We human beings are creatures of habit. While you can either praise or condemn habits, they do make life simpler. For example, if you create the habit of making your bed every morning it soon becomes automatic. You get up and start making your bed while you’re thinking about the day ahead instead of, “Gee, maybe I should make my bed”. The same holds true if you create the habit of jogging after work. Do this a few times and you won’t have to remind yourself to go jogging – you’ll just automatically put on your athletic shoes and off you go.
Both good and bad financial habits
There are both good and bad financial habits. A good one would be to develop the habit of saving 5% of your take-home pay every month. Unfortunately, there are also bad financial habits that can lead to debt hell. Here are seven of them.
Buying on impulse
One of the quickest ways to get seriously into debt is to have a habit of impulse buying. Are you using credit cards to buy things you just want instead of things you need? When you buy on impulse, using a credit card and don’t have enough money to pay off your balance at the end of the month, you’re bound to get into trouble with debt — thanks to a little thing called compounding interest. One professor who teaches at a state school of medicine, has come up with a mantra he suggests you adopt to help you remember your goals – “I only buy what I need”. Repeat this mantra several times when you’re about to make an impulse purchase and you might not make it.
Abusing credit cards for the points
If you use rewards credit cards sensibly they can be a reasonably good deal. But credit card companies don’t offer those rewards out of the goodness of their hearts. They do it in order to encourage you to use their cards. Consider cards that offer a 1% cash back. If you use them to buy something for $100 your reward is just $1. This is okay if you can pay off that $100 at the end of the month as the reward becomes just that – a nice little reward. However, if you start using those cards irresponsibly you could end up piling up debt. Plus, many of those rewards cards come with serious restrictions like higher cash-back rates for specific purchases such as gas and groceries. This means you could not get back as much cash as you had expected. The simple fact of the matter is that using credit cards irresponsibly just to earn those oh-so-tempting rewards is a very bad habit.
Trying to keep up with the Joneses
Whether your “Joneses” are affluent family members, neighbors or friends, one of the worst things you can do is try to keep up with them. The problem is that most of us have a very competitive nature. If we see that a neighbor has just purchased a boat, your brother has a new ATV or your best friend just purchased some very expensive jewelry, it’s hard not to want to keep up with him or her. But if this means buying things you can’t afford it’s a sure way to start piling up debt.
Another of the very bad financial habits is shopping to make yourself feel better. The problem is that shopping can actually release endorphins in your brain that are similar to those that are released when you’re engaged in other activities such as eating chocolate or exercising. When spending money makes you feel good you can become addicted to it. If when you shop it makes you feel better this can create a link between buying material things and being happier and that’s a link that can be tough to break.
Expecting to win the lottery
It’s a very financial habit to behave as if you will be saved by a miracle such as winning the lottery or getting a big windfall. One very smart person said that playing the lottery is for the mathematically challenged – meaning that the odds of winning even $50,000 in a state lottery are so remote as to be impossible. In addition, when you rely on winning the lottery or getting a financial windfall you’re losing your position of control. What you’re doing in effect is waiting for someone or something to bail you out, which means removing yourself emotionally from your debt. You created your debt and you’re the only one that can fix the problem.
Inflating your lifestyle
When you reach your 40s you should definitely be in a much better position financially than when you were in your 20s. You’ll have had 20 years of raises, bonuses and economic inflation so you have a lot more buying power. When you’re earning more money it becomes very tempting to inflate your lifestyle by buying a new home, a more expensive car or taking that dream month-long vacation to Europe. While it’s okay to spend more money now, the important thing is to make sure you’re not engaging in lifestyle inflation and spending more than you can afford.
Paying only your minimum on those credit card accounts
You might think you’re getting out of debt if you make those minimum payments each month but that’s just not the case. Those minimum payments are probably calculated at 4% to 6% of your balance owed. As an example of what this means, if you owe $1000 on a credit card and make a minimum payment of $40 then $960 will roll over to the next month and you will be charged interest on it again. As an example of how bad this can get, let’s suppose that you owed $5000 on a credit card at 18% interest and continue to make just the minimum payment of $200 a month. In this case it would take you 133 months (or more than 10 years) to pay off your balance and would end up costing you $7874 – or $2874 just in interest. As you can see paying just the minimum on your credit card accounts is a very bad habit.