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Whether you have money in your savings account or are drowning in debt, getting rid of these bad money habits will be a great step towards improving your financial well-being. Think of these bad habits as if they were a leaking faucet, flushing your hard-earned dollars down the drain. Once you fix the leak, you will be able to do more with your money, so let's get started.
Bad Money Habit #1. Letting your budget figure itself out.
Think of your budget as a wild animal. If you let it run free, it will bite your head off. If you tame it, it will be a faithful and caring companion. If you're new to budgeting, begin with totaling your income (after taxes). Then subtract your fixed expenses (such as rent and other monthly bills that do not fluctuate depending on usage). Then calculate the average you spend on fluctuating bills (electricity, gas, etc.). For instance, add how much you spent on gas in the last 6 or 12 months and then divide that total by either 6 or 12. Repeat this for each fluctuating expense and subtract each average amount from your income. Finally, analyze your spending. How much do you spend on Uber, eating out, grocery shopping, entertainment, and so on? Many financial experts recommend that you save at least 20% of your monthly income. If you're able to do that, good for you. If you aren't, think about how you can lower your expenses (save electricity, walk instead of taking an Uber, eat at home instead of going out, etc.) to reach this monthly goal. If you cannot cut down your expenses, think of a way to make extra money on the side. Also, think about what you are saving for. Are you planning to buy a house? Would you like to go on a nice vacation at the end of the year? Having specific goals keeps you motivated to save and increases the likelihood of reaching your goals.
Bad Money Habit #2. Paying interest on your credit card purchases.
While credit cards can be a great way to make large purchases that might be hard to pay for at once, they are designed to whet your appetite for purchases you cannot afford. They allow you to stretch your budget whenever you need (or want) to, which might lead to debt accumulation. That's how credit card companies make money and you lose money. Whenever possible, try to pay your credit card bill in full by the date it's due to avoid paying interest. Many credit cards offer cashbacks, so if you use your cards wisely, they will pay you to use your cards (and not vice versa). If you have to carry over a balance, come up with a plan to pay it off as soon as possible. If you have multiple credit cards, you can rotate your usage, which will give you more time to pay (use your Mastercard while you paying off your Visa balance) and save on interest. And, most importantly, avoid making impulsive purchases, especially the expensive ones. Consult your budget and see how that purchase affects your spending to saving ratio and decide if the purchase is worth it.
Bad Money Habit #3. Downplaying your debt.
Perhaps, the biggest mistake you can make when it comes to thinking of your debt is believing that you "don't owe too much money." Maybe you don't or maybe you do. Think of your debt in terms of concrete numbers: "if I pay x amount every month, I will eliminate my debt in y amount of months." Knowing how much you owe and how long it will take you to pay it off sets up realistic expectations and enables you to adjust your budget accordingly. That credit card bill, back taxes and speeding tickets won't pay themselves. The longer you're putting off the payment, the bigger problems you will have in the future, so you need to have a plan. Check your budget to see how much money you can dedicate towards paying your debts and set up automatic payments if possible. Also, whenever possible, make sure the amount you pay is larger than the interest or fees you are paying every month. Otherwise, your debt will keep growing, and you won't get any closer to paying it off.
Bad Money Habit #4. Spending Money To Make Money.
Though every job comes with its own expenses, you have to make sure to subtract those expenses from your income. If you drive for work, do you get reimbursed for gas? If no, subtract your gas expenses from your income. You are paying that amount regularly just to go to work. Once you do that, you might find that you are making less money that you thought you did. Adjust your budget accordingly. Considering your work-related expenses when budgeting helps you analyze your income and brainstorm some ways to increase it if necessary (switch careers, take on extra work, and so on). Whenever possible, try to minimize the amount you spend while making money. Otherwise, you run the risk of working hard and not seeing the fruits of your labor in your bank account, which can be discouraging and even depressing.
Bad Money Habit #5. Not Investing into Your Retirement.
If your company offers to match your investment into your retirement (401K or its equivalent), and you aren't taking advantage of their offer, do reconsider. Investing as little as 3% of your paycheck adds up over time, and, if you budget well, you probably won't miss that in your paycheck. Find out the maximum amount your employer is willing to match and invest at least that amount if possible. If you can, aim to invest 10-15% of your pre-tax income into your retirement to make sure you can live comfortably when you no longer work for a living. If your employer isn't offering a 401K, research some other ways to save up for your retirement. Though retirement seems like a vague dream to someone in their 20s (especially if they are barely earning enough to get by and have student loans to pay), do your best to start saving up for it. Not having to worry about having no income besides Social Security, your future self will be grateful for your sacrifices.