If you want to save money and build wealth there are a lot of bad spending habits that you should avoid.
Unfortunately, many of these habits are a normal part of life for people all over the country. But the good news is, once you bring them to light, it becomes much easier to replace them with better, more productive financial habits. And the best part is that these small changes can have a huge impact on you and your family for years to come.
So, if you’re ready to set your finances on a better track, here are 15 bad spending habits to avoid if you want to build wealth.
1. Financing or Leasing Cars
If you want to build wealth, you should never finance or lease a car.
First, new cars depreciate significantly from the moment you drive them off the lot. According to Edmunds, on average, your car depreciates 11 percent on the first day of ownership. By the end of your fifth year, your car will only be worth about 40 percent of what you paid for it.
So, at the risk of being blunt, if you are looking to build wealth, the last thing you should do is buy something that decreases in value.
Financed and leased cars also have interest tied into their monthly payments. This is money that you are throwing away each month that you could put into your savings and investments.
Not to mention you also have debt hanging over your head.
Beyond that, there are other higher expenses that come with owning a new car.
For instance, insurance rates are based on the replacement value of the vehicle. So, by paying top dollar for a new car, you are signing up to pay higher insurance premiums. Plus, many states base their registration fees on the value or age of the car. This typically means that newer cars get hit with higher annual registration fees.
2. Not Living on a Budget
Of all the bad spending habits out there, not living on a budget can be one of the most detrimental.
You see, creating a budget is a great way to monitor your spending and calculate how much you can put into savings or investments. Beyond that, it’s just important to understand how much money is coming in and how much you are spending.
Why?
Because without a plan, it’s very easy to overspend.
But let’s be honest, creating a budget is a little easier said than done. In fact, many people avoid budgeting like the plague.
In my experience, the main reason why people tend to avoid budgeting is that they don’t want to confront the status of their personal finances. They would rather live their life without a care in the world.
Ignorance is bliss, right?
Wrong.
Until you get on a budget, it’s incredibly difficult to implement changes in your financial life. And seriously, even a few simple changes in how you handle your money can result in a massive financial improvement.
All that said, creating a budget is only step one. Once you have established your budget, you need to stick to it. That’s the most important part.
There are a lot of great options when creating a budget. You can use a spreadsheet, budgeting app, or a notebook.
The key is to use whatever works best for you.
3. Spending Before You Save
When most people think of saving money, they think about how much money they earned and what their expenses will be for the month. Whatever is left over then goes into the savings account.
But this mindset is what holds people back from building wealth.
Wealthy people, on the other hand, pay themselves first by putting money into savings or investing it. Whatever is left over is what they have to live on.
Why does this work?
First of all, it guarantees that you are consistently taking steps to build your wealth.
Secondly, it forces you to adjust your lifestyle around what is left rather than saving based on your lifestyle.
4. Overpaying on Car Insurance
Car insurance companies are always competing for additional business. For this reason, they are constantly on the lookout for new potential customers. This forces them to be competitive with their rates.
That’s why you should check car insurance rates at least once a year to make sure you are getting the best deal possible. Sites like Insurify and EverQuote are great options to compare multiple rates at once.
The only thing to watch out for is that you are comparing apples to apples.
In other words, don’t just base your decision on the rate itself. Lower rates may come with things like higher deductibles or lower coverage levels. While these are great ways to reduce your insurance premium, make sure the policy provides the right coverage for you and your family.
5. Upgrading Your Phone Every 2 Years
Most cell phone carriers offer regularly scheduled phone upgrades. While this might seem like a great perk, it’s actually a bad spending habit that you should avoid. Seriously, upgrading your phone every couple of years can add up to hundreds, or even thousands of dollars that you don’t need to spend. This is especially true for families with multiple devices.
People who are laser-focused on building wealth don’t need to impress people with the latest model of gadgets. Therefore, before upgrading your device, ask yourself if you really need a new phone.
Or just make a rule to only replace your phone when you start having technical issues.
6. Not Investing in Retirement
An important part of growing your wealth should include retirement planning and investing.
By setting aside money for your future, you are making sure that you will have financial stability when you retire.
People often make the mistake of thinking they are too young to start investing for retirement. This couldn’t be further from the truth.
Thanks to the power of compound interest, the earlier your start investing, the more time your money has to grow.
Many employers offer retirement savings accounts like a 401k or Roth IRA. These accounts come with special tax benefits that will save you thousands of dollars over the life of your career.
In addition to the tax benefits, most employers who offer these types of retirement accounts also match your contributions. Take advantage of your employer match if you are looking to maximize your retirement savings each year.
7. Spending Money on Credit Cards
Credit card debt is a major problem across the country. In fact, according to NerdWallet, the outstanding credit card debt in the US amounts to over $900 billion.
Unfortunately, many people fall into this trap. They grew up in households where credit cards were a normal part of their lives. Many parents even encourage their children to get credit cards for emergencies or to “help” build their credit.
The real emergency is the amount of interest that is being charged each month.
Not only do credit cards charge high-interest rates, but they also require very small minimum payments. And this is how they hook people.
It’s easy to convince someone to buy that $5,000, 65-inch TV when your monthly payment is only $15.
For credit card companies, their goal is to ensure that the balance will take many years to pay off.
Why?
Because the longer you take to pay off your balance, the more money they make in interest.
It’s no surprise that credit card companies make billions of dollars in interest every year.
8. Emotional or Boredom Spending
When you are bored or having a rough day, you might head over to the mall to do some shopping.
It feels good, right?
It turns out that there is a scientific reason why humans turn to spending money when they are having a bad day. When we spend money, our brains release chemicals that make us feel happy such as Dopamine (dubbed the “happy hormone”). This doesn’t make you a bad person. It just makes you human.
But it is another reason why it is extremely important to live on a budget if you are trying to build wealth. By having a set amount of money in your budget, you will be less likely to spend money when you’re emotional and make impulse purchases.
Try to find other activities for when you are feeling stressed or bored such as taking a walk, watching a movie with a friend, or trying out a new recipe.
9. Spending Too Much on Rent
For most people, rent is the highest expense in their budget. The good news is that this is also a great place to find savings.
In general, you should try to keep your rent between 25 to 30 percent of your take-home pay. If your rent is more than that, you may want to consider what options you have to reduce it. For example, you could get a roommate, have your kids share a room, or downsize your space.
The less you spend on rent, the more room you have to save and invest for your future. So, whenever possible, look for ways to reduce the amount of money you spend on rent each month.
10. Paying Minimum Payments on Debt
Having debt drains your ability to save money and build wealth. Not only do you have a recurring payment that reduces your saving potential, but your debt also carries interest.
These lovely charges are what banks and credit card companies charge for the “privilege” of being able to use their money to purchase things. The longer you hold this debt, the more interest charges you incur.
By paying your loans off earlier, you can save yourself hundreds if not thousands of dollars that you can use to save or invest.
If you are in debt, you should throw any extra money you have in your budget at eliminating these loans. The money that you save can then be invested.
After all, would you rather earn interest on your money or pay interest to someone else to use theirs?
11. Overspending on Loved Ones and Friends
We all have friends and family that we love and care about. Through the year, you will likely need to purchase gifts or items for birthdays, anniversaries, holidays, and other special occasions. Though, if you aren’t careful, the cost of this can add up especially if you have a large extended family.
As a part of your budget, you should think about how much you want to spend on these types of items. By setting limits and sticking to those guidelines, you can ensure that you won’t overspend.
For example, you may decide that you have a $20 limit for birthday presents for your nieces and nephews.
It may be a tough decision to make, but you may also decide who doesn’t make the list. Each person will approach this differently, but you might choose to only purchase gifts for people who are your immediate family.
Remember that your financial health comes first, so hold your ground. If your family and friends love you, they will understand.
Or, consider inexpensive or free alternatives to giving gifts.
Maybe you can plan a fun outdoor activity for your favorite cousin who likes to hike, or you can make a homemade gift for your aunt.
Be creative and think outside the box.
12. Spending Too Much on Cable/Internet
Cable and internet expenses can easily add up to a couple hundred dollars each month. These purchases can spiral out of control pretty quickly when you are selecting the various add-ons like the best sports package or movie channels.
Fortunately, there are quite a few alternatives to cable today including Hulu, Netflix, Amazon Prime Video, Disney Plus, and others.
In many cases, these platforms have better shows than you can find on the cable network.
To keep costs low, select just one and switch to another when you start running out of shows to watch. If you are feeling particularly frugal, you could also choose to go without television altogether.
Internet is a little more difficult to cut since many aspects of our lives rely on the ability to connect online. Take the time to look at the various competitors in your area for the best rates.
Just make sure to only purchase what you need.
13. Dining Out at Restaurants Too Often
After rent or mortgage payments, eating out is likely one of your highest expenses. And you’re not alone. According to the US Bureau of Labor Statistics, the average American household spends about $3,000 each year dining out.
By cooking meals at home, you can significantly reduce this cost.
These additional savings could make a huge difference in your ability to invest and jump-start your wealth-building machine. Think about that the next time you driving through a fast food restaurant.
14. Dipping into Savings or Investments
We’ve all heard the saying “two steps forward, one step back”. This certainly applies to dipping into your savings.
Your savings account should only be used for true emergencies like a large, unexpected car repair or a trip to the hospital. To help eliminate this, make a list of the situations in which you are allowed to withdraw money from your savings. If your situation doesn’t fit the criteria, then don’t dip into your savings.
In addition to savings, be cautious about taking money out of your 401k or other investments. Not only are there penalties for early withdrawals, but they may also have tax implications.
Plus, any time you pull money from your investments, you are only hurting your financial future.
15. Not Paying Bills On-time
Paying your bills late may result in additional interest or late fees.
To avoid this, create reminders on your phone or calendar to help you remember when certain bills are due. It’s also good practice to send payment a little early in case your check gets lost in the mail.
Final Thoughts
This list is intended to give you a lot of great ideas on how to avoid bad spending habits that can derail your ability to build wealth. Just remember, everyone’s situation is different. So, take a moment to think about your personal situation and the spending habits that might be holding you back.
Remember, even a small improvement in your spending habits can make a significant long-term impact.