Money habits along with your spending patterns develop and are learned over time. This means that your past relationship and your views on how to handle money can ultimately influence your future financial decisions. If you find yourself falling behind on payments, failing to stick to a budget, or you like to spend more than you save, then it is time to alter the way you handle your expenses and cultivate new habits that will help you achieve financial security.
Acknowledging these poor money mindsets is the first step towards ensuring that you aren’t sabotaging your financial health. It is important to consider a few behaviors and learn how to correct them.
Behaviors That Lead to Financial Disaster
Here are six of the most common behaviors that put at risk your financial security:
You Neglect Budgeting.
Having a monthly budget is oftentimes one of the most helpful financial tools to have to keep track of your income and typical expenses. It also comes in handy when you’re aiming to eliminate unnecessary spending. Budgeting also helps you plan ahead for one-time expenses which can trip you up if you don’t keep track of them. Financial planners encourage clients to not only look at the monthly budget but also the annual budget to capture all one-time expenses that may not be one-time at all and this can ultimately lead you to determining how much money to set aside each month.
You Overspend on Purchases You Don’t Need.
It can be easier to sometimes talk yourself out of impulse purchases, but think about what happens when a family member or friend extends an invitation to an expensive restaurant or weekend activity. In this case, you may feel obligated to say yes which can hurt your bank account.
You Haven’t Established a Money Plan.
Planning for the future is an important cornerstone of ensuring your success and if you aren’t valuing long-term goals, saving for an emergency fund, or even taking key steps toward budgeting, this can disrupt your money goals. Mindlessness can be one of the most dangerous saboteurs of your financial well-being and this can be seen when you forget to cancel your gym membership and get charged for the upcoming year.
You Impulsively Buy.
Splurging on big-ticket items can set you back financially but many consumers find themselves chasing credit card rewards by buying things that end up being more like big-ticket purchases. Credit cards offer rewards such as double cashback, bonus air miles, and gift card promos. This can be a temptation and lead consumers to pay for unnecessary things just to get the reward.
You Don’t Track Your Spending.
You might think you are monitoring your expenses but in reality you could be taking part in mental accounting. Oftentimes people forget to factor in tips when they go out for the night and this can be the reason why so many people find themselves short on cash at the end of the day.
You Delay Saving.
People often have the mindset and the feeling that they have the time to save and they can start later. In reality, this is a big mistake because the earlier you start, the better off you are down the line with your financial health.
Money Tips to Help Combat These Behaviors
Now that we’ve identified a few behaviors that may harm your financial health, we should go over a few key tips to help combat these behaviors and ensure that you meet your money goals.
Write out a budget. You are more likely to to stick to a budget when you actually sit down and write it out. Creating a budget means that it will expose all of the spending that you do while forcing you to stop spending in areas that don’t want to give up. Check out our article to master the science of budgeting
Come up with a compromise. If your loved ones are inviting you to take part in a weekend activity that tests your budget, generating a less pricey compromise could help you out instead of declining.
Check your bank balance. Staying up-to-date with your bank balance and credit card expenses frequently will help you get a better sense of your spending habits.
Pay yourself first. Make sure you allocate a portion of your income to your 401(k) plan, cash reserve, or other investments before you do anything else. These forced savings will help to build your investment and retirement savings.
Getting Into Trouble Using Credit
When talking about potential financial trouble, we have to mention credit cards. Credit cards can be great as they allow you to earn cash back rewards or help you build your credit, which will be helpful if you hope to buy a house one day. While they can be extremely helpful, there are some big risks that come with managing a credit card. That’s why it is important to be aware of these dangers so you can avoid making these mistakes and handle your card wisely.
Below are a few risks associated with credit cards:
Getting Into Credit Card Debt.
It can oftentimes be easy to borrow more than you can afford to pay back. You should think about a credit limit as a loan as opposed to free money to spend. Additionally, credit card balances generally come with interest rates so every time you don’t pay your balance in full, you’ll have to pay that much more in interest.
Missing Your Credit Card Payments.
One of the biggest factors that contribute to your credit score is your payment history. As a result, missing payments can seriously affect your credit score. You also run the risk of getting charged a late fee which will be applied to your account as well. If you do make a late payment that’s more than 30 days late, this may stay on your credit reports for up to seven years.
Carrying a Balance.
If you carry a balance over to the following month, you could ultimately pay a significant amount of interest. On average, a credit card’s annual percentage rate could be as high as 16.32 percent, but if you have poor credit, you are more likely to pay an even higher rate.
Using Too Much of Your Credit Limit.
Your credit score can be negatively affected if you have a high credit card utilization ratio which is how much of your available credit you are using. Creditors use utilization ratio as an indicator of lending risk because if you are reaching or exceeding your credit limit, then you are perceived to be more likely to have trouble repaying.
How Prepaid Cards Can Help You Manage Money Effectively
Now that we have identified dangers associated with handling credit, we have a few takeaways about how prepaid cards can help you manage money effectively without incurring additional debt.
There’s No Interest. There are no interest charges and typically you can’t overspend when managing a prepaid card. If used the right way, a prepaid card can help you avoid debt and finance charges.
There’s No Credit Effect - Good or Bad. Prepaid cards are not reported to the three major credit bureaus, therefore using one won’t affect your credit.
Effective Money Management. A prepaid card can be an effective budgeting tool. You can strictly decide where to use it and once the money’s gone, your spending stops.
Ideal Option If You Don’t Like Banks. You can hold your funds, check your balance, and track purchases without having to deal with the hassles that come with a checking account like overdraft fees.
Whether you’re a college student just starting to build credit or an experienced homeowner, having healthy financial practices and a mindset will help you out in the long run. Staying out of financial trouble can sometimes be easier said than done but we hope these key takeaways will help you stay on top of your finances.