Submitted by New Jersey Bankruptcy Attorney, Lee M. Perlman
Most of the modern world is built on a foundation of credit. We have credit readily available for just about everything. Want to buy something? No need to wait, just take out a loan. But this very foundation at the core of the economic machine can also foster some very bad financial habits.
The biggest problem? Credit plays into our ultimate desires for instant gratification. We want what we want, and we want it right now. Why should we have to wait?
But, by racking up credit cards and debt, we take away from our ability to save and invest. And those once-frowned-upon bad financial habits, can lead to a slow and steady financial death involving bankruptcy, foreclosure, and repossession, just to name a few.
No one likes hiding from creditors. We don’t want to shut off our phones or worry about someone showing up on our doorsteps. But that’s just where our bad financial habits can lead to.
And while our poor decisions about how we spend and save can start out small, over time, they gain momentum and increase in severity. Then, those once-harmless behaviors, become full-blown habits and a way of life.
When you’re used to spending money and have little to no experience in budgeting your finances, it’s a monumental hurdle to save and filter your expenditures to the bare necessities. However, to avoid total financial collapse, we have to be wary of where we spend our money.
Your mission? Identify the bad financial habits that negatively influence the way you spend and save, fix them, and replace them with habits that will help you to eliminate debt rather than accumulate more of it.
#1 – Spending More Money Than You Make
Sure, early on in life it’s easy to get sucked into the spend-more-than-you-make trap. We strike out on our own. So naturally we need our own car, apartment, and things to fill it with. We live fairly lavish lifestyles as we ride this spending high.
Yet, spending more money than you earn is quite possibly the worst financial habit that you could have. In fact, it should be considered a cardinal sin. When you spend more than you make, you have no resources to save or invest, you live on credit, and you end up barely getting by.
While most people live paycheck-to-paycheck, that’s certainly no way to survive. Human beings were meant to thrive, not just survive. And the only way to thrive, is to figure out a way to spend less than you earn every single month.
The Fix: This isn’t an easy fix. If you’re spending more than you make, then it’s likely because large payments such as rent or mortgage, car payment and insurance, and existing debt is eating away at your monthly paycheck.
To fix this, you need to consider downsizing your life. Move into a less expensive home, especially if you’re renting, downgrade your car, and find other ways to cut things out of the budget. Focus on living on 80% of your total income, and save or invest the rest.
You might think that there is absolutely no way you can do that. But, believe me, when you’re committed enough, you will always find a way. Take the weekend and commit to figuring it out. Gather all your bills and see where things can be cut out.
#2 – Paying for Things Late
The bad financial habit of paying for things late can seem like an honest mistake. But often, it’s the sign of much bigger problems. When you pay for things late, you’re often disorganized and spending more than you make.
Never pay for things late. Never. If you have an obligation to pay for something on a certain date, ensure that you do just that. Don’t wait until a few days, weeks, or even months have passed by. Ensure that you pay it on time.
Not only will paying things on time improve your credit rating, but it will also make you more mindful of the money committed to both fixed and variable expenses.
The Fix: Pay for things on time, always. I know it sounds simple, but it might not be that simple for some, especially those that are living largely on credit. But regardless of how much money you earn each month, it’s your obligation to pay for things on time.
Paying for things late also signals the onslaught of more fees. If you’ve fallen behind with a creditor, call them to discuss the situation. It might even be possible to seek help from a debt consolidation company to help you streamline your monthly debt obligations.
#3 – Failing to Budget
Another bad financial habit is the failure to budget. If you want to keep your finances sound, you must budget. Even if you’re making a high income, it’s easy to spend money that’s readily available, and far harder to make it. One day, that high income might evaporate, and you’ll be left scrambling to figure out a solution fast.
A budget can keep you on track for your expenses. It can help to create a framework of spending, and illuminate any potential drains on your finances. When you budget, you have a better idea of just how much disposable income you have to spend.
But failing to budget isn’t just a harmless financial habit — it can also result in a slow and steady financial death. Over time, the lack of a budget can equate up to a sizable monthly drain on your finances.
The Fix: Setup a system for budgeting your finances. I know it’s easier said than done. But figure out how much money (disposable income) you have to spend every month, and stay on target, leaving extra money to save and invest at the end of each month.
If you have trouble budgeting, withdraw your monthly income towards expenses from the bank, and separate the cash you’ve allotted to each category into different envelopes.
For example, if you’ve putting $400 towards your meals/groceries per month, simply deduct from that envelope when you spend the money. When you can see the cash, and you’re not spending on credit or a debit card even, you become more conscientious of what’s going out the door.
#4 – Not Tracking Expenses
Benjamin Franklin once said, “Beware of little expenses. A small leak can sink a great ship.” By not tracking expenses, it’s harder to keep up with where you stand. It’s also easier to allow the little expenses to creep up on you.
Many small expenses can add up to a lot of money at the end of the month that can easily eat away at any budget. For example, that $6-per-day latte habit, or the $40 per month gym membership that goes unused, or the $100+ charges for app, music, or movie downloads, can equal big money over time.
Added up, that equates to $2190 in lattes, $480 in gym membership fees, and $1200+ in app, music, and movie downloads per year, respectively. Every little expense adds up. However, when we track those expenses, no matter how small they might be, it’s easier to see the truth of our spending habits.
The Fix: Setup a good system for tracking expenses. Download an app, buy a notepad, or create a spreadsheet on your computer. Every day, with ever single expense, no matter how big or small, jot it down. At the end of every week, analyze all of your expenses. Where did the money go?
No matter what the expense was (15 cents or $15 dollars), jot it down. Track your expenses over time. This will help to illuminate your spending patterns to your mind, and will allow you to expose the truth on where the money really goes.
Does the money go to a bad habit? Does it go to other expenses that can be avoided? Without tracking the expenses, especially if we’re spending cash, it’s harder to see or remember where all of it went.
#5 – Not Opening Bills Immediately
One of the causes of financial catastrophe is the avoidance of bills. Not opening bills immediately when they arrive, or not opening them at all, can wreak havoc on your bottom line. Why? Not only is it a bad financial habit, but it’s also the sign of far more looming problems.
Usually, it means that we don’t necessarily want to see a bill. We don’t immediately open it because we know that it could mean some major pain for us. And, since we do more to avoid pain than to gain pleasure, it remains housed in its envelope.
The Fix: Open all bills immediately when they arrive, no matter how painful it might be. Catalog and categorize those bills, or pin them up on a cork board where you can see it all the time. Absolutely don’t shove them into a drawer and forget about them.
Of all the bad financial habits, this one is easiest to correct. When you can see the bills and the dates that they’re due in front of you, it’s harder to forget. When we don’t forget, we’re less likely to spend money on meaningless things that drain the bank account.
#6 – Using Credit Cards for Everyday Purchases
Credit cards are an important resource to have. They can save us when we’re in a dire straits and run into an emergency such as a car that needs fixing, or a repair in the home that needs immediate attention.
However, credit cards are also a luxury. And, when those shiny pieces of plastic are in your wallet or purse, you might envision them calling out to you and saying “Use me.” The problem, of course, is that we can get carried away when we use credit cards for everyday purchases.
When we use credit cards, especially those that might have attractive interest rates or payment plans that don’t require payment right away, it’s easy to rack up debt.
The Fix: If you’re having trouble with your finances and you’re using credit cards for everyday purchases, it’s likely best to cut up all of your credit cards aside from one for emergencies. This is especially true if you’re over the limit on any of your cards.
When you’re over the limit, it should be a strong signal that you’re overspending and you need to take some drastic measures. Cut them up immediately. Every single card that works on credit needs to go aside from one for emergencies.
It might be a painful thought. But it’s a necessary procedure.
#7 – Taking Out Payday Loans
Payday loans are quite possibly the worst financial decision that a person can make. Once someone gets sucked into the payday-loan cycle, it’s hard to extricate themselves. They often need the next payday loan to help pay for the last one.
Considering that payday loan interest rates are astronomically high, the solution shouldn’t be to take a loan against future income. This predatory lending is legal in 27 states, has some restrictions in 9 states, and outright banned in 14 states.
This is another sign of far greater problems, and it often signals that you’re living outside of your means.
The Fix: While problems do arise, and there might be a call to an emergency, you should never get sucked into the payday loan cycle. If you’re in it already, get out. Sell some of your used items or cut expenses to find the cash and get out of the situation.
The payday loan cycle can last for a long time, and if you don’t make drastic changes now, it could end up costing you hundreds, if not thousands, of dollars in interest rates. That’s money that can be saved and invested for the future rather than wasted away on this bad financial habit.
Originally published here by the Huffington Post.