When times are tough, as they are for millions of Americans, it’s all too easy to fall into bad money habits that can be helpful in the short term, but devastating in the long run. And now as the world reopens, we might be succumbing to a particularly dangerous tendency: comparing ourselves to those spending on epic vacations, new homes and other fantastic luxuries.
But don’t beat yourself up. Comparing ourselves to others is human nature.
“Back in 1954, psychologist Leon Festinger proposed that in order for people to fulfill the basic human behavior of self-evaluation, they end up comparing themselves to others,” said James Lambridis, CEO, DebtMd. “This is known as ‘social comparison theory’. Humans are constantly evaluating themselves against others across all facets of life, including wealth, intelligence and success.”
While it’s perfectly normal to have a “keeping up with the Joneses” mentality, it’s problematic for your financial health (and your mental health!). Here’s a look at 10 other bad financial habits — and how to break them.
1. Social Media Binging
“We live in an age of maximum visibility through social media, where everyone knows what everyone else is doing at all times,” said Lambridis. “Your old high school classmate just bought a shiny new BMW and posted it on Facebook. Now, you look at your 10-year-old Honda Civic and think maybe you deserve a ‘better’ car. Your ex-girlfriend posted an Instagram selfie on a Caribbean beach holding a coconut cocktail with the hashtag #thelife.”
At root, this is a part of the social comparison theory, but in 1954, psychologist Festinger probably didn’t anticipate the advent of social media, and the technologically advanced way we’d be able to glimpse into one another’s lives. The hack to breaking this habit is to limit your social media use, or at least, go into your scrolling with a hefty heap of salt: Nothing is as it seems, and hashtags never tell the full story.
Related: 30 Ways To Dig Yourself Out of Debt
2. Traveling With (Wealthier) Friends
“Traveling with friends who have different budgets can cause you to spend more on a vacation than you can afford,” said Annette Harris, owner of Harris Financial Coaching. “It also leads individuals to pay for their vacation using credit cards. It’s not always wrong to use a credit card to pay for a vacation if you can afford it, but it may cause you to pay more than the vacation is worth when interest is considered. Purchases such as food, drinks and souvenirs can add up, and if you try to keep up with your friends, you can end up breaking the bank.”
To remedy this issue, Harris suggests planning for vacations at least six months to a year in advance so that you can establish a vacation budget.
3. Making Impulse Purchases
Big-box retailers and online giants like Amazon aren’t just banking on us visiting them to buy only what we need; they’re banking on us grabbing last-minute items and impulse purchases.
“The most typical example (of impulse buying) is when you’re grocery shopping or going to Target,” said Amir Hemmat, co-founder and CEO of Welcome Tech. “You go there for a couple items and then walk out with 20-plus more items than you anticipated because of sales or visual attraction to items and goods.”
A better habit is to go in with a list and stick to what you need — and to never shop with a ramped-up appetite.
“Know what you want to buy before you go shopping, and don’t buy anything that’s not on the list,” said Hemmat. “Don’t grocery shop hungry. If you see something you think you need or want, write it down on another list, and then think it over for at least 24 hours before making the purchase. Ask yourself: ‘Do I really need this?’”
4. Paying For Insurance Monthly
“As someone who used to work in the insurance industry, I can tell you that insurance companies make a lot of money on fees,” said David Peters, a financial advisor. “One that gets frequently overlooked is admin fees that the insurance company charges for making more frequent payments (sometimes called installment fees). While most people don’t think of a few dollars each payment as being much, it adds up.”
The better habit is to pay for insurance as frequently as you can afford.
“Most insurance policies renew once every six months or a year,” said Peters. “If you pay for everything all at once (rather than in installments), you can save yourself a lot in fees. It is a big number all at once – but if you save what you would pay monthly (put in savings, money market funds, interest bearing checking account, etc.), you will have the money when the time comes.
5. Entering Into Financing Plans for a New Cell Phone
“When you buy a new cell phone, often people will just put the least amount of money down possible — $500 or whatever,” said Peters. “They tend not to realize that part of the reason they are locked into a two-year agreement is that they are paying back the remaining cost of the phone. Essentially, it is a loan that many people don’t even realize they are in.”
It’s a pain, but it’s better to pay for your phone in full.
“If you are currently in a two-year payment agreement, pay it down early,” said Peters.
6. Buying Into a ‘YOLO’ Mentality
As far as we scientifically know, we only live once, which should be a beautiful reminder to never take advantage of what we have today, and to appreciate each and every moment. Unfortunately this philosophical guiding principle has been distorted into the icky acronym “YOLO.” You may find yourself encouraging a splurge because, hey, YOLO!
“A ‘YOLO’ mentality sounds good but when you really consider the odds of a healthy person in their 20s, they have a high probability of living until their late 80s,” said Thanasi Panagiotakopoulos, principal at LifeManaged.
“This means that they shoulder their own burden to maintain their cost of living in their 80s. On the bright side, time is on their side! Using the rule of 72 math (at a 7.2% projected return your money will double every 10 years) a 25-year-old who can manage to save and invest $10,000, ONE TIME, will have $160,000 at age 75. If you save $10,000 from 25-30 per annum, then by age 80 there will be $800,000 waiting for you, just by saving $50,000 over five years and never saving another dollar.”
7. Buying Into a ‘FOMO’ Mentality
YOLO’s evil stepbrother, FOMO (Fear Of Missing Out), is alive and well in our society, and it can be just as damaging as YOLO — if you don’t budget for it.
“Many people are great at budgeting and spending their money wisely until they get invited somewhere and FOMO takes over,” said Howard Dvorkin, CEO of Debt.com. “In most cases, FOMO requires people to spend money they didn’t plan on spending, all so they can make the group photo. The more active your friend group is, the more you can find yourself paying to be included. It can be hard to say no to friends, especially when you’re someone who loves to be included.”
Dvorkin suggests budgeting for FOMO and saying yes to the activities that you genuinely want to do.
“Also, be the voice of free — when the group is making plans, suggest free things you can all do together,” Dvorkin said.
8. Purchasing a Home as a Liability Rather Than an Asset
“In today’s competitive housing market, people are getting into bidding wars and paying over-appraised values for homes,” said Erik Wright, personal finance blogger with The Real Life Investor Couple and owner of New Horizon Home Buyers. “Many are stretching their budget to the maximum they can afford. This can put a person in financial strain because they are now locked into this large monthly mortgage payment. In most cases, a person would have to live in a home for several years before they could even sell it and break even because of closing costs and realtor fees. So for the first few years of owning a home, a person is actually upside down. In this type of scenario, it is much more a liability than an asset.”
Here are a few ways to treat a home purchase more like an asset, according to Wright:
- Purchase a home that can also produce income. This could be a multi-unit property that you rent out, or a mother-in-law suite to list on Airbnb. Or maybe you can use part of your home to run a business out of.
- Purchase a home that you can increase the value by fixing it up while you live there.
- Purchase a home at a price point that does not put a financial strain on you. Most of that monthly payment goes to interest, taxes and insurance. Only a small percentage is building equity. So, buy a less expensive house and invest the difference to grow your long term wealth.
- Look to buy a home in an area that will most likely appreciate in value faster than the average. Also, avoid areas where homes may seem to be losing value.
Budgeting 101: How To Create a Budget You Can Live With
9. Not Investing Time in a Financial Education
“One of the biggest poor habits I observe is not taking the time to learn about finances. Just like you have to regularly invest time and resources to maintain your physical health, the same goes for your financial health,” said Danetha Doe, financial wellness educator and creator of Money & Mimosas. “In fact, according to the Consumer Financial Protection Bureau, boosting your financial skills through education has a significant impact on your bank account and well-being.”
In order to reduce financial stress and be financially healthy, Doe says that you have to consistently seek out quality education about different money topics. Otherwise you run the risk of finding yourself in predicaments that could have been avoided.
“To get started, you can commit to reading one article about finances on a daily basis. It could be an article about savings, money mindset or investing,” said Doe. “Then, commit to learning about one new topic each month. This could mean buying a book about alternative investing or enrolling in a course about how to build generational wealth. As your knowledge and skills grow, your confidence and bank account will grow too.”
10. Trying To Do Everything at Once
“You might want to build an emergency fund, pay down debt and save for retirement,” said Dylan Pollock, owner and financial coach at R&D Financial Coaching. “But imagine if each one of those goals is a five-gallon bucket you have to fill with water. You could fill them simultaneously one drop at a time or you could focus on filling up the first bucket before moving on to the next.”
“Trying to do everything at once means slow progress, making it easy to feel hopeless and lose motivation,” Pollock continued. “Instead, by focusing on one goal at a time, you will see faster results toward your first goals and that will keep you motivated to continue on to the next.”