Your financial habits help to shape the way you live, plan, and prepare for the future. Small day-to-day choices can snowball into huge financial roadblocks, often staying hidden until it’s too late. Struggles often come not from how much you earn, but from how you manage what you do have. So, what are the bad financial habits you should avoid to secure your future?
If you’re wondering what financial habits might be holding you back from a secure future, here are some examples of the most common bad financial habits that you should be avoiding:
- Not sticking to a budget.
- Impulse buying or emotional spending.
- Confusing bad debt and good debt.
- A lack of an emergency fund.
- Spending beyond your means.
- Not having a financial plan.
In this blog, we’ll dive deeper into these bad financial habits, why they’re dangerous, and how to get your finances back on track.
1. Not Sticking To A Budget
More often than not, just thinking you know where your money goes isn’t enough to keep on top of your finances. Without a budget, it’s easy to overspend or forget about key expenses until it’s time to pay for them. Budgets can give your money a bit more direction, allowing you to control your finances rather than simply reacting to the costs of everyday life.
Why Do People Avoid Budgets?
When it comes to budgets, many people often avoid them altogether or give up soon after trying to implement them. This can be for a number of reasons, but often falls into either psychological or practical factors.
Psychological Factors
- Restriction: Budgets can often be seen as a restriction on personal freedom, meaning people can often be reluctant to follow them.
- Fear: Creating a budget can often expose your spending habits and the true picture of your financial situation. It can be scary and uncomfortable to face this reality.
- Lack of Motivation: The benefits of budgeting, like reducing debt or saving more, aren’t always seen immediately. This lack of quick gratification can often mean people don’t see the point in sticking with a budget.
- Perfectionism: Sometimes, when setting up a budget, we may go to the extreme. Setting overly restrictive or unrealistic budgets may lead to early abandonment.
- Inflexibility: It can often seem like budgets don’t make room for unexpected circumstances, which can be frustrating.
Practical Factors
- Time-Consuming: Creating and tracking a budget can be time-consuming, which can put people off starting the process.
- Punishment: If you feel like your budget is a chore or form of punishment, you’re less likely to want to follow through.
- Abusing the Budget: Some people might try to ‘game’ their budget to give themselves more money for non-essentials, making the effort less effective.
- Accountability: If you don’t have a clear tracking and adjustment system, you might struggle to stay on track.
- Difficulty Prioritising: You might find it challenging to determine which expenses are essential and which can be cut down.
- Financial Hardships: Budgets might not appear to address the underlying issues when it comes to financial hardships, so they can be brushed off as useless in these situations
How To Build A Budget That Suits You
In simple terms, budgeting involves making a note of your monthly income, outgoings, and any necessary debt repayments. This helps you to understand how much you have to spend and what you need to cover before you give yourself ‘fun’ money.
Once you’ve established your income and outgoings for the month, it’s important to work out your wants and needs. Figure out what you need to spend money on each month and where you can trim down your spending.
Budgeting Example: The 50/30/20 Rule
If you’re struggling to know how to allocate your money, the 50/30/20 rule is a popular starting point for creating a budget. It splits your income into wants, needs and savings, with the opportunity to adjust numbers based on your goals.
- 50% – Needs: This covers essentials like housing, food, and bills. You might also want to factor in other necessities, like commuting costs, and be sure to look for where you can make savings, with railcards or offers on your food shop, for example.
- 30% – Wants: This is where you spend some money on the fun stuff. Use this percentage for meals out, activities, and holidays. You can still have these things on a budget, but you need to spend within your means.
- 20% – Savings & Investments: This money goes straight into a savings account. Whether it be a Help To Buy ISA or simply an account you don’t have a contactless card for, this percentage helps you save for the things you hope to have in the future.
2. Impulse Buying Or Emotional Spending
We all know that buying something we want can give us a huge mood boost, but this is often only temporary. Getting lost in this bad financial habit can lead to regret and financial impacts that can last much longer.
It’s important to address the reasons and emotions behind your impulse buying. Finding what triggers these spending sessions can help you combat unnecessary spending and put you in a better position with your disposable income.
What Are The Common Triggers For Impulse Buying?
The triggers for emotional spending often fall into three common categories: emotions, culture, and marketing. We’ve detailed these below so you can find out what influences you to possibly spend above your means.
Emotional Triggers
- Boredom: ‘Doom scrolling’ is a go-to for when we’ve got a bit of spare time. Scrolling through online shopping sites can lead us to finding items we think we need. We seek immediate gratification when we’re bored, and purchasing items we like gives us that small boost.
- Stress: The quick mood boost that comes from impulse spending can become addictive, especially when faced with anxiety or sadness during stressful times.
- Peer Pressure: We often feel a need to keep up with those around us. If your friends have the latest clothing or technology, for example, this can make you feel like you need to purchase the same, even if you can’t afford it.
- Social Media Influence: In an age of social media, we can often feel pressured to follow trends and have the latest products. This can have a huge negative impact on your finances, especially if it’s something you don’t need.
Cultural Influence
In an era of self-care and wellness, we can often get lost in a ‘treat yourself’ culture that encourages excessive spending. It’s important that you make room for fun activities or hobbies, but you need to make sure that you can afford this. You shouldn’t be sacrificing paying your bills or reducing debt for short-term happiness, which is what often comes from impulse purchases.
Marketing Triggers
The websites and apps of online retailers are designed to capture your attention and encourage impulse buys. This is simply part of their marketing strategy, but it’s important that you recognise these steps and know how to differentiate between actual wants and impulse purchases.
These marketing strategies take the form of flash sales, one-click checkouts, and targeted ads, all designed to bring in as much money as possible. If you repeatedly see a product or think you’re getting a great deal that won’t last long, you’re more likely to spend money you don’t have.
How To Combat Impulse Buying
The main focus when tackling your emotional spending is taking a look at what draws you in and why. By actively avoiding these triggers, you can make an effort to only spend money you have spare on the things you really want.
Here are a couple of strategies you might want to use to tackle this bad financial habit:
- The 24-Hour Rule: Seen something online you’d love to own? Give yourself 24 hours to really consider it. This gives you enough time to let the emotions of impulse buying settle and think about it clearly. If you really like the item and have thought about how it would fit practically into your life or space, buy it!
- Unsubscribe From Promotional Emails: Seeing the discounts, deals, and offers that come through promotional emails can often lead to us buying things we don’t need, simply because they’re slightly cheaper. By unsubscribing from promotional emails, you’ll only find deals and discounts when you’re actively looking to buy something you’ve thought about, not buying for the sake of “saving” money.
- Track Emotional Spending Patterns: By tracking patterns in a journal, for example, you’ll be able to see clearly if any particular emotion or life event leads you to spend excessively. Recognise these patterns, and perhaps put measures in place that allow you to avoid making purchases during these times.
3. Bad Debt vs Good Debt
Most of us look at every debt as a negative thing, but this isn’t always the case. Knowing what counts as good debt and bad debt can help you put money aside to make contributions to what really matters.
What Is Good Debt?
Debt is usually considered ‘good’ if it helps you to generate income or build on your net worth, especially when it has a low interest rate. Good debt might benefit your finances in the long term in a number of scenarios:
- Education: Debt like student loans help you invest in your career opportunities and earning potential. Be sure to consider the short and long-term prospects of your chosen field, but this debt can often pay for itself after a few years in the workforce.
- Business: Any business comes with risk, but borrowing to start your own business can be considered good debt. When your business succeeds, that debt will have been worth it.
- Property: A mortgage can also be considered good debt. If it allows you to buy your own home, a mortgage can help you to make significant progress in your personal life. Your property may also increase in value over time.
What Is Bad Debt?
‘Bad debt’ is used to purchase assets that depreciate in value or take your income away for little benefit. Draining your monthly earnings and damaging your credit score for things you can’t afford will have a negative impact on your financial security. This may include:
- High-interest credit cards.
- Payday loans.
- Depreciating assets – like furniture, technology, or vehicles.
How Can I Manage And Reduce Bad Debt?
- Snowball And Avalanche Method: The snowball method involves paying off your smallest debts first, using the gratification as motivation to continue onto larger amounts. Alternatively, use the avalanche method to pay off your highest interest debts first.
- Consolidation Plans: There are a couple of agreements available to help you consolidate your debt into one payment, which is then split between creditors.
- Negotiating Interest Rates Or Payment Plans: Try speaking with your creditors to find a method that works for you on a monthly basis.
You can find out more about our advice for avoiding debt in our helpful blog: “What Are The Top 3 Financial Habits?”
4. Lack Of An Emergency Fund
Emergencies will never wait for a good time, and they can hit hard and fast. Without a financial safety net, people will often rely on credit cards or loans that won’t do them any good in the long run.
What’s The Ideal Emergency Fund?
In an ideal world, you should have around three to six months’ worth of living expenses saved up. This will not only help you cover any unexpected costs but will also give you a financial cushion if you need time off sick or were to lose your job.
Start small to cover any sudden expenses, but you can build it up by:
- Automating Savings: Move what you’d like to save into an account as soon as your paycheck lands in your account.
- Save Windfalls: If you get any extra money, like tax refunds or bonuses, add these to your savings as soon as possible.
- Cut One Unnecessary Monthly Expense: For example, start making lunches at home and redirect what you would spend into your savings.
5. Spending Beyond Your Means
It can be easy to slip into a lifestyle that doesn’t match your income, but the negative consequences will always catch up with you. You might see signs in your everyday life, like having no savings, constant financial stress, or increasing balances on credit cards.
What Can Lead To This Bad Financial Habit?
- Lifestyle Inflation: As you start to earn more, you may fall into the trap of spending much more, too. Budgeting is still important even on a higher salary.
- Social Pressure: As we covered earlier in this blog, the pressure of keeping up with friends and social media can lead us to more unnecessary spending.
What Changes Can I Make?
- Shift your mindset to focus on delayed gratification and intentional living. This can help you prevent impulse buying that leads to spending over your means.
- Track everything you spend for 30 days. You can then start to cut out what isn’t necessary and set spending limits where you need to.
- Try embracing secondhand purchases or DIY options. This gives you the opportunity to buy the same products but with less of an impact on your finances.
6. Lack Of A Financial Plan
It’s hard to achieve any goal without a plan, especially when it comes to your finances. Having a plan for your money can give you a bit more clarity and motivation and helps you to control your future.
A solid financial plan covers short, mid and long-term goals. For example:
- Short-Term: Save for a holiday or pay off a credit card.
- Mid-Term: Buy a home or build an investment portfolio.
- Long-Term: Saving for retirement or placing a focus on providing generational wealth.
It’s easy to start! Simply write down three financial goals, create your ideal timeline, and be clear on the actions involved. Be sure to readjust and revisit every few months to suit your new goals, timelines, or income.
How Can STARTrading Help?
If you’re struggling with bad financial habits, the thought of taking control can be scary. Alongside following our above advice, you may want to consider building your trading portfolio to add to your financial freedom and future security.
STARTrading was founded by Lewis Crompton in 2019 and presents a safe and profitable path to financial independence that takes just 30 minutes a day. Our students rate us ‘Excellent’ on Trustpilot, and our training providers are CPD-accredited, so you can be confident that our strategies are efficient and enjoyable.
If you have any questions about our trading mentorship programmes or need further support, contact our team today! We’re happy to help you get started!
