Living paycheck-to-paycheck is difficult. Along with leaving you uncertain about how you’ll make ends meet, it often prevents you from setting money aside for the future. A situation like this can occur regardless of a person’s income level, particularly if they don’t develop skills that help them get ahead. Here’s a look at five money habits that will keep you poor, as well as how to overcome them and start moving in a better direction.
Not Creating and Sticking with a Budget
Overall, designing and following a budget isn’t the most fun, but it’s generally critical for financial success. When you create a budget, you’re making a plan for your money. You have full awareness of your expenses and the opportunity to allocate your income to make sure you’re covering your bills on time and handling your living expenses.
Without a budget, it’s easy to spend in a way that leaves you short on something critical, like rent or utilities. If you do fall short, you can make a challenging situation worse. For example, it could trigger utility shutoffs, late fees, evictions, or similar outcomes.
Take the time to create a workable budget. Begin by outlining your various bills, allowing you to allocate income to those first. Then, take what’s left and divide it into various spending and saving categories.
When you figure out how much should go into the spending categories, make sure you’re realistic. Usually, the easiest thing to do is look at your average spending and use those as a baseline. Begin with necessities like groceries and gasoline, and move your way toward optional spending like entertainment. Make sure you aren’t being overly optimistic about how much you can scale back on the necessities, as doing so can set you up for struggles when you inevitably spend more in that area.
Keep refining your budget over time, too. Costs in specific categories can shift, so you want to account for that as quickly as possible. That way, your budget adapts to your life, ensuring it remains a good fit.
Racking Up Debt
Relying on credit cards, personal loans, or similar financial products to make ends meet or support the purchase of non-necessities makes it harder to get your financial footing back. The cost of interest often adds up far quicker than you’d expect, causing you to essentially throw away hundreds – if not thousands – of dollars on interest every year.
High-interest debt is classically difficult to pay off, causing it to hang over you for years. Plus, high balances on credit cards on credit cards can harm your credit score, making it harder to secure lower rates down the line.
Focus on finding ways to avoid the need to accrue additional debt. For example, if you’re considering a non-essential purchase, don’t go forward if you can’t cover it with cash. If you’ve been using a credit card to make ends meet, see if you can revamp your budget and cut back on non-essentials to avoid having to go that route.
It’s also potentially wise to check into options if your debt is becoming too difficult to manage. For example, going with a reputable credit counseling agency could provide you with insights that can help you get back on track. Some even have debt repayment plans available that can help reduce your interest rates while you focus on paying off the debts, which can leave to savings while giving you a clear path for becoming debt-free.
Spending More to Capture “Savings”
Many people justify unnecessary purchases because the items were on sale or there was a coupon. The issue is that you’re not saving any money if it’s something you didn’t genuinely need. Instead, you’re still spending; it may just be a bit less than it would be otherwise.
Usually, this type of issue involves the “fear of missing out,” which is a feeling brands and retailers create intentionally. If you succumb to that feeling, you end up spending money you didn’t plan to send out the door, and that can put you in a bind.
One way to avoid this situation is to reduce your exposure to this kind of messaging from retailers. Don’t comb over sales flyers or look at every coupon. Instead, if you’re looking for discounts on things you do need, focus those efforts to ensure you’re not looking at information you don’t need. For example, many cashback or rebate apps have search features that let you see if there are rebates on specific items. By doing that, you aren’t skimming a long list of cashback opportunities that don’t apply to your genuine needs.
It’s also wise to unsubscribe to sales emails from stores that don’t sell necessities. Again, this helps you reduce your exposure to advertising that’s designed to make you worried about missing out, often preventing you from unnecessary splurges that can bust your budget.
Lifestyle Inflation
When you get a raise or bonus at work, changing your lifestyle due to the extra money can keep you trapped in a challenging cycle. Essentially, if you start spending more every time your income goes up, you may prevent yourself from getting on better footing. It limits your ability to leverage the extra funds to make positive progress.
Instead of spending more, consider how you can take the extra cash to get ahead. Consider paying down debt, boosting your savings, or similar steps that reduce your expenses long-term or provide you with a financial cushion. Try to keep your other spending relatively level as you work toward those other goals. Then, once you start hitting those targets, you can reevaluate the situation to determine how you can stay on a more positive path while loosening things up a little.
Confusing Needs and Wants
One area where many people struggle is confusing needs and wants. For example, people need food to live, but going to a restaurant for a meal is a want, even if it meets that need. Primarily, that’s because dining out isn’t the most affordable way to address that need, which causes it to shift into the want category.
The same situation can unfold in numerous ways. You may need clothes, but you might want higher-end clothing. You may need a car, but you might want a luxury model with all of the bells and whistles. Ultimately, needs usually represent the base-level approach that ensures you can live, while wants offer an elevated experience that isn’t genuinely necessary.
Learn to identify the difference between needs and wants, and spend time considering whether any spending you’re about to do crosses into want territory. By getting into that habit, it’s far easier to determine if you’re justifying a want purchase by incorrectly labeling it as a need, allowing you to adjust your mindset and start making wiser financial choices.
Can you think of any other money habits that keep you poor? Do you have any tips to help people overcome money habits that can lead to financial trouble? Did you struggle with any of the issues above and want to tell others about your experience? Share your thoughts in the comments below.
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Tamila McDonald has worked as a Financial Advisor for the military for past 13 years. She has taught Personal Financial classes on every subject from credit, to life insurance, as well as all other aspects of financial management. Mrs. McDonald is an AFCPE Accredited Financial Counselor and has helped her clients to meet their short-term and long-term financial goals.
