bad money habits
Updated October 08, 2021

4 Bad Money Habits You Need to Quit Immediately

Building Wealth

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It’s easy to develop bad money habits, but it can be difficult to address problems with your outlook. Even seemingly minor changes can have an ongoing effect on your financial situation.

Awareness is the first step toward improving your money habits.

This article will cover some of the most common bad habits that prevent people from achieving their financial goals. Keep in mind that it’s easier to stick to small, gradual changes—don’t expect to transform your entire financial outlook overnight.

Not Keeping a Budget

Why It’s Bad: It’s extremely difficult to identify bad spending habits without a clear budget.

How to Quit: Look for an approach you can commit to. If you’re having trouble staying motivated, ask a friend or relative to act as an accountability partner.

How Much It Costs You: Most people will save at least (bare minimum) $100 after creating a budget.

Maintaining a budget can be a harsh adjustment at first, and people often avoid budgeting due to money-related anxieties. That said, budgeting is the best way to monitor your money, manage spending levels, and reach your savings targets.

There’s nothing wrong with keeping a paper budget, but budgeting apps and websites have made the process significantly more accessible. Mint, for example, allows users to develop personalized budgets, improve their credit scores, and receive reminders when bills are due.

Most budgeting apps categorize transactions, letting you see how much you spend on different things. For the first few months, start with attainable goals in one or two categories.

For example, if you currently spend an average of $250 per month at restaurants, you could try to cut back to $200. You can always adjust your targets later on.

Everyone has unique spending habits, but budgeting can help almost anyone save a substantial amount of money. YNAB, for example, claims that new users save an average of $600 in the first two months and $6,000 in the first year.

Many people will save hundreds of dollars per month after creating a budget, but how much you save through budgeting is ultimately up to you. Some people eventually move to a more minimalist lifestyle, while others are content with cutting down on a few bad habits.

Putting Off Retirement Savings

Why It’s Bad: Tax-advantaged retirement accounts have annual contributions limits, and compound interest makes early investments more valuable.

How to Quit: Open an IRA or 401(k) right now and start contributing a small percentage of your paycheck.

How Much It Costs You: The tax benefits of retirement accounts can add up to hundreds or even thousands of dollars per year.

Retirement might seem far away when you’re in your 20s or 30s, but it’s never too early to start preparing for the future. Tax-advantaged retirement accounts like 401(k)s and IRAs have strict annual contribution limits, so you can’t always make up for lost time.

Furthermore, investments generally outpace inflation by a significant margin, so investing sooner gives your money more time to grow. Social security, pensions, and other retirement benefits are no longer enough for more people, so it’s important to start investing for retirement at a young age.

The SEC’s compound interest calculator is a great way to estimate either short- or long-term investment outcomes. For example, contributing $500 per month for 40 years (a total of $240,000) leads to an overall value of just above $1 million at a return of 6%.

On the other hand, investing the same $240,000 in half the time cuts the total to less than $500,000.

Retirement Accounts

401(k)s and IRAs (Individual Retirement Accounts) are the most common retirement accounts.

Both accounts come in both Standard and Roth variants. The 2020 contribution limits are $19,500 for 401(k)s and $6,000 for IRAs.

Contributions to Standard 401(k)s and IRAs can be deducted from your taxable income, substantially reducing your tax burden.

For example, if you earned $35,000 and contributed $5,000 to a retirement account in 2019, you would only owe federal income tax on $30,000. Withdrawals from these accounts in retirement are taxed as regular income.

Roth accounts, on the other hand, tax contributions but allow for tax-free growth and withdrawals. With that in mind, they’re usually a better option if you expect to be in a higher tax bracket during retirement than you are now.

IRA contributions for 2019 can be made up until you file your taxes, while 401(k) contributions are typically taxed for that calendar year. If you open an IRA today, you can still take advantage of the benefits this year as long as you haven’t filed your.

Employer Matches

Some companies offer full or partial matches on 401(k) contributions up to a certain limit. These programs are designed to encourage employees to save for retirement.

If your employer matches your first $2,500 at 50%, you’ll end up with $3,750.

Employer matches provide an immediate return on investment, and they’re a great way to jump-start your retirement portfolio. It’s almost always a good idea to contribute enough to receive the entire match.

Timing the Market

Why It’s Bad: Time in the market almost always beats timing the market—you’ll end up losing money while you wait for the perfect time to buy.

How to Quit: For long-term investments like retirement, use dollar cost averaging and don’t worry too much about fluctuations or market conditions.

How Much It Costs You: Trying to time the market for your entire career could end up losing you thousands or tens of thousands of dollars.

Timing the market involves buying when stocks are low and selling when they’re high. It offers an intuitive appeal—perfectly timing the market would allow you to take advantage of gains without being affected by losses.

On the other hand, perfectly timing the market is easier said than done.

In practice, increasing your overall return by timing the market is virtually impossible. Of course, it might work out on a few isolated occasions, but market conditions are notoriously unpredictable.

If you keep waiting for the market to drop, you’ll miss out on consistent gains and end up with less money when you retire.

Numerous studies have found that market timing is unsustainable over long periods of time. Dollar cost averaging is a more reliable strategy, especially for retirement and other long-term investments.

Rather than holding money to invest at the right moment, invest the same percentage of each paycheck.

Keep in mind that you probably won’t be withdrawing from retirement accounts until age 59.5 or later (the minimum distribution age for penalty-free withdrawals from IRAs and 401(k)s).

There’s no reason to worry about short-term losses in your 20s, 30s, or 40s. You can start putting more money in bonds to mitigate risk as you approach retirement.

Carrying a Credit Card Balance

Why It’s Bad: Credit card interest compounds quickly, making it more and more difficult to pay down the original balance.

How to Quit: Avoid going further into debt if possible, and try to make more than the minimum payment. If you’re having trouble, consider a debt consolidation loan or balance transfer credit card.

How Much It Costs You: Varies depending on your interest rate and the size of your balance. At an APR of 20%, you’ll accumulate nearly $5,000 in interest over two years on a balance of $10,000.

Debt can make it difficult to achieve your financial goals, and credit cards generally come with extremely high interest rates. In fact, interest rates usually range from roughly 15 to 25 percent depending on the card in question.

At 20% APR, a balance of $5,000 will increase by over $1,000 in just one year. Given its rapid growth, credit card debt should be one of your top financial priorities.

Debt consolidation loans and balance-transfer credit cards are two of the most effective ways to get out of credit card debt.

Debt Consolidation Loans

Debt consolidation loans offer a set amount of money upfront, which you gradually pay back in regular installments. They usually come with much lower interest rates than credit cards, helping you reduce interest and get out of debt for less money.

Balance-transfer Credit Cards

Many credit card providers offer cards specifically designed for balance transfers. Balance-transfer cards generally come with a fee of around 3 to 5 percent along with an introductory period with no APR.

If your balance is currently $5,000, for example, a 3 percent fee would cost $150. On the other hand, that debt would grow by more than $1,000 in a single year at 20% APR.

You would save over $900 by transferring the balance to a card with 12 months interest-free and paying it off by the end of the introductory period.

Taking a hard look at your finances might sound overwhelming, but adjusting just one or two bad money habits will help you save significantly more money every month. These are just a few of the most common issues that hold people back from sustainable financial success.


Logan Allec, CPA

Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.

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