Living from paycheck to paycheck is a common struggle for many Americans. This financial situation not only makes it difficult to save for future goals, but it also increases the risk of accumulating debt and losing money to fees and interest charges. If you find yourself in this position, it’s crucial to identify and correct any poor money habits that may be keeping you poor. In a June 2023 YouTube video, financial advisor turned social media influencer Humphrey Yang shared 11 money habits that can hinder your financial progress and provided alternative strategies to improve your financial health.
1. Buying Things for Status
One common money habit that keeps people poor is the desire to buy expensive items solely for the purpose of showcasing wealth or status. Yang advised against purchasing costly items that drain your budget and leave you with unnecessary financial burdens. For example, buying a luxury car as a status symbol may lead to a hefty monthly car payment. Instead, consider opting for a more practical and affordable vehicle that still fulfills your transportation needs.
2. Trying to Financially Keep Up With Friends
It’s not uncommon to feel pressured to keep up with friends who have higher incomes and extravagant tastes. However, Yang cautioned against succumbing to this temptation and spending beyond your means. He shared a personal experience of going to expensive restaurants with a financially well-off friend and spending a significant amount of money on meals, despite earning less. Instead, focus on your own financial situation and make spending decisions that align with your budget and goals.
3. Using Buy Now, Pay Later Plans
Many online retailers offer tempting “buy now, pay later” options through providers like Affirm or Afterpay. These plans allow you to split your purchase into convenient installments without paying interest upfront. However, Yang warned against using these plans due to the possibility of high late fees. He advised only buying items you can afford to pay for at the time of purchase, avoiding unnecessary debt obligations.
4. Not Saving Cash for the Future
Building and maintaining a savings account is essential for avoiding the paycheck-to-paycheck cycle. Yang stressed the importance of planning and offered several tips to save effectively. Automating transfers from your paycheck to a savings account can ensure consistent savings. Additionally, closely monitoring your bank and credit card statements enables you to identify expenses that can be cut back, allowing you to allocate more towards savings.
5. Buying Things on Impulse
Impulse buying, especially on credit cards, can quickly drain your finances and hinder your ability to save. Yang emphasized the pitfalls of purchasing items on a whim, particularly when they are for your loved ones. Instead of giving in to impulse purchases, practice mindful spending and limit unplanned expenses.
6. Making Only Minimum Credit Card Payments
Paying only the minimum amount due on your credit card each month can lead to a dangerous cycle of debt. Yang warned against falling into this “debt spiral” where the accumulated debt and interest surpass your income. He recommended prioritizing paying off credit cards with high-interest rates, typically 18% or higher, before considering investments.
7. Choosing Low Price Over Value
While being cost-conscious can be advantageous, solely relying on the cheapest option may not always yield the best outcome. Yang shared a personal example of choosing a mechanic who charged significantly less for a car repair, only to discover that the repair was subpar. He advised considering the long-term value and potential cost savings of opting for better quality services or products.
8. Keeping Unnecessary Subscriptions
Forgetting about or rarely using subscriptions can result in wasted money each month, particularly when free trials are involved. Yang recommended periodically reviewing your credit card statements to identify subscriptions that can be canceled. Utilizing apps like Trim and Hiatus can help you track and assess your subscriptions to find opportunities for cost reduction.
9. Failing to Track Your Expenses
Lack of awareness about where your money goes can perpetuate poor money habits. Yang emphasized the benefits of tracking expenses, including gaining insight into your spending patterns, promoting consistency, and improving overall money management skills. Several budgeting apps are available that automatically sync with your accounts, making expense tracking more convenient.
10. Waiting Too Long to Invest Money
While it’s essential to prioritize debt repayment and meeting basic needs, delaying investments for too long can hinder wealth accumulation. Yang advised consistently contributing a portion of your income to brokerage and retirement accounts as early as possible. Over time, the power of compounding returns can significantly grow your investments.
11. Not Considering Tax Benefits
Minimizing taxes is a crucial aspect of building wealth and should not be ignored. Yang suggested leveraging tax-advantaged retirement accounts, such as IRAs or 401(k)s, as well as health savings accounts (HSAs) if eligible. Additionally, taking advantage of deductions like the mortgage interest deduction and utilizing education savings plans, such as 529 plans, for your children’s college expenses can provide valuable tax benefits. Seeking guidance from financial advisors, accountants, or tax professionals can help maximize these strategies.
In conclusion, identifying and rectifying poor money habits is essential for improving your financial situation. By avoiding unnecessary expenses, prioritizing saving, and making informed financial decisions, you can take control of your finances and work towards achieving your goals.