Managing our personal finances should be straightforward, but our habits make it complicated.
My goal for today is to define 5 bad habits that are bad for your personal finance so you can identify whether or not you are doing one or more of these habits. My goal is not to make you feel guilty about it, rather, I want to let you know that there is a way to overcome bad habits and I will teach that on part 2. Before we define these 5 bad habits, I will have to quickly give you a crash course on “budget” and “habit”.
What is a budget?
The definition of a budget is actually simple. It is so simple that it can be express by a simple equation:
income – expense = 0.
In other words, the money that you spend, save and invest should be equal to zero, not net positive or net negative. It should be zero.
One common myth many people believe is the goal of budgeting is to ensure that there is money left from their income month after month. In reality, having excess money piling in their bank doing nothing month after month is as bad as overspending. Again the goal is to ensure that income = expense.
Yes, treat savings and investing as part of your expense and yes, every leftover dollar you have should be put to work.
What is a habit?
According to Google.com, habit is,
“a settled or regular tendency or practice, especially one that is hard to give up”.Google.com
5 Bad Habits That Is Bad For Your Personal Finances
1. The Habit of Comparing Your Wealth to Others
This group tends to buy things simply because they know someone who has just got the latest shiny bright thing and they want one for themselves. When they see their relatives, friends or co-workers bought a new phone, gaming console, make-up, etc. they will have an urge to buy one for themselves even if they absolutely have no need for it. They would be anxious or depressed if they don’t get a model that is equal to or better than their friends or family.
Upgrading your items to the latest models is okay if you are on top of your budget. If you have money left after paying your bills, setting aside for your emergency fund, paying yourself, and giving back to your local church or community then go for it. Buy and indulge yourself because you deserve it. However, if you have to take a loan (e.i. credit card) just to keep up with the Kardashians, then you are in deep water.
Reflect on it. Companies constantly upgrade their products because they need to generate money. If you are playing this comparison trap game, then it will make you happy for a month or so until the next big thing comes out again. When this happens, you will have once again have the urge to get the latest one. Happy for a month or so but it would make you financially stressed over a long time.
2. The Habit of “I Want To Be The Very Best”
Pokemon is a very popular anime and thanks to Pokemon Go, its popularity becomes even greater. Why am I talking about Pokemon? Well, it is because of its opening song lyrics which sings,
“I want to be the very best, like no one ever was”
I guess that mentality is okay coming from a 10 years old boy, so I’ll give him some slack on that. Sure, there is nothing wrong with being the very best on things that you love to do and in fact, I encourage you to become best at what you do. The problem lies when adults apply this mentality to their spending habit. A BIG no no!“
I Want To Be The Very Best” Mentality (IWTBTVB Mentality) is a level up of “The Comparison Trap”. Instead of just wanting to have the same model as the people they know, people with IWTBTVB Mentality want to always be one step ahead of their peers. They want the best phone, the best gaming console, the best car, the best bag, the best make-up, and so on and so forth.
Again, this is okay if you have excess money. Excess money means you have leftovers after doing your financial responsibilities. Unfortunately, many victims of this mentality are already living paycheque to paycheque, so they have to use their credit cards or loans just to have the shiniest things.
Like “The Comparison Trap” people, they gain short-term happiness but they are setting themselves up to fail in the long run. Yes, I understand that growing number of followers, likes on posts, acceptance or people and so on and so forth are addicting and it provides self-validation, but I can promise you that there something greater than showing to people things that you actually do not own (if you buy it using a loan, then it’s your lenders property, not yours).
3. The Habit of Instant Gratification
Millennials are notoriously known as the instant gratification generation or “I want it now” generation! As a millennial, I would defend that it is not our fault. We were trained by the older generation to become this way. TV commercials here and there encourages us to buy items or to subscribe to services because they will satisfy our “needs” right here and right now.
Personal finance-wise, this is a bad thing because relying on loans to purchase items on the spot makes a. things more expensive (~5% to 20% APR) and b. lenders will bite you back in the worst possible moments.
Another disadvantage of the instant gratification mindset is you impulsively buy things that you do not have the money to pay it for. On top of that, you most likely do not need those items so later that week, you will see those things lying around or stored inside your closet or garage. Why?!
4. The Habit of Happy Go Lucky
Well, at least this group do not buy things indiscriminately (I hope). They just go with the flow, buy things that they like but usually don’t put too much effort being on the top.
They generally know their financial situation and most likely will spend less if they know they are broke. They wish they make more money but usually, they will settle for what they have. They generally do not have a budget, emergency fund or retirement. Their goal is to simply have money on their bank and avoid too much debt.
Compared to the first two habits, a happy go lucky habits is definitely better but surely there is a room for improvement.
5. The Habit of Giving More Than You Can
This is a hard one because on the one end, being a generous person is a proper thing to do, but on the other hand, keeping good personal finance must be a responsibility for all.
There are many of you who are generous and likes to help people or to hand out gifts to others. Maybe your reasoning is, “well, I can’t keep this when I die, so might as well share it to other”. This, in fact, is a good thing, but it is still important to have boundaries or margin. What I mean by that is, giving is good but you need to do it within the constraints of your budget.
I know someone who is close to me, and I “admire” her generosity. She works in Canada so you can imagine that she gets paid well compared to people who work in a third world country. She works hard and doesn’t spends her money on extravagant vacations nor things so she can send cash to her nephew who lives in the Philippines so they can go to school. Sadly, that “extra” cash is borrowed money. She doesn’t have a budget thus she often over-commits on how much money she would send. She is nearing her retirement age, but she doesn’t have retirement money saved.
Again, I want to make it clear that helping and being generous to others is good, but please do it within your budget, otherwise, it becomes another bad habit that can ruin your personal finance.
That is it for me wealth-builders! Please note that this list is not comprehensive and I know there are many more bad habits that people do that are bad on their finances. If you identify one or more habit that great! There is no need for you to feel bad about yourself, instead, you need to celebrate because now you know that there is a problem that needs to be solved. Next Time, I will share to you how to replace these habit by learning a better habit.
One more thing before I go. Please share your comments or feedback in the comment section. Did this article added value to your life? If yes, which one affected you positively. In contrast, if you feel the article is no help at all, then please give me some suggestions on how I can better serve you.
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