By Mark Provenzano, Principal of Hedged Private Wealth in Metairie, LA.
Life is an accumulation of habits. Habits are a natural progression of learned behavior. Some habits are part of life and important to our survival. Other habits come from a lack of knowledge that can spiral into considerable hurdles. The beauty of a habit is that it can be changed if faced with a determined spirit.
Bad money habits rank at the top of the charts when people comment about the stress in their lives. The following are the most common bad money habits I see people constantly trying to break. With a little determination and discipline, these habits can be reversed.
- Not tracking spending. How easy is it to pull out the debit or credit card and swipe away? Or how many times have you signed up for a membership online that is an automatic deduction because you’re sure you use it? It’s easy to spend. However, not being mindful of your spending patterns is a habit that can quickly be detrimental to your financial health. Fix: Track your expenses. It can be as easy as carrying around a notebook and writing down every expenditure, or if you want to be a little more advanced, there are some great apps out there that will connect right to your debit, credit, savings and checking accounts. Mint is one I often recommend to my clients.
- Living without an emergency fund. We hear this over and over again. You should have three to six months of living expenses set aside for unexpected emergencies. I often hear “how are we supposed to save and set aside when unexpected expenses constantly show up?” Fix: If it has to be a slow process, so be it, but you have to start somewhere. This may take some serious discipline, but it can be done. Start with what you can and keep adding to the account. Some of my clients actually feel accomplished and it becomes more of a goal when they see their bank account increasing.
- Not managing credit scores and reports. A credit report is a financial resume. It’s a history of an individual’s ability to manage their money over time. There are multiple factors taken into account including late payments, non-payment, filing for bankruptcy, tax liens, credit card utilization, etc. Lenders, like mortgage companies, take all of this into account when they determine how much they will loan you and what the interest rate will be. Fix: Due to the constant rise in identity theft, you need to check your score once a month. I recommend people sign up for Credit Karma, a free service that monitors your score. This will provide a snap shot and monthly changes to your credit score. Once a year, you can get a free credit report at www.freecreditreport.com. This is a report that shows what all of the three bureaus, Transunion, Equifax and Experian are reporting. If there is an issue found, you need to report it to the bureau immediately so they can correct it.
- Failure to consider tax implications. Unfortunately taxes are often an afterthought in financial transactions. Americans are not educated enough about the tax implications and the damage it can do to their future. A common example I often see is an individual leaving their employer and then cashing out their retirement plan. The individual never understood the tax implications of this decision. They have to pay income tax on the distribution based on their tax rate. They could be hit with a 10% penalty for an early withdrawal if they’re under the age of 59 1/2. Their distribution could push them into a higher tax bracket based on the amount. Fix: Before you buy or invest, know what the tax implications could be if you had to cash in. If you decide to move forward and more than a year goes by, find out if any tax laws have been changed. Talk to a tax specialist or CPA, this isn’t a situation you should leave to your own interpretation.
- Not updating beneficiaries. Life changing events like marriage, divorce and death can result in the wrong beneficiaries being left on accounts. This results in the wrong person walking away with everything you worked so hard for and they are legally entitled to it. Most of the time it was as easy as filling out a form to change the beneficiary. Fix: I often tell clients to make a date with yourself once a year. Think of it like a physical. Once a year you know you need to see the doctor. Same mindset, once a year you need to sit down and review all your documents. Make it a date like your birthday, that way you will never forget.
- Letting your significant other handle all the money decisions. If you’re not paying attention to your finances or being part of joint conversations you could be putting your financial future at risk. It’s great when you and your spouse are healthy and everything is good in life, but the reality is that life can throw anyone some speed bumps. Sickness, divorce, or death can come into place. Fix: Protect yourself. Have frequent money chats, be involved in all planning conversations, and know where your money is going and how you can have access to everything you jointly decide to invest in.
- Comparing yourself to others. Keeping up with “The Jones,” won’t get you anywhere except further into debt. You don’t know what goes on behind closed doors and honestly it’s none of your business. Making financial comparisons between your situation and someone else’s isn’t realistic or healthy. Fix: Water your own lawn, don’t worry how the neighbor’s grass grows.
Changing a bad habit is a daily practice. A lifetime of doing the same thing doesn’t change overnight, but starting to take the steps to change the pattern will reward you in so many aspects of life.