We all want to improve our finances and avoid the pitfalls of poverty. But sometimes our own habits and behaviors can sabotage our best efforts. Here are 10 common money habits that may be keeping you poor, and what you can do to change course.
Not Paying Attention to Your Money
The first step to financial health is awareness. If you don’t know how much you earn or spend each month, you can’t make smart decisions about managing your money. Start tracking every dollar that comes in and goes out. You may be surprised where your money is leaking.
With this knowledge, you can start controlling your spending and making a plan to spend less than you earn. Money is simply a tool — use it wisely to support the life you want. Ignoring your finances won’t make poverty go away.
Lacking Clear Financial Goals
Goals motivate us and push us to take action. When it comes to money, you need clear goals for earning, spending, and saving.
Decide how much income you want each year. Then make a plan to develop the skills and education to land a high-paying job. You also need a savings goal so you can retire comfortably. The earlier you start saving, the easier it will be thanks to compound interest.
Goals give you something to work toward. Set milestones and check your progress regularly to stay motivated.
Paying Yourself Last
Too often, people spend first and try to save whatever is left over. The problem? There’s usually nothing left. Pay yourself first instead — automatically deposit at least 10% of every paycheck into your savings and investment accounts before you spend anything.
You’ll adjust your lifestyle to live on what’s left. Over time, you’ll find ways to spend a little less here and there without feeling deprived. Paying yourself first guarantees you actually save money.
Buying Expensive Things
It’s tempting to spend on fashionable clothes, nice cars, lavish vacations, and fine dining. But these luxuries lose value quickly and cost you long after the initial purchase. It then takes more work to earn the money back.
Enjoy occasional splurges but avoid going into debt for expensive items that drop in value. Credit card interest rates are exorbitant. If you can’t pay it off immediately, wait until you’ve saved up. Remind yourself — possessions won’t make you happy long-term. Invest in assets that appreciate.
Keeping Bad Debt
Not all debt is created equal. Credit cards and retail loans charge sky-high interest rates that keep you stuck in a cycle of debt. If you can’t pay off the balance every month, cut up the cards.
Financing depreciating assets like cars and furniture also creates bad debt. Try to buy with cash, or minimize loans to what you can pay off quickly.
Good debt like a mortgage or business loan can make you money over time. But minimize and pay off high-interest bad debt first.
Not Thinking About Increasing Income
It’s wise to reduce expenses, but you can only cut back so far. Focus more energy on earning more — the potential is unlimited. Identify skills to make yourself more valuable and research high-paying careers. Or start a side business for extra cash.
High-earners started at the bottom too. With drive and determination, you can work your way up or start new income streams. Multiple streams of income reduce reliance on one job.
Waiting Too Long to Invest
Investing early and consistently lets compound interest work its magic. Just $10,000 invested at age 30 could grow to over $100,000 by age 60.
But waiting until age 55 requires investing four times more to end up with the same amount. The longer you wait, the more you need to save. Open a retirement account as soon as possible and invest regularly.
Even small amounts will grow exponentially over decades. Take advantage of time — start NOW.
Not Maximizing Employer Matching
If your employer offers a retirement plan with matching contributions, invest enough to get the full match. This is free money! All you have to do is save in the plan to get an extra boost.
Turn down the match and you turn down part of your compensation. Find a way to save at least this amount, even if it means cutting expenses elsewhere. Don’t leave this free retirement money on the table.
Being Afraid of Reasonable Investment Risk
Playing it too safe can cost you. Keeping all your savings in a conventional bank account may seem safe, but interest rates often lag inflation. Your money slowly loses purchasing power.
Invest in a mix of stocks and bonds instead. This carries some risk, but historically has produced average annual returns around 8-10%. The key is giving your investments decades to ride out ups and downs.
Start early, diversify, and let your money grow. Don’t let fear of markets keep you poor.
Not Reducing Your Tax Bill
Taxes take a huge, often invisible bite out of your income. From income to sales and property taxes, it really adds up. But you may be paying more than necessary.
Talk to a tax professional about legal ways to reduce your tax bill through retirement plans, business structures, deductions and credits. The wealthy use these strategies to optimize what they pay. You should too.
Every dollar you save in taxes is one you keep. Don’t overpay — put that money to work for your future.
Breaking these 10 habits is the first step to real financial freedom. Pay attention, make a plan, save early and often, spend wisely, earn more, take calculated risks, and keep more of what you make. You have the power to build the life you want. What habit will you tackle today?