5 Bad Money Habits You Need to Drop ASAP
Drop these bad habits and be on your way to financial freedom.
“You will either learn to manage money, or the lack of it will manage you” — Dave Ramsey
Money management is a skill, and like any other skill, the only way you become better is if you learn and practice. Although one won’t become perfect at money management overnight, many of us are guilty of a few bad habits that are preventing us from achieving financial freedom.
Financial freedom is something that many adults yearn for and is something that can be achieved by all with a combination of wits, determination, and a little sacrifice. You may be guilty of a few of the bad habits on this list, but if you work to fixing them, they can be replaced with good habits, which will catapult you on your journey towards financial freedom.
1. Spending your tax refund
It sure does feel good, getting a large tax refund that you can spend however you wish. It may be very tempting to splurge on some new additions to your wardrobe or upgrading that TV in the living room.
However, this tax refund is the perfect chance for you to improve your financial situation.
As satisfying as it would be, spending this tax return is a huge mistake. Instead of seeing your tax return as a chance to buy more stuff that you don’t need, it’s the perfect opportunity to use that additional money to pay off some debt or build an emergency fund to cover any unexpected expenses.
As much as you want that new shiny TV now, your future self will be very glad that you passed on it.
2. Buying useless stuff you don’t need
We are all guilty of doing this at one point in our lives, buying useless stuff that ultimately ends up collecting dust in the basement. Thanks to online shopping, it has become extremely easy to spend hundreds of dollars with just a few clicks.
Although at the moment it may not seem like a lot of money, over the course of a few months or a few years, you would’ve spent thousands of dollars which could have gone towards building your retirement nest egg.
Here’s a trick that I use to avoid unnecessary spending. Whenever you’re about to make a questionable purchase, imagine if someone came up to you and offered either the item or the item’s value in cash. If you would rather take the cash over the item, you know that the item is an impulse buy that you’ll likely later regret.
3. Keeping all your money in a chequing account
This may sound counterintuitive because if I’m keeping more money in a chequing account, doesn’t that mean I’m not spending it and thus being smart with my money? Well yes and no.
Although having more money in a chequing account does mean that you aren’t spending it, you are not using your money to its full potential. The interest you earn from keeping your money in a chequing account is almost laughable, typically in the range of 0.1% to 1%.
The annual return of the S&P 500 throughout its entire history is roughly 8%. An S&P 500 ETF would generate significantly higher returns in the long run when compared to a traditional chequing account. My suggestion is to keep enough in your chequing account to cover day-to-day expenses. The rest should go into either a high-interest savings account or invested in the stock market.
4. Not having money for an emergency
Imagine this scenario, you’re on a road trip to the cottage and you decide to take the backroads to avoid traffic. You’re enjoying the ride with your friends and singing along to your favorite music before you run over a huge pothole that you swear you didn’t see. You get out of the car to inspect the damage and see you have a popped tire.
At that moment in time, can you afford to buy new ones?
If you’re like 40% of Americans, you can’t afford to cover a $400 emergency with cash, savings, or a credit card charge that can be quickly paid off. This statistic is alarming and shows that many people can’t handle an unexpected financial emergency.
Life is unpredictable, and you never know what hurdles it might throw at you.
Having a safety net not only protects you from financial emergencies. It also gives you peace of mind that you have this insurance in place, and ultimately, you can’t place a price on peace of mind.
5. Not budgeting
A budget is by far the easiest way for you to get a strong grasp on your finances. Despite this, only about 1 in 3 Americans have a detailed household budget that outlines their financial plans.
Some individuals cite a wide variety of reasons for not budgeting, such as not having the time, finding it boring, or feeling overwhelmed with money management. Although it may be intimidating to take an objective look at your finances, budgeting is an absolute must for financial freedom.
Not budgeting is a bad money habit that needs to be dropped immediately because, without a budget, you are very likely to overspend on stuff that you don’t need, creating an even worse financial situation for yourself.
