Personal Finance

How To Break Bad Spending Habits

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 12 minute read

Each of us is prone to relapsing into certain routines. It’s easy to rationalize spending money on frivolous things like a cappuccino every morning or a new pair of shoes every so often. But think about how it will affect your bottom line.

Repeatedly spending even just $1 or $5 may quickly add up. And they could be one of the numerous reasons you’re still in the red despite your best efforts in other areas.
Consistent financial mismanagement is a common characteristic of those who struggle with debt. But problems can be avoided if you discover them early.

Recognizing and changing these poor financial practices might help you get back on track even if you’re already in the negative.

Bad Financial Habits to Break in Order to Get Out of Debt

Many Americans are severely hampered by their level of debt. Household debt in the United States was $14.64 trillion in the first quarter of 2021, according to the New York Federal Reserve’s Quarterly Report on Household Debt and Credit.

Credit card debt, thankfully, has decreased by $157 billion since the end of 2019, according to the same data. Nevertheless, Experian reports that in 2020 the typical American family carried a credit card balance of $5,315.

The difference between individuals who go into debt and those who don’t is often nothing more than a matter of routine. By keeping an eye out for these tendencies, you may put an end to some of those harmful habits and reconsider your perspective and strategy around debt.

  1. Impulse Purchases

Whether you intended to buy something or not, do you sometimes give in to the temptation of a sale? When we shop on the spur of the moment, it can lead to a cascade of bad financial decisions.

  • Defending the wisdom of haphazard and expensive purchases. It’s simple to rationalize a splurging purchase, such as an expensive purse or new electronic device.
  • Making hasty acquisitions with a credit card. You might not have enough money to cover the expenditures of an impulse buy since you didn’t budget for them. If you’re doing this, it indicates you’re buying stuff on credit that you can’t really afford.
  • Spending too much time away from home. The most careful budgeter will inevitably make a mistake once in a while. On the other hand, giving in to spending temptations means losing track of your budget and other financial objectives. And when you realize you’ve gone over budget, it’s tempting to just keep using the card, which may quickly become a dangerous habit.

The odd impulsive buy probably won’t ruin your finances, but making it a habit might be disastrous. Plan out how you’ll stop yourself from making hasty purchases.

Psychology Today published an article by Julian Ford, a psychiatry professor at the University of Connecticut School of Medicine, who suggests developing a personal mantra to help you maintain your concentration and accomplish your goals. You may make the phrase “I buy nothing more than I definitely need” your personal motto.

Before making a purchase, consider whether or not it jives with your personal motto; if it doesn’t, then you should probably quit. You may be confident that whatever it is you need will still be around in a few days.

  1. Getting Points using Credit Cards

Credit cards with perks aren’t always bad. Some have their place in your wallet, provided you utilize them properly. Credit card rewards are a nice perk, but the corporations don’t give them away for free. Spending is prompted by the promise of a reward.

What was happening in shoppers’ minds in the split second before they pulled out their credit cards in a 2021 study from MIT’s Sloan School of Management. Brain activity during cash and credit card purchases were evaluated using functional magnetic resonance imaging.

Scientists were aware that credit card purchases were more common than cash purchases, but they questioned why this was. Researchers looked at whether or not people tend to go beyond when using credit cards because of the convenience of doing so or because doing so triggers reward areas in the brain, leading to an insatiable need to spend.

Credit card purchases topped those made with cash because, well, money makes us happy.
And if you use your credit card for the perks, you can wind up spending more. This is the time-tested “the more you purchase, the more you save” marketing strategy.

You might get a little rebate on the purchase, but many credit cards have stringent limitations. Annual reward maximums may be set by some cards, and the highest cash-back rates may only apply to a subset of transactions (such as gas and groceries).

Credit card rewards aren’t as valuable as they seem until you utilize them wisely. It’s not wise to incur more debt just to earn credit card rewards. If you’re carrying a balance on your credit card and want to save money, transfer the amount owed to a card with a reduced annual percentage rate (APR). You may be able to lower your monthly interest payments by doing this.

  1. Trying to keep up with the Joneses

It’s better to be the worst home on the best street than the best house on the worst street, as the saying goes. But when everyone around you seems to be doing well, the pressure to keep up with the Joneses can make paying off debt seem less important than having a nice property.

Psychologists use the term “conspicuous consumption” to describe the constant pressure to appear successful and popular. According to Intuit’s MintLife, sending “wealth signals” includes making purchases you wouldn’t normally make in order to appear more successful to others. Spending too much money when shopping just to show off your riches or position.

Comparing oneself to others isn’t a problem for some, but for others it can be quite difficult. Assistant professor and program director of personal financial planning at Kansas State University, Sonya Britt, tells MintLife that television, the Internet, and social media do not help people manage their finances.

In addition to commercials and hundreds of people’s social media profiles, we can now instantaneously learn about our neighbors’ latest purchases, such as a new motorbike, a trip to the Maldives, or a house renovation.

Unfortunately, external indicators of achievement are often unreliable. You never know what’s going on in someone else’s life, so try not to judge too quickly when you see a neighbor pull up in a flashy new automobile. Maybe they got a huge auto loan and will be paying it off for a long time. Either that, or they’re trying to deny that retirement is on the horizon.

When feelings of envy or the need to show your value arise, it might be beneficial to recall your most important objectives. More essential than making a stranger jealous are things like reducing debt and putting money down for retirement. Reducing debt is one of the best strategies to raise your credit score, which has various positive effects.

Maximizing your 401(k) contributions may not be a public display of wealth, but the peace of mind that comes from knowing you have enough money to retire comfortably is priceless.

  1. Shopping to Improve Your Mood

Who here has ever splurged on anything depending on how they were feeling? If so, know that you are not alone. Shopping may be a welcome diversion from the pressures of daily life and the demands of the workplace, which is why the term “retail therapy” has become so commonplace.

Unfortunately, buying happiness may quickly become an addiction. Ryan T. Howell, associate professor of psychology at San Francisco State University, explains in Psychology Today that obsessive or repetitive buying can lead to more spending despite “harmful emotional, social, and financial effects.”

When life gets rough, it’s common to want to go shopping as a form of release, and this tendency increases with frequency of use. To improve your mood in the short-term, you may resort to shopping, which may lead you to associate your happiness with the acquisition of material objects. This connection can be quite hard to sever.

Howell recommends taking a moment to collect oneself before making a purchase as a means of preventing emotional purchases. Think about the rationale for your purchase before you pull out your credit card. Why do you feel you need it? Are you feeling down or bored?

Seek help from a professional if your emotional spending is out of hand. While it’s true that managing a shopping addiction can be difficult, with the guidance of a committed mental health professional, you can identify your triggers and develop coping methods that will help you avoid falling into and remaining out of debt.

Not all stores or shopping experiences are undesirable. Buying items just because you want them will just add to your debt load while you’re trying to pay it off. Find strategies to cut costs when you go shopping.

Examples of such applications are Ibotta and Drop, which may be used to save money on almost all of your shopping trips. Online purchases made through Rakuten can qualify for cash rebates.

Giving oneself a waiting time is another common tactic for avoiding impulse purchases made out of emotion. Delaying any non-essential purchases by at least 48 hours might help reduce the desire to spend once the novelty of making the purchase has worn off.

  1. Investing in Convenience

It’s easy to fall into the trap of overspending due to the allure of ease. When you factor up the cost of takeout meals with the cost of preparing the same meal at home, it’s easy to see how spending money on takeout might make it difficult to pay off debt. There are times when your busy schedule demands a certain degree of convenience.

However, in order to make progress in reducing outstanding debt, it is essential to carefully evaluate all outgoing cash flows to identify potential savings. Getting your expenditures under control is difficult. Do not anticipate a sudden metamorphosis into a new you. There will be a time of adaptation. Do you not brown bag your lunches during the week and instead go out to eat every day? Do you have to go to Starbucks every day, or can you switch to brewing your own?

There are limitations in the latte factor idea that prevent it from being a reliable tool for determining where you can make the biggest savings. However, there are probably hundreds of smaller buys you might reconsider and find a cheaper alternative to.

Factor in the price of necessities like groceries, entertainment, clothes, housekeeping, and vehicle maintenance. You definitely can’t do it all by yourself, but you might be amazed at how much you can do. It is feasible to become debt-free.

  1. Extreme Lifestyle Inflation

Each of us has a preconceived notion of how our lives should unfold. Earn a starting pay that is lower than average, and then raise it as we acquire experience. It is possible to improve one’s economic situation by changing jobs and negotiating for higher pay.

However, people who consistently carry a balance on their credit cards and those who have their money under control have distinctly different financial habits. When a perpetual debtor’s income rises, so does their spending.

Inflation in the cost of living implies that any additional funds are quickly spent. Raising your expenditure right away to match your increased income will not help your financial situation. If you’re constantly adding to your debt by spending all the money you earn in increases, you’ll never be able to get out of it.

Imagine you are currently making $60,000 a year and you are offered a position earning $75,000 annually. If you get a pay raise but then go out and buy a car that costs $15,000, that raise doesn’t do you much good. On the other hand, you may improve your financial situation by putting any surplus cash toward reducing your debt load.

Pay raises and promotions often come hand in hand with a corresponding increase in spending. But that’s fine, provided you’re not living over your means. It’s an issue as soon as you need to take on debt to maintain a particular standard of living. You should only spend what you can comfortably afford to help ensure that you never lose your hard-earned independence.

  1. Neglecting Your Debt

When told something they don’t like, you know how kids put their fingers in their ears and yell, “I can’t hear you!” If you are aware of your financial predicament but choose to do nothing to rectify it, you are doing this act. Warning signs for those who have a habit of avoiding their financial obligations include the following:

  • How to avoid debt collector calls
  • Destruction of mail without inspection, especially invoices and statements
  • Responding negatively to debt discussions by seeming tense, defensive, or hostile
  • They are in the dark about their total debt.
  1. Failure to Stick to a Budget

Sticking to a budget is the bedrock of financial independence. Keeping track of and analyzing each purchase doesn’t sound like a lot of fun. However, budgeting is an established method of fiscal management.

For the same reason that counting calories may help those who are having trouble maintaining a healthy weight, keeping track of one’s financial transactions can help those who are having trouble keeping their finances in order.

There’s no better time to learn about budgeting than right now if you haven’t already. Add up all of your monthly income and subtract all of your monthly costs, both fixed and variable.

Rent or mortgage payments, insurance premiums, and automobile payments are all examples of fixed costs that repeat on a regular schedule and cost the same amount each month or year. Food, utilities, entertainment, and clothes are examples of variable costs.
It’s possible that you’ll have to start making only the minimal payments on your debts, and then increase them as you go farther ahead.
Once you’ve paid off all of your debt, you’ll find that sticking to your budget is a lot more fun. 

You’ll feel more independent after taking a hard look at your finances and sticking to a budget.

You start to recognize the areas where you can make changes to better suit your priorities, and you realize that being frugal really frees up more money for you to spend on the activities you like.

  1. Not Saving Any Money

Even if you’re already carrying a balance on your credit card, it’s still a smart idea to make saving a regular part of your routine. You may feel hopeless about it, especially if your debt load is substantial.

But it’s important for everyone to save at least a little bit of money every month, preferably in an interest-bearing high-yield savings account.

In order to construct a debt-free existence, it is crucial to have some money on hand. If you live month-to-month, you will never have any savings for unexpected expenses. So, what do you do if your automobile breaks down and requires expensive repairs? You charge it to your credit card and end up back in debt.

The sooner you start putting money aside from each paycheck into an emergency fund, the better prepared you will be to deal with both little and large unexpected costs. Debt payment is an exciting time, and it’s easy to put off saving until later. However, having access to some quick cash in the event of an emergency is essential. You may use this knowledge to keep from accruing even more debt in the future.

  1. Neglecting the Future

This question underlies most of the guidance offered on personal finance websites: Do you have plans for the future? When handling money, do you plan for the long haul? If you don’t, you risk undermining your attempts to end your financial woes for good.

Those who are just getting by today can be forgiven for not being able to envision themselves five, ten, or fifty years from now. It’s difficult to think positively about the future when getting through each day is a struggle and debt is crushing. Nonetheless, it’s essential that you do.

Keep in mind your long-term objectives even while you work to reduce your debt. Imagine yourself a year from now. Then try to imagine what will happen in the following three, five, and even ten years.

It’s alright if not every wish can be fulfilled. But those lofty aspirations and objectives are typically what motivate us to take on the challenging tasks, like reducing our debt load.

Bottom Line

Over the course of many, many repetitions, we develop our habits. Negative monetary routines, such as avoiding debt, making impulsive purchases, and overspending in an effort to impress others, can utterly demolish all hopes of ever being debt-free.

If you feel like your financial life needs an overhaul, consider which of these harmful practices you may be engaging in. Rather than having a fixed attitude that says you’ll be in debt forever, break the pattern Act responsibly and begin sound monetary practices immediately. Your debt and financial troubles don’t have to keep you back.

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