In the world of personal finance, money habits play a crucial role. They can either propel you towards financial freedom or keep you trapped in a cycle of living paycheck to paycheck. As a financial coach, I’ve spent the last decade of my life immersing myself in the field of finance and money through a degree in finance, a qualification in accounting and a career in investment banking and one of the most life-changing skill I have learned through it all is how to handle my own finances, recognize my bad money habit and break free from them. So, in this blogpost, I’m going to share with you 9 of the most common bad money habits that keep people poor and tips on how to break out of them.
1. Paying yourself last
I first heard of this in the book Rich Dad Poor Dad by Robert Kiyosaki and it’s one of the blueprints in achieving financial freedom.
Robert explains that the way people pay their bills can be broken down into two types the first way is poor people’s habits and that’s through paying yourself last, so as soon as your paycheck comes in you then pay your rent, your phone bill, your subscriptions, you fund your social plans and then you’ll save whatever’s left over if there is even any money left to save.
The second method he talks about is the rich people’s habits and they do the complete opposite, they pay themselves first and that is what you want to do take 10% minimum and put that into your savings account the minute you get paid treat it like paying a bill, this is so important and by doing this you’re guaranteeing that, that money will be saved and won’t just slip through your fingers through spending.
A lot of people are probably thinking that there’s no way I can do this I leave paycheck to paycheck but the surprising thing is when you take that 10% and put it away your mind will think of way to structure your spending and structure your finance to last for the whole month and you won’t even realize that you’re saving in the background.
People don’t even realize how much they are spending on paying the bills, buying something new, going on that weekend away and then they save what is left but that is the backward mentality, the key is to pay yourself first instead of making other people richer by buying their things before you pay yourself.
2. Getting comfortable with bad debt
It seems that debts these days is actually the norm, people are using debt to buy even the smallest of things, to buy presents, to buy clothes. I have a straight wall that is unless I can afford to pay for that thing outright in cash, I shouldn’t be buying it with any form of debt.
Remember credit card companies want you to be bad with your finances because that’s how they make money from you, the average credit card interest rate is 22% which cancels all kind of benefit and reward this credit card companies are providing if you’re not able to pay them off.
3. Not having an emergency fund/ Stockpile of funds
This ties into the first bad money habits I mentioned and essentially, it’s about saving enough so that you have a buffer behind you of about 3-6 months of living expenses.
This is super important and it will give you peace of mind just by having this buffer kept to one side and available to tap into if you need it, you free up that mental energy to designate to more important things.
So how you gather this 3-6 months buffer is through that paying yourself first, start putting that 10% away and once you have your stockpile then you can start using the additional money you save to building into your investment fund and looking at investments.
4. Not Knowing Your Income & Expenses Properly
Until you know what your starting point is how do you know where you want to be, there something call lifestyle inflation and it means that your spending will rise as your income rises, the more money you make the more you spend and it’s a cycle make more money buy a bigger house, buy a nice car, spend more, make more and it’s crazy how normal this is but it is a recipe for disaster.
You need to be in control of your finances and mapping out how and what you’re spending on, it’s easy to buy things you don’t need or can’t afford especially when you’re distracted or budgeting properly.
As your income grows, it’s tempting to upgrade your lifestyle—buying a bigger house, getting a new car, or eating out more frequently. However, indulging in lifestyle inflation can erode any progress you make in saving and investing, preventing you from building long-term wealth.
5. Having expensive hobbies
A lot of people like to shop and I guess part of this is retail therapy but again marketing, social media and these multi billion dollar company & organizations loves to tell us how much we need to spend our money and spend our cash on items we don’t need, instead of keeping and investing it
How to stop expensive spending:
Wait before buying: Give yourself at least 24 hours to think about a purchase. This delay helps you differentiate between wants and needs.
Stick to a shopping list: Make a list of what you truly need before going to the store, and commit to only buying those items.
6. Focusing Purely on Saving
If you want to improve your financial position you can firstly either save more of your existing income or you can make more money and create more income streams and the ideal combination is a mixture of both.
You can’t build wealth if you’re making more money and spending all of it but also can’t build wealth if you’re just focusing on the saving side, because there is a cap to how much you can save using those cashback sites will only get you so far.
So, to truly build wealth you have to think of both sides of the equation both how you will save a larger percentage of your income but also how you will make more money, the saving money side has a cap but the making money side does not, it’s infinite.
There is unlimited potential upside, whether it’s investing in the stock market, asking for a pay rise or starting a side hustle.
You need to break the bad money habits of thinking that saving money is going to massively increase your wealth.
7. Paying Too Much Taxes
Taxes are going to be the single biggest expense in your life, whilst everyone has to pay tax a lot of people just pay it without legally reduce your bill, LEGALLY is the keyword here.
The wealthy they have knowledge of legal corporate structures that comes with tax advantages, they hire tax advisors that help them minimize bills.
So, if you want to get one step ahead one of the best ways to increase your wealth is through understanding tax rule in a way that stack up in your favor for example investing through an ISA or a Roth IRA which is an investment account that shelters your dividend and profit from taxes or operating under a business instead of an individual if you’re a sole entrepreneur.
All of this stuff is absolutely legal, and if you are someone who disagree with this and prefers to pay more taxes regardless of whether or not you can reduce it legally, then it doesn’t hurt to understand the tax rule and reduce that tax bill so that you can instead use the money to give back to things that directly align with your values.
8. Waiting Too Long to Invest
When you start having savings, you have that stockpile, that buffer that we talked about earlier, then you should to start looking at investing that money so that your money start working for you.
It’s important to diversify those investment so you can weather different situations that come around in life but avoid leaving that money in a bank account because inflation is a thing and means that you are essentially losing money every year.
Start looking at different investment strategies once you’ve saved up enough and don’t leave any additional money more than you need to in a bank account.
There is always going to be reasons why you can’t invest, either because you don’t time, you don’t have enough money, you don’t know where to start but the longer you put off investing the harder you will have to work to get that same level of financial freedom as someone who start investing earlier.
In conclusion, bad money habits are detrimental to your financial health. By identifying and changing your bad money habits that are keeping you poor, you can take control of your finances and start building wealth. It’s also important to note that change doesn’t happen overnight. It takes time and consistent effort to break old bad money habits and form new good ones.
