With the New Year, many people work to improve their financial situation by changing their bad spending habits and repaying debt.
Like most New Year’s resolutions, people tend to start enthusiastically, then gradually fade as the months go on. We’ve learned that the secret to keeping a resolution is to change your habits for the better.
It’s not enough to want to improve your financial situation. You also need to change habits that are preventing you from being successful and nurture better habits that will make it possible to affect permanent change.
Starting this new year, we’d like to encourage everyone to think about bad spending habits that can be changed and new habits that can help improve your financial standing.
5 Bad Spending Habits to Break
1. Failing to budget and track your spending.
- Effectively managing your personal finances means planning. It’s simply not possible to truly control your money if you aren’t budgeting. When you budget, you’ll give every dollar a purpose—you shouldn’t spend anything you haven’t budgeted for in advance.
- Part of the budgeting process is calculating your income and writing out a spending plan for that money. But equally important is the act of tracking your spending.
- If you don’t track every dollar you spend, you’ll never know if your budget is working, or where to make smart adjustments to make your budget more effective.
- To get started, check out our free online budgeting course. You’ll find also find educational guides and downloads to help you create a personal budget you can live with.
2. Paying too much for things.
- Impulse spending is often a challenge, but the number one form of overspending is paying too much for something.
- Many forms of overpaying are obvious; if you buy something at a convenience store that you could get much cheaper at the grocery store, you’re overpaying. Convenience costs extra, and if you’re resolving to change your spending habits, it’s time to eschew convenience and be more frugal.
- There are other, less intuitive ways to overspend. If you’re driving all over town to save a few cents on sale items, are you really saving money? The costs of your time, gas, and mileage on your car might just make it a loss. Part of having a spending plan is doing some homework about where to go to get the best deals without having to drive all over town chasing after a few cents.
- Buying cheaper items instead of quality might also cost you more in the long term. For example, if you buy cheap goods, like shoes and clothing, you may end up spending more replacing them than if you’d spent more on better goods in the first place. Buying an inexpensive car that needs constant maintenance might cost you more in the long run than paying more upfront for something reliable.
- This is why tracking your spending is so crucial. If you see that your attempts to save money are actually costing you more over time, you should make a different choice.
3. Getting into debt by spending money you don’t have.
- If you want to use credit, you must plan carefully to be able to pay off your balance in full at the end of the month. There are advantages to using credit cards—convenience, security, efficient record-keeping, reward programs, etc. But using credit doesn’t have to mean carrying debt. If you don’t pay off those balances, the negatives to using credit outweigh the positives.
- A big contributor to a financial crisis is spending money you don’t have. If you are prone to spending more than you have, then your best bet is to destroy your credit cards or freeze them in a block of ice for an emergency. Also, remove the credit card information you’ve stored at online retail sites; it makes it too easy to place items in your shopping cart and check out before you’ve really thought about the purchases.
4. Spending too much on personal habits.
- Not all of the things you spend money on are worthy. If you have personal habits that are costing you a lot of money, you might need to make some changes in that area as you take control of your finances.
- That said, don’t go into the new year limiting your lifestyle more than necessary. If socializing is crucial to your well-being, then you have to be able to plan and budget for it ahead of time. Another common habit is dining out. It’s always more expensive to dine out than to prepare your own meals.
5. Ignoring irresponsible spending tendencies.
- Unfortunately, ignoring your debts won’t make them go away and will eventually lead to a full-blown crisis.
- When creditors call, you need to speak to them (debt collectors are a different matter). When you get bills every month, open them! If you’re leaving credit card bills unread, you’re almost certainly heading for trouble. If you confront your issues as they come up, you’re less likely to keep spending and making them worse. Get in the habit of addressing your debt every time you’re faced with it. Never put off sending debt payments or communicating with your creditors.
- Halting your bad spending habits is half of the equation. To achieve financial freedom, you’ll also need to develop new, better habits to ensure your long-term success.
- More Resources: What to do if a Debt Collector Calls You
6 Ways to Control Spending Habits
1. Plan and budget for every dollar you spend.
- Remember, the essence of budgeting is planning. Have a plan for every dollar. Don’t give yourself permission to buy anything you didn’t plan for as part of your regular budgeting process.
- Even if you want to create a small discretionary spending category, you’re still planning for that money. So, if you can afford to have 5% of your budget go toward any unplanned purchases, you’re still creating a plan for that 5%, and you need to stay below that amount.
- Track as you go, and adjust as necessary. If you decide you’re spending too much in one area, find ways to tighten up and change your budget from month to month. Your budget shouldn’t be static—it should change often as your circumstances change.
2. Communicate your financial situation with family, loved ones, and your creditors too.
- Talk to everyone in your household about the family finances, and what you can all afford. Everyone has to help if you’re going to stick to better spending habits in the new year.
- Don’t hide anything—this will lead to greater conflicts and bigger financial problems later. Your partner might be spending without thinking about it, while you’re struggling to balance the budget. You might both be buying the same things unnecessarily. Part of the spending plan should include a plan for who’s buying what, so you don’t buy extra things you don’t need.
- You should also communicate with your creditors if they contact you. Be careful what you say to third-party debt collectors. Communicate with them only in writing and start with a debt validation letter—but don’t ignore communication from your original creditors. You can head off a lot of problems by communicating with them when you’re in financial trouble.
3. Make it harder to spend your money.
- Try to avoid using credit cards and use cash wherever you can.
- When banking, consider keeping your money in savings accounts that aren’t easy to withdraw from. CDs or IRAs that lock in your funds over time will ensure that money doesn’t get spent impulsively.
4. Plan and cook your own meals.
- Besides personal finances, many people’s New Year’s resolutions revolve around health and fitness. Cooking your own meals is the single best way to address both kinds of resolutions. You’ll likely be healthier and definitely save a lot of money.
- On average, it’s five times more expensive to dine out than to cook meals for yourself at home. Every dollar you spend dining out includes 80 cents you could have saved by cooking your own meal.
- Include meal planning in your budgeting process. It’s easier to control food spending if you are doing all of your own cooking, so getting into the habit of regular meal prep will make your budgeting process easier.
- You can even save money on groceries online—it’s easier to compare prices, you won’t have to endlessly walk through each aisle and tempt yourself to purchase something you don’t need, and more.
5. Use “bonus” money wisely.
- Any extra money that comes along, whether a bonus from work, a gift, or tax refund, should be saved or used to pay down debt. Too many people treat their tax refunds like “found” money and spend it on indulgences. Any money you get, no matter the source, should be treated as income. Include this money in your written budget, and spend it just like you spend the rest of your paycheck—carefully.
- Even things like credit card reward points can be used for everyday purchases. If you have the opportunity to cash in rewards on a shopping site like Amazon, then use that credit for regular, planned purchases. Don’t use your rewards for “extra” things you don’t need.
- Related Article: Why Tax Refund Anticipation Loans Are Bad For Credit
6. Get financial help if you need it.
- If you find you’re struggling to keep up with your New Year’s resolution to develop better spending habits, get help. Professional debt coaching is available free of charge to help you create a workable budget and address your debt situation. Before you give up on your goals, talk through your situation in a personalized, confidential setting and get help coming up with a plan for success in the New Year.