With the high cost of living and economic uncertainty in the world, there’s no better time than now to take a good look at your finances — particularly your spending habits — and make some changes. This might not be the most exciting or fun thing you’ve ever done, but it’s vital to ensuring that you don’t ruin your financial stability or well-being.
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But what if you don’t know where to start?
This is a common concern people have when it comes to their finances. Even if you have a monthly household budget or an emergency savings fund, you might not immediately find the solution. You could be wasting money and never even know why or how.
But if you’re ready to cut down on excess spending and get your finances back on track, you need to know which habits are causing the most financial strain. These are some of the most wasteful financial habits you might have that could have a significant negative impact on your financial health.
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Paying for Unnecessary Insurance Policies
You might already know you’re paying too much for insurance, and that’s something you might be able to negotiate with your insurance provider. But many people pay for insurance they don’t even need or use. This is not only wasteful, but it can hurt your overall finances.
“One issue I often see is [people] spending too much on insurance they don’t need,” said Malcolm Ferrante, the head of the Investment Migration Unit at CSB Group who also is an expert in international finance, investments and taxation.
“It’s smart to be protected, but some policies cover things you may not use,” Ferrante added. “That extra cash could be better spent elsewhere. I usually tell people to think carefully about only what they truly require.”
If you have multiple types of insurance, evaluate them and cancel the policies you don’t need. For example, do you have children’s life insurance or identity theft insurance? These could be useful, but only in select cases.
And what about rental car insurance or collision insurance? The former is redundant if you already have auto insurance that covers rentals. The latter could be extraneous if the vehicle it’s for isn’t worth much in the first place.
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Relying on Debt To Fund Your Lifestyle
It’s no surprise that debt can lead to some serious financial difficulties, but people still commonly rely on it to fund their lifestyle choices. This can be especially problematic if that debt starts racking up or if you’re not able to pay off your balance every month.
“For most people in the U.S., relying on debt is probably the most wasteful habit,” said Jay Zigmont, Ph.D., CFP and founder of Childfree Wealth. “With credit card rates currently being over 20%, using them and not paying them off each month can cost thousands. Payday loans and other debt can be even more expensive than credit cards.”
If you’re using debt to pay for your lifestyle, you might want to re-evaluate your spending habits and cut back on a few things.
Rewarding Your Children Out of Guilt
Having kids can bring a lot of joy to your life, but certain financial habits can hurt your financial well-being.
“Taking your kids out as a reward to reduce your guilt about your living situation or because you work long hours can strain your budget financially. It may reduce your guilt and create memories, but there are also downsides,” said Annette Harris, owner at Harris Financial Coaching.
For example, Harris said, taking your kids out on extravagant vacations or outings can quickly add up. If you’re spending money to try to alleviate your own guilt about something — like not being around as much as you’d like — you could end up spending money you simply don’t have.
If you’re not careful, these spending habits can lead to greater financial hardship later, like drained savings accounts or credit card debt.
Relying on the Power of Refinancing
Refinancing a mortgage loan isn’t necessarily a bad thing. But it can be detrimental to your finances if you don’t consider the true costs of doing so.
When you refinance a loan, you may be able to get a lower interest rate and reduced monthly payments. But you also could be resetting the loan term and keeping yourself in debt for longer.
Not only that but refinancing a loan comes with its own fees. Depending on the changes to the loan’s term and rate, you could end up spending more money than you expected. You also might have a harder time breaking even on your loan if you refinance too often.
Paying Too Much for Your Car
Buying that luxury vehicle might seem like a good idea right now, but it can cost you a great deal of money.
“It is usually the bigger consumption decisions that do the most damage to our finances,” said Brian Preston, CFP, CPA and author of “Millionaire Mission.” “For example, a large auto loan is a wealth destroyer.”
Preston gave the following example to illustrate this point:
“Consider this: For a 30-year-old consumer, every $15,000 of additional car loan could cost your future retired self $250,000 when you compare what your money could do for you if you were to invest that amount instead, assuming 8% return on investments. Remember this the next time the car salesperson tries to convince you that it is only $250 more a month.”
One way to fix this wasteful habit is to keep your car payment low — or to buy the vehicle in cash.
“If you can’t pay cash for a car, I recommend following my 20/3/8 car rule. You should put 20% down, you should be able to pay it off in three years or less, and your car payment should be no more than 8% of your income,” Preston said. “This will ensure that you’re getting a reliable vehicle without getting yourself into a financial mess.”
Paying Only the Minimum Due
Having credit cards isn’t always a problem. After all, they can be helpful in a pinch. You can also use them to build credit. And if you’re savvy with the way their rewards systems work, you could even benefit from using them.
But if you’re carrying credit card debt every month, you’re very likely hurting your finances.
“Unfortunately, the majority of people aren’t paying their credit cards off every month, and it costs them hundreds, sometimes thousands, of dollars per year,” Preston said. “Just like compounding interest will grow your army of dollar bills over time, compounding debt will destroy it.”
Many people indulge in a splurge here and there, but the problem is when they start compulsively impulse buying.
Impulse buying is essentially when you purchase something that you neither needed nor necessarily wanted. You simply get it, either because it appealed to you in the moment or because you were influenced by clever marketing or promotions.
But when you impulse buy, you also quickly start increasing your monthly spending. This is true whether you buy many small items or a few big-ticket items.
“Impulse buying is particularly insidious because of its cumulative effect; while each purchase might seem inconsequential at the time, they can collectively lead to a significant financial drain,” said Liam Hunt, director at SophisticatedInvestor.com. “Plus, impulse buying can also lead to clutter and waste, as many impulsively bought items are quickly discarded or forgotten.”
The next time you go shopping, think twice before adding something to your cart. If you don’t really need it, the purchase could be a waste of money.
Neglecting Your Financial Education
If you’ve been neglecting your financial education, you could be hurting yourself financially and not even know it.
“A lack of financial literacy is a silent budget killer. Many individuals fail to educate themselves on basic financial principles, such as budgeting, investing or understanding taxes,” said Jake Claver, a qualified family office professional and the CEO of Syndicately, an online investment platform. “This ignorance can lead to poor financial decisions, such as high-fee investments or tax inefficiencies, which can significantly eat into one’s savings.”
Not Knowing Where Your Money Is Going
You don’t necessarily have to budget for every nickel and dime. But if you don’t understand your own financial habits, or spending triggers, you could be setting yourself up for some serious financial issues down the line.
“The most important thing I can suggest is to figure out where your money is going,” said Dr. Kate Mielitz, an accredited financial counselor and AFC program manager for Beyond Finance. “Do you spend more frivolously when you are stressed? Are you more likely to eat out if you are tired? Figure out where your money is going and trim back on things that aren’t absolutely imperative.”
You don’t have to do it alone either. You can get a small support team around you to help.
“Let your friends and family know so that they can support you,” Mielitz said. “Whatever financial goals you set, make them SMART — Specific, Measurable, Action-oriented, Realistic and Timely.”
And whatever else, don’t compare your goals or finances to others.
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This article originally appeared on GOBankingRates.com: 9 Wasteful Habits That Could Destroy Your Finances
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