If you sometimes find yourself worried about finances, you’re not by yourself. A March 2015 Pew Survey of American Family Finances revealed that only 51% of Americans felt financially stable. Fifty-five percent of those surveyed mentioned that they either broke even or spent more than their earnings monthly, while 33% noted they had no savings at all.
It’s likely that you could benefit from saving more money and reducing unnecessary expenditures. Rather than waiting for your circumstances to change for the better on their own, confront some of your less-than-ideal financial habits that may have formed over time.
After five years of researching the daily practices of over 350 individuals from different economic backgrounds, I discuss in my popular book Alter Your Routines, Transform Your Future the financial behaviors that pave the way to wealth. Long before they attained financial independence, the self-made millionaires in my research established specific money habits that most average people do not adopt.
Habits—those automatic actions, thoughts, and decisions—serve a function: they save mental energy by enabling us to carry out tasks without conscious thought. These learned responses and attitudes dictate our success in various areas of life. Recognizing a challenge is crucial to overcoming it, so it’s essential to identify habits that may hinder your financial success. Here are 10 detrimental behaviors that can undermine your financial well-being, along with my suggestions for overcoming them. You possess the capability to initiate these changes. Let this year be the one where you eliminate poor habits and nurture prosperous ones.
Poor Habit 1: Excessive spending on housing.
Housing expenses start with rent or mortgage payments, and can also include property taxes, utilities, insurance, repairs, and maintenance. Costs related to housing typically make up the largest share of your expenses, so it is crucial to keep them as low as possible.
My findings suggest that housing expenses should not exceed 25% of your net monthly earnings. In my research, 64% of wealthy individuals maintained their housing costs below this threshold. Additionally, my study indicated that those spending more than 40% of their net income on housing experienced greater financial difficulties.
However, my findings might not fully capture the issue. According to a 2015 report titled Projecting Trends in Severely Cost-Burdened Renters: 2015-2025 published by Harvard University’s Joint Center for Housing Studies and Enterprise Community Partners Inc., an increasing number of families face housing costs that exceed 50% of their net monthly income.
What strategies can you employ to manage housing costs? Consider downsizing, seeking more affordable housing, or sharing living space with family or friends. If those options are not feasible, here are further suggestions:
- Lower utility bills. In winter, set the thermostat a few degrees lower and raise it slightly in summer. Consider using programmable thermostats to manage the temperature during certain hours. Also, conserve water: take shorter showers, reduce outdoor watering, turn off the tap while brushing teeth, and run full loads of laundry and dishes.
- Choose a more affordable TV and internet plan.
- Perform landscaping tasks yourself. Mow the lawn, trim the shrubs, and handle mulching flower beds.
- Appeal your property taxes. Challenge the assessments.
- Increase your home insurance deductible.
- Negotiate a lower rent with your landlord.
Lowering your housing expenses to that ideal 25% benchmark will enable you to save. If you only change one financial habit, make it this one. Controlling housing costs should be your top financial priority if you aim to thrive.
Poor Habit 2: Overspending on vehicles.
Similar to housing, spending too much on cars can consume a significant portion of your monthly net income. New cars depreciate the moment they leave the dealership. Opting for high-quality used vehicles can help avoid drastic initial depreciation losses. In my research, 44% of the affluent individuals bought used cars, generally acquiring 2- or 3-year-old vehicles from leases, and these wealthy individuals tended to keep their cars for many years.
While older vehicles may incur repair costs starting around 125,000 miles, which might average about $1,500 annually, it is still considerably cheaper than ongoing payments for a new car loan or lease.
Be wise: purchase quality used vehicles and drive them until they can no longer function, which is exactly what 94% of the self-made millionaires in my research did. That’s a solid financial practice.
Poor Habit 3: Forming habits through associations.
Most of our habits are acquired from those around us: parents, instructors, family, friends, colleagues, neighbors, mentors, famous figures, coaches, etc. Regarding financial behaviors, this can have either a positive or negative effect. If you struggle with unhealthy money habits, it’s likely that many individuals you regularly engage with also face difficulties managing their finances. Their poor spending and saving practices can influence you—an expensive night out can unexpectedly add up to $300, or a vacation may lead to considerable debt.
Reflect on how your social circle and daily associations (including colleagues and family members) influence your financial behaviors. Being around individuals with sound spending habits can inspire you to adopt similar practices.
If you aim to embrace better financial behaviors, spend time with individuals who exhibit positive habits and distance yourself from those who do not. Being surrounded by friends, family, and role models who are committed to living within their means increases the likelihood of securing similar habits for yourself.
Poor Habit 4: Using credit cards to subsidize your lifestyle.
Spending every dollar you earn means you aren’t saving. Even worse, exceeding your income pushes you into debt to sustain your lifestyle. If you find yourself relying on credit cards to cover essential living expenses, you are, by definition, living beyond your means. In doing so, you risk using future earnings to fund your current way of life.
What actions can you take? Consider these recommendations:
- Document all your spending for one month. This will help you identify where your money is going.
- Once you’ve tracked your expenses for a month, formulate a monthly budget. Set specific goals for each category of spending within your budget. This allows you to compare your actual expenditures against your targets each month.
- Join my 100-Day Spending Challenge. Focus on cutting back or eliminating spending in one controlled area for 100 days. For instance, instead of dining out for lunch, you could pack your meals and potentially save around $1,500 annually. Also, consider avoiding other daily expenses like snacks or drinks for a set period. Or, you could refrain from credit card use for the next 100 days. (Involving friends in the challenge can significantly improve your chances of success.)
Poor Habit 5: Impulsive spending.
In the mid-1970s, a team of behavioral scientists, psychologists, and various professionals conducted an extensive study involving over 1,000 children born within a single year in Dunedin, New Zealand. Their aim was to evaluate each child’s self-control and, 40 years later, assess their life outcomes. The findings revealed that those who displayed the highest self-control ultimately became more prosperous. The capacity for self-control emerged as a primary indicator of financial success in the study.
Impulse buying is often propelled by emotions and a lack of restraint. After extended shopping, an unplanned item at checkout might tempt you, leading to an unexpected purchase. Retailers exploit this weakness, using strategic product placement to enhance impulsive spending.
To counteract impulsive purchases, increasing awareness is key. Recognizing these marketing tactics engages your conscious mind, helping you resist temptations. Staying focused on your shopping list can lead to a sense of control over your expenditures. Each victory further develops your self-restraint, making you less susceptible to retailers’ marketing strategies.
Poor Habit 6: Excessive gambling.
In my research, 77% of individuals from lower income brackets participated in lottery games weekly, while 52% gambled on sports during the same timeframe. The odds of winning the Powerball stand at 1 in 292.2 million. Bob Martin, the former manager of one of Las Vegas’s first sportsbook casinos, famously stated that the actual number of bettors who profit from NFL bets is so minuscule that “it’s as if no one wins.” According to Sports Insights, a sports bettor’s chance of winning is only 2.3% for 53.2% of bets placed.
Building wealth is a gradual process, not an overnight event. Instead of spending money on lottery tickets or sports betting, consider saving those funds. Slow and steady wins the race when it comes to financial fitness.
Poor Habit 7:
Overspending on entertainment.
Limit your entertainment expenses to no more than 10% of your monthly net income. This category includes vacations, dining out, recreational travel, movies, and more. Many individuals who struggle financially exceed this 10% suggestion, often adopting a live-for-the-moment mindset, which can become problematic over time. If you’re aiming for a long and financially secure future, it’s wise to cut back on entertainment expenses now.
Poor Habit 8: Neglecting to save.
Individuals who achieve financial independence typically cultivate the saving habit. The earlier you start saving, the more wealth you will amass. A staggering 94% of self-made millionaires in my study established a practice of saving 20% of their income long before they built their fortunes.
During my research, I discovered a specific savings method employed by millionaires, which I refer to as the Bucket System Savings Strategy. Here’s how you can implement it:
1. Divide savings into four buckets.
- Bucket 1: Retirement savings – Includes 401(k) plans, IRAs, and other retirement-related products such as annuities.
- Bucket 2: Designated expenditures – This could be a designated checking or savings account for significant future expenses, like education or wedding costs.
- Bucket 3: Unforeseen expenses – This bucket is for unexpected costs like medical bills, sudden job loss, or necessary repairs.
- Bucket 4: Recurring expenses – Set aside funds for birthday gifts, holiday spending, and other predictable costs.
2. Set savings targets.
For the bucket system to be effective, establish how much you will save from each paycheck. For instance, if you decide to save 20% of your net income, you could allocate as follows:
- 10% into Bucket 1 (retirement).
- 4% into Bucket 2 (designated expenditures).
- 3% into Bucket 3 (unforeseen expenses).
- 3% into Bucket 4 (recurring expenses).
3. Automate your savings.
The implementation phase is where it gets real: transferring the designated amounts into each bucket account automatically.
If you aspire to achieve financial independence someday, developing a habit of living below your means is crucial. One way to do this is to consistently live on 80-90% of your net income by automating your savings. Even if you begin by saving just 5% of your earnings, the important thing is to cultivate a saving habit. As your earnings grow, you can increase your savings contributions.
Poor Habit 9: Failing to monitor your expenditures.
Understanding where your money goes equips you with control over your finances. You may discover you’re paying for services you don’t utilize, such as gym memberships or streaming subscriptions. Additionally, expenses can evolve over time.
If you don’t keep tabs on your spending, you might miss opportunities to save money on various purchases. This is especially true for insurance, which can fluctuate over time. Always ensure you are securing the lowest rates for homeowners, auto, and life insurance. Review your internet and cable costs regularly to stay informed about any changes that could impact your bill; negotiating the lowest rates should be a routine task.
Don’t overlook your smartphone plan either. With increased competition in the cellular market, you could save money by shopping around for better rates. Make it a point to avoid overpaying for your phone service and all other regular expenses.
Poor Habit 10: Not engaging in bargain shopping.
Make the pursuit of bargains a regular practice. Many of the wealthiest individuals in my study frequented thrift stores to score deals. Searching for discounts, using coupons, attending early bird screenings for shows, and actively comparing prices can lead to significant savings. Consider placing the difference into your savings account.
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Building wealth isn’t overly complicated. Simply spend less than you earn and save the remainder. Over time, your savings will accumulate and yield interest income, dividends, and capital gains. While it may be challenging to break ingrained financial habits, it is essential for attaining financial freedom. Ultimately, no one wants to rely on family or friends for financial support. By cultivating positive money habits, you take charge of your financial future and empower yourself to reach your potential.
Make this the year you take charge of your finances like a wealthy individual does. Before long, you may find yourself in a prosperous financial position.
Spending Trends Among Millennials
Identified as the “thrifty, fun—and caffeine-driven” demographic in TS Bank’s Consumer Spending Index survey, millennials approach spending differently than other generations. The survey uncovered the following insights about this group:
- Cash is Preferred. Millennials utilize cash, debit cards, and checks more frequently than the average consumer.
- Coffee on the Go. They purchase coffee or food to go approximately 11 times each month, compared to seven times for Generation X and five times for baby boomers.
- Dining Out. Millennials eat out about 13 times monthly, more than Generation X (eight) and baby boomers (five), yet they tend to spend less overall on meals ($103 versus $123 and $139 for Generation X and baby boomers, respectively).
- Sound Decisions. Millennials spend less yearly on discretionary items (food, clothing, travel, entertainment) compared to others—$26,000 versus a national average of $32,000.
