Five Financial Habits That Need to be Broken
Smoking . . . biting your fingernails . . . talking on your cell phone in traffic . . . misusing balance transfers?
When you think of bad habits, your money may not be the first thing that comes to mind. But, your spending and saving patterns can be just as unhealthy and hard to alter as your addiction to Ben and Jerry’s or your compulsion to text your best friend during rush hour. And, just like quitting smoking or going on a serious diet, taking control of your finances requires dedication and hard work.
If you find yourself setting a budget one week only to blow it all on a weekend shopping spree the next, it may be time to take stock of your financial habits and find out which ones need to be kicked for good:
Bad Habit #1: Abusing Balance Transfers
In theory, transferring your high-interest credit card debt to a new account with a low-to-nonexistent introductory rate is a great way to reduce the amount you owe and pay off your balance more quickly. But, in reality, a balance transfer can sometimes lead to more debt. If you use a balance transfer, make sure that you keep your original goal in mind: Getting rid of debt. Don’t let the low interest rate on your new card tempt you into a spending spree, and make sure you read the fine print on the terms of the new agreement.
Think about it: A credit card got you into this mess. Do you really trust another one to bail you out? A better – and safer – way to reduce your debt is to get a part-time job and use the paychecks to whittle away what you owe. Or, tighten your budget a little until you get your balance under control. And, once you pay off your credit card, stop using it. End of story.
Bad Habit #2: Not Setting a Budget
This is one of the worst – and most common – bad money habits. If you’re not setting a budget, you probably have no idea where your money is going. Taking the time to set a budget is one of the smartest ways to get a handle on exactly how you’re spending your money and where you can afford to tighten your belt a little.
It’s simple, really. Start with the total you make per month, subtract your living expenses like mortgage or rent, food, and utilities. And, don’t forget to budget for gas or transportation. After that, decide on an amount to put into savings and leave yourself a small allowance for entertainment and other “fun” expenses. But remember: To be successful, you have to stick to your budget once you set it. No excuses.
Bad Habit #3: Ignoring Your Credit Report
The information on your credit report is used in countless ways – from getting a good rate on a home mortgage to securing a new job. And, with identity theft becoming more and more common, it’s critical to scan your report for any errors.
According to federal law, you are eligible for a free credit report each year from the three major credit bureaus: Experian, TransUnion, and Equifax. It’s a good idea to request a copy from each and review it thoroughly. Not only does this give you the chance to dispute errors, taking the time to check up on your credit can also alert you to fraudulent activities, like an identity thief opening a credit card in your name.
Bad Habit #4: Not Starting an Emergency Fund
When it comes to setting up an emergency fund, it’s easy to procrastinate. After all, the prospect of setting aside three to six months of income can be pretty intimidating, especially if you’re starting from the ground up. But, we all have to start somewhere. Figure out how much you can save per month, and set that amount aside in an account that’s for emergencies only. And remember: Your emergency fund is separate from your savings account, so set aside enough in your budget to stock your savings and save for emergencies.
Your emergency fund should be enough to allow you to pay your basic living expenses – like housing, utilities, and groceries – for several months in a worst-case scenario. If you’re laid off or are unable to work because of an illness or injury, your emergency fund can help you make ends meet until you get back on your feet again. And, it’s important to remember that your emergency fund is for true emergencies: Don’t be tempted to blow the money you’ve saved. A new TV is not an emergency.
Bad Habit #5: Paying the Minimum
The key to financial independence is living debt-free – and you can’t do that if you’re simply paying the minimum balance on any existing credit cards. Minimum payments may seem like a more affordable way to pay large debts, but this strategy only benefits one person: Your credit card company. Carrying a large month-to-month balance means that you’ll be shelling out more in interest over the long haul.
Kick this habit by paying off your entire credit card balance every month. If you’ve racked up a pretty large amount in debt, sit down with your budget and figure out just how much you can afford to pay every month, and stick to that amount until your debt is paid off. You may have to skimp on things like going out to dinner, but you’ll feel great when you’re finally debt free.
Breaking these bad financial habits will take some hard work on your part – anyone who’s ever started a diet understands this. But, once you learn to change the way you think about your money, you’ll be on the road to financial independence and debt-free living.
Copyright © 2008 Reality Media Inc.