10 Money Habits Getting You Into Debt And How To Break Them
A little debt would not hurt, will it? That is how it starts. You make a small purchase on your credit card, and over time, without you realizing it, you’re thousands of dollars (or RM) in debt.
To stay out of debt, it is important to identify the habits that got you into debt in the first place. Herein I share;
10 Bad Money Habits and How To Break Them.
#1. You assume you’ll make more money later on
You assume you will get a better job, earn a better bonus or increment, or get big clients. Then you rack your credit card.
But, one lesson the pandemic taught us is that our income sources are not as secure as we thought. Many businesses have been hit hard, and employees get pay cuts.
What you can do:
Don’t make assumptions. Look at the true reality in front of you. If you want to buy something, save for it till you can afford it.
#2. You’re an impulse spender
You see something; you want it, and you buy it.
You see a sale; you are attracted to big discounts, and you buy it.
Now everything is a click of a mouse or a tap of the phone. You get what you want. If you are not careful enough, this habit will cause you debt.
What you can do:
Create a 14-day rule. Take a photo of the item you want to buy and the shop's name, and wait for 14 days. Then after, you decide whether to buy it or not.
#3. You don’t think “the worst is going to happen."
No one wants to think something bad is going to happen. So they spend as they earn. But, in life, things do go wrong.
House to repair, car breakdown, job loss, etc. If you don’t have savings, you will most likely use credit cards for help.
What you can do:
Start savings 10% of your monthly income into an emergency fund. Even if you cannot do that, save a little each month (perhaps $200). It’s still better than nothing.
Simple steps to build your emergency fund;
1. Save $ 1000 as a start
2. Set aside 5-10% of monthly income into emergency savings
3. Build until it covers three to six months of your household expenses.
An emergency fund will prepare you for unexpected situations, such as a major car breakdown, loss of a job, salary pay cut, etc, without going back into debt.
#4. You rationalize your purchase
Many people know that bad spending habits will negatively impact their finances. But still, they rationalize the bad purchase as useful and necessary.
They feel they deserve to spend as they have worked hard for the money.
What you can do:
Before planning a trip or purchasing right away, check your current financial situation. Is this a need or a want? Can I buy this by saving money instead of using credit?
#5. You don’t budget or Keep track of your money
Many people don’t budget because they think it’s difficult, boring, and unnecessary. But if you don’t make an effort to budget, you’ll have no idea where your money goes month after month.
When you don’t track your expenses, you might spend on autopilot. It could be daily Starbucks, or a $180/month gym membership you never use, etc. Spending on autopilot can be a huge drain on your finance.
What you can do:
Create a budget for your monthly income. An ideal budget is as below. From your total monthly income :
a. 60% is allocated for Necessities.
All expenses that you commit in a month.
ie. House loans, car loans, food, transport, utility bills, credit cards payment, etc.
b. 20% is allocated for Savings.
ie. Emergency (10%) and Long-term needs (10%)
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c. 20% is allocated for Others.
I recommend Lifestyle (10%), Personal growth (5%) and Charity (5%).
ie. new clothes, good dining, outings with family, training, books, giving money to parents, infaq, etc.
#6. You use a credit card the wrong way
A credit card is not a reason you’re in debt. If you use it correctly, a credit card can be an advantage. Plus, using the credit card in a smart way can earn you cashback or other types of rewards.
However, it can cause debt if you use a credit card wrongly, as below;
a) Only make a minimum payment
b) Use the credit card to buy things you cannot afford
What you can do:
Use your credit card responsibly. One way is to cap your credit card value. Ideally, you should pay in full. But, if you can’t do it, try to cap at a certain limit.
Example:
You set the limit at $ 3,000. So if the balance has exceeded $ 3,000, try to pay as much as you can to reduce the balance to the target you set.
#7. You try to keep up with others
You will save a lot of money not paying for brand names.
Some people are killing their net worth due to financial peer pressure. They spend more time and money trying to keep up with others than appreciating what they have.
We buy things we don't need, with money we don't have, to impress people we don't like - Fight Club
What you can do:
You don’t need a brand new car just because your neighbour or coworker got one. You don’t need to spend money on designer clothes or bags simply want to impress on social media.
Learn to enjoy the money that you earn by spending properly and reasonably.
#8. You spend more than your income
Logically, spending $3000 each month is impossible when your salary is $2500. But, somehow, it can be for some people. Borrowing from others, using credit cards, etc, are ways to spend money you don’t have.
What you can do
Start earning more. Earning more is a good habit.
After paying your monthly commitment, you don’t have much left to save money each month; then it is time to increase your income.
Ideas to increase income:
· Ask for a raise
· Look for a new job
· Upgrade your skills
#9. You use credit when you have cash
Using a credit card instead of cash for ordinary purchases is a bad habit, especially when you don’t pay your credit bills in full every month.
What you can do:
You must be willing to pay for what you want with the money you have earned. You should use cash or a debit card to make everyday purchases like groceries, petrol, utilities, dining, etc.
#10. You use debt to pay off debt
When you take another loan to pay off the loans, or use a credit card to pay off other cards, then you are not paying off anything. You’re just shuffling your debt around and incurring more debt each time.
When you do a home refinance or loan consolidation (via home loan), you will incur an additional cost of 10 -12% of the loan amount. Ie from legal fees, MRTA, valuation fees, etc.
What you can do:
Prioritize eliminating your debts instead of considering refinance or debt consolidation. There are many ways to reduce debt faster.
Conclusion
“Being in debt is hard. Being financially disciplined is hard.
But we can choose our hard.” – Swish Goswami.