Habits are a huge but underappreciated part of wealth building. It’s the little things you do on a daily basis that determine your future. By just eliminating a handful of bad habits in your life, you can make big improvements to your financial situation.
I can’t read your mind, but chances are excellent that you’ve got the same few bad financial habits that almost everybody else has. I’ve got great news for you, though. You can identify your bad habits, and you can work on fixing them. If you start today, you’ll be amazed at the progress you can make.
1. You’re not accepting responsibility for the situation you’re in
This is, by far, the most prevalent problem among people who can’t get out of debt. The fact is, you can’t get out of the debt cycle until you get out of the blame cycle. It’s not easy to escape from the blame game, but it’s a crucial first step. If you don’t do that, then financial success will be much more difficult.
It’s easy to blame everyone else for the financial rut you’re in. You could point to bill collectors or credit cards. You could even blame the lack of financial education in schools. And yes, those could be aggravating factors that are holding you back. I won’t deny that some people were given unfair advantages in life.
To be truly free, however, you have to accept responsibility for your destiny. I’ve spoken with a lot of wealthy people, and none of them got rich by blaming others for their problems. A prosperous mindset means putting yourself in the driver’s seat. Nobody is going to care about your finances as much as you do.
2. You’re buying things that don’t appreciate in value
Not everything you own has to grow in financial value. It’s perfectly okay to splurge on luxury items from time to time if you can afford it. However, the “YOLO” (you only live once) philosophy can ruin your life if you let it. At the very least, it can ruin your finances.
Be honest with yourself. Are you someone who feels like they have to buy the latest and most expensive sneakers? That’s an item that will depreciate, or lose value, as time passes. Do you tend to buy cars for their looks instead of focusing on low-maintenance vehicles with good gas mileage?
Or perhaps you spent a big chunk of money on a boat even though you couldn’t really afford it. Maybe you found out the hard way that boats are very expensive to maintain. These are all examples of things that don’t appreciate in value.
Consider spending money instead on things that can grow in value. That would include stocks, bonds, real estate, or precious metals. Instead of buying a trendy gold chain with your name on it, how about buying gold bullion as an investment in your future? That’s the mindset that could put you on the road to prosperity.
3. You’re not planning properly for emergencies
We all tend to harbor the fantasy that emergencies can’t happen to us. That’s a costly mistake, though. Health problems, automobile accidents, lawsuits, and other financial disasters can happen to just about anyone. Life is full of risks, and bad luck happens to everyone at some point.
It’s a tragedy that so many people are uninsured or underinsured. However, you don’t have to be among them. Insurance is expensive nowadays, but consider it an investment. To save money, you can shop around and find discount insurers. That’s a better strategy than just forgoing insurance altogether.
You also need to have some sort of emergency fund. This means at least three months’ worth of living expenses that you have immediate access to as cash or credit. Therefore, it can’t be tied up in real estate, bonds, or other nonliquid assets. Six months’ worth of living expenses is even better if you can afford it.
4. You’re paying interest instead of earning it
You don’t need to be a millionaire to start earning interest in the form of dividends from stocks, bonds, and high-yield savings accounts. But too many people have it backward. They’re paying interest on loans and credit cards instead of earning income from interest-yielding assets.
Then they make it even worse by letting the debt sit there. For example, too many people are only paying the interest on their credit cards. Meanwhile, they’re not paying off the principal amount they borrowed. And so, they’re losing money every month and getting nothing in return.
That’s why I recommend paying off your highest-interest debt first. Then, move on to the next-highest-interest debt, and so on. This, along with having emergency savings, should be very high on your list of priorities. Refinancing your debt is fine in some instances. However, paying the debt off completely should be the primary goal here.
The circle of financial life
You might have detected a recurring theme here. Everything circles back to the first rule, which is to accept responsibility for your finances. Take emergency funds as an example. Maybe you can’t afford to save three to six months’ worth of living expenses right now. At least, you can try to set aside a little bit of cash somewhere. That might involve giving up some of your non-essential YOLO purchases.
That might be uncomfortable, but you’ll be taking responsibility for your future. It’s worth the sacrifice because you’re putting yourself back in control of your finances. Really, it’s just a matter of losing those bad habits that have been holding you back and, hopefully, replacing them with good ones.
Want to check out more of my personal finance guides? Take a look at these tax prep tips for investors.