Some bad habits affect our physical health, like smoking, nail biting or eating too much junk food. But others take a toll on our financial health.
How do you know if you have unhealthy financial habits, and what can you do to build better ones? Take these three steps.
1. Dig into your relationship with money
Relationships with money are complex. It isn’t always easy to identify financially unhealthy behavior. But there are some signs you can look for. Common problem areas include spending more money than you earn, neglecting to start an emergency fund and not saving for retirement.
Taking a financial health quiz can be a good first step toward detecting weak spots. However, our struggles don’t always reflect poor habits or decision-making. Many experts say it’s important to consider the role that systemic issues can play in shaping financial health.
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“Not being able to get a living wage, not having medical insurance, having student loans in a career that you can’t find a job. The fact that there’s nowhere in this country that someone who is living on minimum wage can rent a two-bedroom apartment . Those are all systemic issues,” says Saundra Davis , founder of Sage Financial Solutions, a San Francisco Bay Area-based organization focused on providing financial services for low-wealth communities.
If you’re dealing with these kinds of systemic problems, focus on finding support. United Way’s 211 service can connect you with resources if you’re struggling to pay bills or afford basic needs.
On the other hand, if your income should be enough to cover your expenses but doesn’t, that’s when you should look at your behavior, Davis says. What choices are you regularly making, and what do you have the power to control?
Look for patterns. Maybe you shop online when you’re bored or upset. Or you ignore your debt because it’s overwhelming. Maybe you tend to spend windfalls instead of using the money intentionally because your family didn’t emphasize the importance of saving growing up.
Emotions and experiences can have a major impact on our money habits. That’s why it’s also possible to develop unhealthy habits if you’re in good financial shape. For example, a person who pays all their bills on time and has plenty of savings might still feel anxiety around spending or argue about money with a partner.
“Often there’s that history of financial scarcity and loss somewhere in their background that’s unresolved that leads them to not be able to fully connect with the fact that they’re actually financially secure now,” says Ed Coambs, a certified financial planner and financial therapist in Charlotte, North Carolina.
Once you better understand what’s behind your unhealthy habits, you can begin to repair them.
2. Set personal goals
Ask yourself, “Where are you trying to go? And where are you right now? And then how do you bridge that gap?” Davis says.
Setting financial goals can put you on the path toward healthier habits. Your goals can revolve around specific dollar amounts, such as becoming debt-free or saving three months’ worth of expenses in an emergency fund, Davis says. Or, the goal might be about changing your money mindset, such as becoming more thoughtful about your spending or getting comfortable discussing money with others.
Create a plan that supports your vision of financial health. Say you want to boost your emergency savings or make credit card payments on time. Automating those transactions can help. You can transfer a specific amount from your checking account to savings each month or set up minimum credit card payments through your issuer’s website.
Coambs suggests checking in on your finances once a month or every couple of months. Review your budget and behavior to determine whether you’re on track to reach your goals.
3. Lean on resources
Breaking financial habits can be challenging. But you don’t have to do it on your own. There are people and activities you can turn to, “whether it’s journaling or having a conversation with your partner or some other mode of helping yourself feel safe again around the topic of money,” Coambs says.
There are also many professionals who can offer guidance. A financial therapist, for example, can help you unpack your money relationships.
“All of us have a money history. And if your money history is one where there’s a lot of emotional pain and chaos connected with money, then oftentimes those issues in your past need to be treated much like any other type of trauma,” Coambs says.
You may also choose to work with a financial planner or seek free advice on managing your budget, credit or debt from a nonprofit credit counseling agency.
Along your journey to improving your financial habits, learn to advocate for yourself, Davis says. “What that can do is reduce or eliminate shame, about going to get help wherever you might need it. If that means public benefits, if that means family and friends, whatever that means to you,” she says.
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Automate everything
You can’t forget to save if it’s automated. Whether it’s your 401(k) contribution taken pretax from your salary, or automatic transfers from your checking account into a savings account or money market account, automating will help you save without even thinking about it.
Lauren Zangardi Haynes, CIMA, certified financial planner at Spark Financial Advisors, says your employer may be able to also split your paycheck so it goes into both your checking account and a savings account.
“And then you can automatically transfer that money to an investment account, or to an IRA, or to a Roth IRA,” Zangardi Haynes says.
Evaluate your banking
Review your savings account to make sure that you’re earning a competitive annual percentage yield, or APY.
It’s going to be difficult to keep up with inflation. But a high-yield savings account at a competitive bank is your best option for an emergency fund or other cash you might need on short notice.
Also, take a look at your checking account. If you’re incurring a monthly maintenance fee for going under a required minimum balance, you should be able to find a way to avoid that – whether through a low minimum balance checking account or by having a recurring direct deposit.
Compare savings accounts and checking accounts to make sure you’re maximizing yields and minimizing fees.
Attack your debt
If you have debt, make paying it off a priority. The interest you’re paying on a credit card is likely a lot more than what you’re earning on a savings account.
“If you have any credit card debt, you need to pay that off immediately without even considering anything else,” says Amy Hubble, CFA, certified financial planner at Radix Financial LLC.
The average purchase APR for all credit cards was around 16%, according to Bankrate data. Don’t count on credit card rates moving much lower. And they could move higher this year with the Fed planning on raising rates three times in 2022.
Paying off your debt and not running a balance are the only sure ways to avoid paying credit card interest.
Maximize your cash back
When you make your purchases, make sure you’re being rewarded for them with cash back.
Weigh whether you’d be better off earning more cash back with a credit card that has an annual fee but higher cash-back rewards, or a no-annual-fee card that has a lower cash-back percentage.
Most bank debit cards don’t let you earn cash back. So in most cases, using a credit card for purchases is going to help you save money throughout the year. Credit card companies will often let you apply cash back toward your balance or some may let you directly transfer it to your checking account.
There’s more to it than just choosing the right card.
Credit card shopping portals are also places where you can potentially maximize your cash back. By going through your credit card’s website or through a site such as Rakuten, you can earn cash back in addition to what you earn on your cash-back credit card.
Evaluate your budget
Check that you’re not overpaying or paying for monthly items that aren’t being used. Go through your budget — or monthly expenses if you don’t have a budget.
It’s easy to start a budget, and it can help you maximize your savings. See if there are areas of opportunity, such as cutting back on dining out or on coffee or other spending, that adds up over time. Also, go through your budget and try to renegotiate items, Crystal Rau, certified financial planner at Beyond Balanced Financial Planning, says.
“I check our insurance just to make sure we’re still getting the best rate for the coverages that we’re carrying,” Rau says. “It’s just about doing a reset every year, just to make sure you’re getting the best deal and you’re taking advantage of all those things that are offered to you.”
Review employee benefits
You may be able to adjust some employee benefits options outside of open enrollment, such as how much you contribute to your employer-sponsored retirement plan, like a 401(k).
Adjusting your withholding for taxes or how much you’re putting away for retirement — which may reduce your taxable income — is a way to potentially save money, Rau says. Consult with a tax adviser to make sure that your strategy makes sense to save money on taxes.
