It’s a new year and your opportunity for a fresh start. What are your yearly goals? Maybe you vowed to get into shape and drop a few pounds, or perhaps you want to quit smoking. All three are excellent goals. But as you work toward better physical health, don’t ignore your financial health.
Being financially savvy builds your personal wealth, and when you’re ready to get a loan, you’ll probably qualify with no hassles. But if you don’t have a strong understanding of personal finance, you can easily adopt a few bad money habits. Are you in need of a financial makeover? Here are eight bad money habits to break as you enter a new year.
1. Spending more than you earn.
Everyone’s guilty of this at some point in life. You see an item that you want, and despite your financial limitations, you splurge and buy the item. The occasional splurge may not cripple your finances. However, habitually buying things that you cannot afford is a recipe for financial disaster. And when there isn’t enough cash for these purchases, the risk for credit card debt increases.
Living within your means can keep your finances on track and avert money problems. But how do you achieve this? Start with a simple budget. Assess how much you earn each month or week, and then write down all your expenditures. This reveals where your money goes. Next, decide a reasonable amount to spend on extras, such as dining out, entertainment and shopping. The key to staying in budget – only spend what you allocate for each category.
2. Ignoring your retirement
If your retirement is twenty or thirty years in the future, retirement planning might be the last thought on your mind. This is a huge money mistake. The longer you put off retirement planning, the less money you’ll have in your later years. Learn your retirement options now and make moves to start saving this year.
Maybe you can participate in an employee-sponsored 401(k) and contribute a percentage of your income to this retirement account each pay period. Then again, you might open an individual retirement account (IRA) with your bank or a brokerage firm and save on your own.
3. Skipping a financial cushion
How would you handle a major car expense or medical bill? Would you meet this expense with a credit card? Underestimating the importance of an emergency savings is a terrible money move, but one you can easily fix. Even if you don’t have a lot of disposable income, you can save a little each paycheck. Financial experts recommend paying yourself first and saving 10% of your pay. But if this is a stretch, go less and save 5% of your income. With money in the bank, you’re better prepared to handle a financial emergency.
4. Paying only the minimum
Getting sucked into a routine of only paying the minimum on your credit cards will keep you in debt. Your balances will hang over your head for years and you’ll pay a ton of interest. Minimum payments are just that – a minimum. You can’t pay less than this amount, but you can certainly pay more. Not to say you have to drop hundreds of dollars on your debt each month. But if you can afford to pay double or triple your minimum, go higher and pay off the balance quicker.
5. Paying your bills late
Yes, you’re busy and juggling multiple creditors. But this isn’t an excuse to miss payments. This bad habit can ruin your relationship with your creditors, trigger bad credit, as well as result in late fees and higher interest.
Visit your creditors websites and sign up for online account management. The entire process takes less than five minutes, and once you’re enrolled, you’re able to manage your account from any computer. You can schedule payment reminders, set up automated payments and review your account history 24 hours a day.
6. Not understanding your health insurance
Health insurance is expensive, and to keep your cost low, you might go with the cheapest plan. Unfortunately, cheap plans and insufficient coverage go hand-in-hand. Not to say you need the best health plan. But you will need a plan that adequately meets your family’s medical needs. Plus, it pays to fully understand how your coverage works. Don’t just look at price. Is there a plan deductible? What is your office co-pay? Is maternity coverage included? Do you have dental? Declining health riders and paying a higher deductible will lower your monthly premiums, yet raise your yearly out-of-pocket cost.
7. Poor management of extra money
Did your boss surprise you with an annual bonus? Was your tax return higher than expected? Money doesn’t fall into your lap often, and when it does, you might brainstorm the best way to spend your “free” money. But before you spend this cash on things that you don’t need, think of wise uses for the money. A surprise lump sum can provide the help you need to pay off a credit card or build a cushion for a rainy day.