Would you like to hold on to more of your money? If so, you’ll have to break bad habits that keep many people poor. Some of the areas discussed below touch on budgeting, credit cards, saving money, smart investing, and buying cars. By correcting the bad money habits discussed in this article, you’ll be on a path to greater riches.
1. Failing to prepare a budget – It doesn’t matter how much money you make, a household budget is needed to keep track of your spending habits and make corrections when you see that a particular category of spending is getting out of hand.
Setting up a budget is easy. Personally, I use Mint.com, which is a free online service. It notifies you when large or questionable expenditures are made from your bank account. And you can analyze your spending habits in a gazillion different ways. There are other great budgeting services and software, but Mint work for me. But if you don’t like putting your personal financial information online, try our simple budget spreadsheet approach discussed here.
Maintaining a budget will also help to ensure small, impulse purchases don’t become a problem. You’d be surprised by how quickly one cup of Starbuck’s coffee per day can add up to real money.
2. Maintaining large credit card balances – The first problem with owing a lot on your credit cards is that if you’re only making the minimum payment, it’s going to take you about 100 years to pay it off. Okay, maybe not that long, but many years for sure. Much of that will be the result of interest charges.
The second problem is that high interest rates on your credit card will balloon your outstanding balances even faster. If you combine this with only making minimum payments, you’re never going to get out of debt.
So here’s what I want you to do if you’re also putting money into investment accounts. Jot down the interest rates on your credit cards. Then compare those rates to the annual percentages you’re earning on your investments. If your credit card rates are higher, then shift more planned investment money toward paying off your credit cards. It doesn’t make since to earn 8% on your investments while paying the credit card company 15%. See the math? Also consider this strategy for paying off debts faster.
3. Not saving – If you don’t establish a mindset of paying yourself first, you’re never going to build wealth. At the beginning of every year, you should decide how much of your income you’ll put into your saving and investment accounts. If you have no idea how much to save, start with 10% of your annual salary and gradually increase it to 15% or more.
Then do the necessary things to make sure you stick with that savings strategy. The best way to is have money directed automatically into places such as your 401k account. And get in the habit or writing a check every two weeks or a month to other savings and investment accounts. Treat this process like would with paying your monthly bills.
4. Failing to create an IRA (Individual Retirement Account) – An IRA is a retirement investment vehicle that was created by the government to entice you to put away more money for your retirement years. But many people fail to create one because they either don’t understand how it works or think it’s too complicated. The two most popular IRAs are Traditional and Roth. Both allow you to save money while at the same providing favorable tax consequences. If you don’t set one up, you’re missing out on a great way to grow your wealth over the long term.
With an IRA, you can investment in mutual funds, stocks, real estate, and just about any type of investment. These investments can earn and accumulate profits over time that will be available to you later in life.
5. Purchasing new cars – Many people don’t realize that cars are not investments. There’s an old adage that goes, “The value of new car drops by 20% as soon as you drive it off the dealer’s lot.” It’s a statement that makes you laugh out loud, but it’s also true.
Think about this scenario. You purchase a new car for $25,000. A month later it’s worth around $20,000. That’s five grand down the drain just for the pleasure of experiencing that new car smell. Wouldn’t you rather go with a used car and hold on to that $5,000?
I love cars and I drive a pretty nice one. But I would never buy one new. There’s just too many great used car deals out there, and you can put the extra money into an IRA.
6. Ignoring 401k matching – Most (but not all) employers offer a 401k retirement plan or something similar. For your organization it might be called a 403b, 457 plan. They all share common features.
One of the best features is that when you contribute to the plan, your company will match that contribution up to a certain amount or percentage. In effect, they are giving you free money. So why would anyone turn down free money? Believe it or not, a lot of people do. I hope you aren’t part of that crowd.
Now that you know some of the biggest impediments to building wealth, you’ll probably break these bad money habits. Specifically, I hope that you create a household budget, keep your credit card balances low, commit to saving a certain amount of your income every month, invest in and IRA and your company’s 401k, and never ever buy new cars. So take action and incorporate these ideas into your blueprint for achieving financial freedom.