6 Bad Money Habits That Could Wreck Your Finances — and How to Break Them

Bad spending habits — everyone has at least one of them. Maybe for you it’s adding “just one more thing” to your shopping cart, or repeatedly getting slapped with overdraft or late payment fees.

These bad habits may seem innocuous at first but could easily turn into financial self-sabotage.

“Breaking a habit like these can be really difficult because these habits have developed over the years, and they provide us with psychological comfort and safety,” says Thomas Oberlechner, founder and Chief Science Officer at FinPsy, a San Francisco-based consulting firm that integrates behavioral expertise into financial services and products.

Oberlechner says the key to overcoming a bad money habit lies in knowing when you’re using the impulsive, right side of your brain — as opposed to the focused, concentrated left side — in financial decision-making.

“It’s really about psychological experience. It’s about behavior. If we understand the role of emotion, then we have a chance to fix it,” Oberlechner says.

Once you understand yourself and can identify your bad habit, Oberlechner adds, then you can create a plan “that turns your impulsive or unconscious behavior into the healthy financial behavior that [you] actually want.”

Of course, breaking any bad habit is easier said than done.

MagnifyMoney spoke to financial professionals to hear how they and their clients broke their bad habit. See if any of their hacks could help you break yours.

Bad money habit #1: Spending money as soon as you get it

The solution: Automation

If you’re constantly feeling broke just a few days after you receive a paycheck, you may be guilty of this bad money habit. One way to make sure you hold onto some of your cash is to use what the behavioral finance community calls a “commitment device” to lock you into a course of action you wouldn’t choose on your own, like saving your money.

In this case, the device is automation. Automating your savings won’t help you stop siphoning money from your checking account the same day your direct deposit clears, but it can make sure you save what you need to first. Check with your bank or the human resources department at work to have a portion of your paycheck automatically sent to a savings account instead of putting the entire sum in your checking account.

You should automate your bills and credit card payments for the pay period, too. Once your obligations are automated, “you can be impulsive with your play money,” says Oberlechner.

Bad money habit #2: Reaching for your credit card all the time

The solution: A cash diet

Paying for everything you buy with a credit card can be good practice if you pay off your card every month. If you’re chronically swiping your credit card for things you can’t afford to pay off by the next billing cycle, leave your card at home and use cash instead.

When you don’t pay off your card each billing cycle, you rack up interest charges on everyday purchases, and that may cost you a lot more money in the long run. If you’re using more than 30 percent of your total credit limit each month, you may also be harming your credit score.

To break your habit, leave your credit card at home and use cash or a debit card for your purchases.

“Take a certain amount of cash and say ‘I can spend no more than that,’” says Vicki Bogan, an associate professor at Cornell University in Ithaca, N.Y., who researches behavioral finance. “If you have a huge [spending] problem, try to limit yourself so that you only have access to a certain amount of money.”

If you really want to challenge yourself, you can try going on what’s called a spending freeze, where you stop spending any money on non-essentials for a period of time. On top of helping you save money, the freeze can help you notice how much money you may be wasting simply because you’re always pulling out your credit card. After your freeze ends, you may be less inclined to swipe your credit card.

Another rule that could help you break your swiping habit is the $20 rule. The financial rule of thumb is simple: Anytime your purchase is less than $20, pay in cash, not credit. The $20 rule forces you to think about whether or not a purchase is worth swiping your card for. Chances are, if what you’re buying costs less than $20, it’s not something you’d be OK paying interest on.

Bad money habit #3: Spending beyond your means

Solution: Budgeting

If you chronically spend beyond your means each pay period, you are likely digging yourself into debt. Get a handle on this habit by understanding how much money you have coming in and how much you can afford to spend on a monthly basis. You can use budgeting apps like Mint or YNAB to make that part easier. These tools can also help you identify the spending categories that are costing you more than you might realize.

Oak Brook, Ill.-based certified financial planner Elizabeth Buffardi tells MagnifyMoney that after examining one of her client’s expenses she found the client was spending a lot of money at drugstores picking up snacks and little things after work. So the client gave herself a budget of $10 per drugstore visit to save money.

“We’ve been seeing her spending at drugstores go down steadily over the last few months,” says Buffardi.

Buffardi had two other clients who struggled with overspending because they loved to shop online. They both created boundaries for themselves when it came time to pay for the items in their online shopping carts. One client decided to buy a certain amount of gift cards that she could use on a given site.

“If she spent all the gift cards in the first day, then she was done until the next paycheck. If she wanted something that was more expensive than the amount she had on the gift cards, she had to hold off on other purchases in order to purchase the more expensive item,” says Buffardi.

The other client simply removed her credit card number from her payment profiles so it would be more difficult to make thoughtless purchases. Her theory, Buffardi tells MagnifyMoney, was that if she was forced to stop and pull out her credit card before she could make the purchase, it might slow her down and give her time to think about the purchase she is about to make and — maybe — stop some purchases from happening.

Bad money habit #4: Always buying lunch from a restaurant

The solution: Plan your lunches a week in advance

If you’re losing $10-$15 a day to the local deli during the workweek, remember this: You don’t have to buy lunch if you bring it to work with you. However, organizing your day so that you actually have time to prepare and pack your lunch may be where you struggle.

Leave room in your busy schedule to pack your lunch in the mornings, or during the evening when you may have more time to yourself.

Melville, N.Y.- based certified financial planner David Frisch says he packs his lunches in the evening because he knows he runs late in the morning. He puts together everything but the dressings and sauces he plans to eat while making dinner, so lunch is already 90% done, then he adds the last 10 percent in the morning.

Frisch suggests setting a budget for how much you’d like to spend on food per pay period, then tracking how much money you typically spend on the convenience of frequently going out to lunch. Again, a budgeting app can be handy here to easily identify places where you spend the most.

Compare that amount to how much you spend on food for entertainment purposes, like going out to dinner with friends over the weekend and for your necessities, like eating lunch to fuel your workday.

“If you are spending so much money on convenience, you have that much less money to spend on everything else,” says Frisch. If you’re spending money from your food budget for convenience purposes, you may be more reluctant to go out on Saturday night for dinner.

If you’re already packing your lunch, but purchase a second lunch because you’re still hungry or you no longer want to eat what you packed, try packing a larger meal or having leftovers for a second lunch.

Bad money habit #5: Ordering out for dinner because you’re too tired to cook

The solution(s): Prep when you have time/energy; try meal delivery services

It’s easy to spend more than $50 getting dinner delivered three to four days out of the week, or buying groceries that go to waste because you’re too tired to cook. Oberlechner suggests doing some of the “work” of making dinner when you know you have more energy.

“If you’re too tired to cook in the evening, replace the spontaneous behavior by preparing dinner in the morning. So in the evening you don’t have the work of preparing anything,” he tells MagnifyMoney.

Another hack Oberlechner suggests is making a little extra dinner for the days you know will be especially long, when you won’t want to cook dinner. For example, if you know Tuesday is a really long day but Monday is not, cook a little extra on Monday and have those leftovers for dinner on Tuesday.

If cooking dinner simply isn’t a habit for you, you can try a meal kit service like Blue Apron, Plated, or HelloFresh to get interested in cooking, suggests Brooklyn, N.Y.- based certified financial planner Pamela Capalad. She tells MagnifyMoney she’s advised many of her clients to sign up for a meal kit service, then transition into grocery shopping and cooking at home regularly.

Generally, the services cost about $10 to $15 per serving and can serve up to four people.

Bad money habit #6: Letting your kids throw extra things in your shopping cart

The solution(s): Shop solo or lay ground rules early

Frisch says he and his wife solved this problem with their now 15-year-old triplets when they were four years old.

“Up until they were four we couldn’t bring them to a supermarket because it was impossible for my wife and I to watch three kids at the same time,” says Frisch. The easiest recommendation, he says, is to have somebody watch them at home while you go do the shopping. You may spend some money on a sitter, but you are also saving money without an eager child sneaking candy and toys into your shopping cart as well.

If an extra set of hands at home isn’t available, then try to set ground rules before you go to the store. For Frisch, that meant allowing the triplets to get one — just one — extra item at the store.

When a child wanted to add something “extra” to the cart, Frisch or his wife would say, “If you want this now, then you have to put the other one back.”

“Ultimately what happened was they kind of had to make a decision as to which one they would really get,” says Frisch.

The triplets quickly realized they could all benefit from working together.

“They actually started to communicate and say ‘if you get this and I get this, we can share,’” Frisch told MagnifyMoney. “They just figured out that if they all got one thing and shared, they ultimately all got more than they would have.

The post 6 Bad Money Habits That Could Wreck Your Finances — and How to Break Them appeared first on MagnifyMoney.

7 Ways to Manage Money Better than Your Parents Did

Don't let your parents' bad habits become yours. Here's how to do money the right way.

Every generation has their own habits when it comes to money. Whether it was our parents stashing cash in paint cans or their bedroom mattresses, or our great grandparents balking at investing after the Great Depression, generational events help mold how we manage our lives.

Sometimes it’s a good thing. Learning to be frugal after living through hard times can leave you better off, for example. Then again, some financial habits from decades ago have absolutely left people worse off.

If your goal is avoiding many of the financial pitfalls your parents (or their parents) fell into, you should strive to learn positive money habits while unlearning any lessons that stifle wealth.

I spoke to several financial planners to hear their thoughts on how the younger generation can do better than their parents. (Full Disclosure: I am also a certified financial planner.) Here’s what they said.

1. Avoid Placing Blind Trust in Financial Advisors

Your parents and their parents likely met with a financial planner during their lives. They didn’t have as much information at their disposal as we do today, so they hired professional help.

Unfortunately, many placed too much trust in the financial professionals they hired. Without much oversight, old school financial advisors were able to line their own pockets at their client’s expense, usually by selling them high-cost investments with low returns they didn’t understand.

To avoid falling victim to bad advice, you should learn as much about investing as you can, says Colorado financial advisor Matthew Jackson of Solid Wealth Advisors.

“Dedicate yourself to learn about investing so you can make educated decisions about your retirement rather than risk being led down a wrong and costly path,” Jackson said.

“In the age of technology, educating yourself about finances can be free and done in the comfort of your own home,” he continued.

You should still consider hiring a financial advisor, however. Just don’t trust them blindly. Brian Hanks, a financial advisor and author of How to Buy a Dental Practice said  your best step is to find an independent, helpful, fee-only advisor who is paid a flat fee to offer comprehensive advice.

By avoiding advisors who are paid commissions for the investments they sell, you can ensure you’re getting unbiased advice meant to benefit you.

2. Diversify Your Investments

Many people from the older generation have a narrow view of what it means to invest. Unfortunately, they tend to believe their way is the best way – even if it’s not the best way for their kids.

“If the parents are risk averse, they tell their kids to save their money in bank CDs, pay down debt, and avoid things like equities,” said financial advisor Joseph A. Azzopardi of The Well Planned Retirement. “If the family’s wealth was primarily made in private business, they encourage their children to focus their capital on business ownership.”

While many of these strategies can be successful when it comes to building wealth, there is no single best strategy. That’s why Azzopardi and many other advisors suggest their clients diversify instead of putting all their eggs in one basket.

“Diversifying a family’s balance sheet is a valuable way to lower overall risk and create multiple sources of income,” he said.

3. Switch Employers When it Benefits You

Our parent’s generation was strikingly loyal to a single employer, often to their detriment. Even when they had the opportunity to make more money, they often eschewed that option based on a misguided sense of duty.

“Many people just put their heads down and went to work every day, never thinking that there might be a better opportunity across the street,” says financial planner for business owners, Grant Bledsoe.

While loyalty is admirable, the advice to stick with a single employer for life is rather outdated today.

“You can be loyal to your employer of course, but need to be more strategic about your career advancement,” says Bledsoe. “You can really boost your earnings by continuing to improve your skill set and taking calculated risks along the way.”

4. Plan for a Lengthy Retirement

These days, people are living significantly longer. For the younger generation, that means we need to save up more cash to retire.

“As life expectancy continues to grow, present and future retirees will need to plan for a retirement that could span the course of several decades,” said Seattle Financial Advisor Josh Brein.

Whether you sit down with a financial advisor or plan your investments yourself, make sure you’re planning for a lengthy and expensive retirement. According to the Social Security Administration, men and women who reach the age of 65 can expect to live until ages 84.3 and 86.6, respectively.

5. Put Your Own Financial Health First

Our parents placed a lot of faith in higher education, so much so that many worked hard to pay for their children’s college education while neglecting their own retirement needs. This is a mistake, said financial advisor Joe Carbone of Focus Planning Group.

No matter what, you should remember you can’t borrow money for retirement. And, once you reach retirement age and find you’re short on cash, it’s too late.

6. Learn Basic Financial Education Early

In many families, the topic of money has always been taboo. You don’t speak of it because it’s “rude,” or because it’s an adult topic that shouldn’t be discussed with the kids.

But, not talking about money can be devastating for young people who reach adulthood without basic financial knowledge. Because of this, most financial advisors agree today’s parents should teach their kids money basics like budgeting and how to manage credit scores.

“Let’s face it, it almost completely falls on the parents to be the money professor since it’s rarely touched upon in our education system,” said Kansas City Financial Planner Clint Haynes.

If you don’t teach your kids about money, you can expect them to learn their lessons the hard way.

7. Build a Lifestyle That Doesn’t Require Debt

Today’s climate of cheap and easy credit started decades ago. Unfortunately, many of our parents embraced the idea of borrowing money to buy things they couldn’t afford.

This has led to the acceptance of ideas like the “perpetual car payment” and huge mortgages.

Albuquerque financial planner Jose Sanchez said his dad fell into the trap of financing an expensive car long ago when car loans first came into play. After getting his first job, he went out and bought a new 1968 Camaro, mostly because he thought “he deserved it.” But, after having kids and settling into working life, he realized the purchase was more of a financial burden than he thought.

Today’s workers would be wise to reject the easy credit atmosphere that is so prevalent today. The less money you owe, the more options you have.

And when it comes to building a life you truly love, the more options you have, the better off you’ll be.

Image: Zinkevych

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