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In school, you learn about history, grammar, algebra and other basic knowledge. But one fundamental subject most students are never taught, even at home, is how to maintain healthy financial habits.
You're not alone if you've never had a solid introduction to financial literacy, or you find it difficult to manage money. But bad money habits (overspending, racking up debt and not saving) can hurt your financial health, turning small missteps into costly mistakes over time.
With some awareness and knowledge on how to break these habits, you can improve your finances—now and well into the future. Let's go over some financial habits you might need to work on.
1. Not Spending Wisely
If you don't plan where your money will go, it's easy to fritter it away. Excess nonessential spending leaves less for essentials, like making housing and bill payments, reducing credit card debit, repaying student loans or saving for retirement.
That's not to say you have to eliminate all discretionary spending; life is more enjoyable when you can occasionally do the things you love, like traveling, dining out or attending concerts. The goal is to find balance, only indulging in nonessential spending once mandatory expenses are covered.
How to Break the Bad Money Habit
- Avoid shopping with credit cards. Shoppers typically spend less with cash or debit cards compared to credit cards, since it creates more of a sense of losing "real" money.
- Pause before purchasing. Before a hefty nonessential purchase, especially if that purchase is rooted in emotional spending, stop to consider if it's a need or want and if you can you truly afford it. Also consider any tradeoffs, such as if this will mean less for savings or cause you to take on more debt.
- Resist sales. While savings are tempting, don't buy something simply because it's on sale. Stick to purchasing items that you actually need.
- Slash extra costs. Look for opportunities to reduce nonessential spending, like swapping out restaurant delivery for more home-cooked meals, or canceling subscriptions you rarely use.
2. Not Creating an Emergency Fund
Whether it's a broken leg, car accident or sick pet, emergencies can set you back thousands of dollars. An emergency fund is savings you can tap when unexpected bills arise that don't fit in your regular budget.
Without an emergency fund, surprise bills could force you to take on high-interest debt, or get behind on (or skip) other important bills, leaving you and your credit in trouble.
How to Break the Bad Money Habit
To avoid these dire situations, follow these steps:
- Open a separate account for your new emergency fund. This will help you avoid dipping into it for day-to-day spending or other savings goals, like a vacation.
- Set a goal for how much to save in your emergency fund. It can vary by person, but experts generally recommend setting aside enough for three to six months of living expenses.
- Determine how, and how much, you'll contribute. If money is tight, your contributions might be occasional. If you can part with even a little cash each week or month, set up an automatic transfer from checking to this savings account so it's a no-brainer.
- Leave the account alone unless or until you're facing a true financial emergency. If you do make a withdrawal to cover an expense, replenish it as quickly as you can.
3. Maxing Out Your Credit Card
When you keep a low credit card balance and or none at all, your credit score benefits. But if you rack up large balances or exceed your credit limit, it can wreak havoc.
A transaction that puts you over your limit might be declined, though if you have a strong payment history or opted into over-limit protection, it may go through. But if it processes, expect fees, a steeper interest rate and higher minimum payment, and possibly account cancellation.
While you technically can spend up to your card's limit, your credit score suffers if you get too close to it. That's because your credit score factors in your credit utilization rate, or how much of your available credit you're using at any time. Using too much makes you appear risky and overextended, thus dragging down your score.
How to Break the Bad Money Habit
- Know your rate. A credit utilization ratio under 30% is ideal (the lower, the better). Say you have several credit cards whose credit limits total $10,000; ideally, you'd keep your balances at or below $3,000. Calculate your current rate and work to reduce it if needed.
- Reduce reliance on credit cards. Don't put purchases on your card that you can't afford to pay off quickly. Aim to keep your credit card spending in check so you never even get close to maxing out.
4. Carrying a Balance
Historically, credit cards started out as charge cards. This allowed transactions on credit, but the full balance was due each month, incentivizing customers to only spend what they could afford.
Very few cards still work this way, though you should pay off your balance in full each month to avoid interest. But nowadays, you can carry a balance from month to month, only paying a small minimum payment rather than the total amount. Here's the catch: Paying only the minimum—especially on significant balances—doesn't make much of a dent in your principal. Meanwhile, you pay interest fees that add to your balance and prolong your debt.
How to Break the Bad Money Habit
- Live within your means. Reserve your credit card for purchases you can pay off quickly to avoid or minimize interest payments. For large purchases, it's better to save up and pay for it outright; it will cost you far more to put it on a credit card and pay interest for carrying a balance over time.
- Pay more than the minimum. While credit card bills only require a small minimum monthly payment, you can—and should—always pay more to reduce interest payments and get out of debt sooner.
- Choose your card wisely. If you have multiple credit cards and know you'll carry a balance, swipe the card with the lowest APR. If all your interest rates are steep, consider getting an intro 0% APR credit card, which has a window of no interest on transferred balances until the regular APR kicks in, often 12 or more months later.
5. Not Saving for the Future
No matter why you're not saving, whether you struggle to scrape it together or you prefer to live in the moment, this financial mistake can spell trouble later in many ways. For example:
- Not being able to afford buying a home
- A delayed retirement (or less comfortable retirement lifestyle)
- Inability to contribute to other expenses, like your kids' college education
- Being vulnerable to debt without enough savings
Interest-bearing savings grow over time due to compounding interest, and investments also usually increase over the years. The longer you wait to start saving and investing for the future, the less time you leave your money to grow.
How to Break the Bad Money Habit
- Maximize yields. Traditional savings accounts earn very little interest, so build savings in accounts with higher returns like high-yield savings accounts, certificates of deposit and money market accounts whenever possible.
- Start small and automate. Every little bit counts; even if you can only spare $10 a week, time is on your side. Simplify the process by setting up automatic transfers from your checking to savings or investment accounts, or from your paycheck to a retirement account.
- Cut other costs. Scrutinize your latest debit and credit statements for any recurring expenses you can slash (even temporarily) like unused subscriptions to make room for saving. If you can't find room to cut, you could boost savings by finding a side gig.
6. Not Sticking to a Budget—or Not Even Creating One
Budgeting is a simple, useful tool that helps you understand how much money comes in and goes out each month. This makes it easier to live within your means and reach your goals.
If you don't have a budget or stick to one, you might live paycheck to paycheck and run out of money for important bills. Budgeting helps you plan to have enough money for regular expenses in addition to savings and debt repayment goals.
That's not to say your budget can't include fun stuff, like vacation savings or entertainment. In fact, these and anything else can (and should) go in your budget; the goal is to make sure you have money to cover your expenses and spending without overdrafting or accruing debt.
How to Break the Bad Money Habit
- Find your favorite budget plan. Budgeting can be customized to your preferences. You decide whether yours is complex or simple, in an app, spreadsheet or piece of paper, and whether it uses cards or cash stuffing. If it's not working, don't give up on budgeting; try another plan.
- Seek accountability. If you and your significant other budget together, approach it as a team to help keep each other accountable and celebrate wins. If you're budgeting solo, try an app like Mint, which sends reminders.
- Look for creative cuts. There's no need to part with your beloved streaming service if you can find other ways to balance your budget. For example, maybe you can find savings by checking if you can save money by switching car insurance or phone companies.
7. Not Maximizing Savings Accounts
Even if you're excelling at building an emergency fund and savings for the future, you could still be practicing a bad money habit if you're not careful about selecting the ideal account type for your savings.
If you keep your savings in a traditional savings account, you're not maximizing your money since these accounts hardly earn any interest. Instead, move it to a high-yield savings account, which generates more interest (free money!) and grows your balance faster.
In other situations, not choosing the right accounts can mean taking longer to reach goals, or paying more taxes. For example, if your workplace offers retirement accounts like a 401(k), you'll enjoy tax savings. And if your employer provides a contribution match, that's free money that expedites growth.
Other tax-advantaged types of accounts worth exploring include individual retirement accounts, health savings accounts, flexible spending accounts, and if you have kids that will attend college, 529 plans.
How to Break the Bad Money Habit
- Shop around. Don't plop your money in your bank's default savings account or the first one you find online. Compare rates, fees and terms with several financial institutions to ensure you're getting the best annual percentage yield and lowest fees.
- Explore workplace benefits. Find out from your employer if you're taking advantage of everything they offer, such as tax-advantaged retirement or health savings accounts or contribution matches.
Don't Forget Your Credit
Your credit score is calculated using a range of financial factors, and the money habits discussed above can impact them directly or indirectly, and for better or for worse.
If you fail to save for the future or emergencies, for example, you might resort to costly debt or max out your credit card. If you don't budget or go overboard on nonessentials, you might miss bill payments, hurting your credit score.
On the other hand, keeping debt balances low, reducing reliance on debt by saving and budgeting, making on-time bill payments and other healthy habits support a strong credit score. As you make efforts to improve financial health, monitor your credit for free on Experian to see how your progress pays off.