. This holds for all the bills, including those for electricity, mobile phones, credit cards, and others.
- Don’t Use Credit Card Everywhere: The evolution of the digital age has led to increased use of credit cards. However, if you keep on using that card everywhere, you will find yourself burdened with a huge bill at the end of every month.
- Neglecting Repairs: Does your toaster need repair? Are your car’s routine service past the due date, and the engine is causing minor problems? Ignoring these minor repairs in fear of spending money could take a bigger toll on your pocket. Like, the toaster might cause a fire in your kitchen, or the car might break in the middle of nowhere. However, you can save some funds by trying to do minor house repairs, such as fixing a pipe yourself. These habits will keep you busy on your weekends and will save you a lot of cash.
Financial Habits for Saving
Savings are quintessential for everyone for a prosperous life. A person should always save some part irrespective of what stage of life he/she is in. Even if you earn small, you can save a smaller fraction every month. Below are some financial habits for saving money that will go a long way in tackling emergencies.
- Review Your Credit Card Statement: Construct a habit of checking up your credit card statements for any errors, frauds, or anything that may look suspicious.
- Never Share Your Account Details: You might have heard that many times but still people fall into traps. You should never leave your account or card details on an unsecured website.
- Set up Automatic Bill Payments: This covers up all the delays if you are used to forgetting paying bills.
- Open Health Saving Account/Policy: Alongside meeting emergency needs, this will get you some rebate in taxes as well.
- Spend Less than you Make: This habit is a badge of honor because it is simple mathematics. Restrict your spending to less than your income.
- Invest in a Retirement Plan: Start investing in a retirement plan in your mid-twenties, and you will probably end up with enough money in your fifties.
- Jump Into Stock Market Wisely: If you do not know about the stock market, never invest your money because your friend earned through it. This way, you will only lose your hard-earned money. If you wish to invest, you should learn and understand the market first.
These are some of the essential financial habits one should build rather than becoming a prodigal.
Financial Habits for Students
If you are a student and want to save for your startup or higher studies, adopting financial habits for students will help. Get a better savings account, save more, and join some part-time work after school/college hours. Thus, being a student brings you the golden opportunity of learning good financial habits to develop a financially sound future.
If you aim for a good life for yourself, parents, and loved ones, it’s best to start developing effective financial habits today. Besides the above guide, you can also read some books covering the financial habits of billionaires to know how they achieved success.