If you’re a fan of business and investing, you’ve likely heard of Warren Buffett, one of the most successful and respected investors of all time. Buffet’s financial wisdom and success can inspire and guide all looking to improve our financial well-being. This post will delve into some unhealthy money habits that may be holding you back from achieving financial success and provide tips and strategies for developing healthy financial habits. Adopting just a few of Buffet’s money habits allows you to set yourself up for financial success.

10 Money habits that can keep you broke and poor:

  1. Unhealthy money habits
  2. Lack of budgeting
  3. Trying to keep up with the Joneses
  4. Lack of emergency savings
  5. Not tracking your spending habits
  6. Making impulsive purchases
  7. Lack of diversification in your investments
  8. Lack of a financial plan
  9. Paying too much in taxes
  10. Living beyond your means.

1. Unhealthy money habits

Unhealthy money habits are behaviors and practices that negatively impact your financial well-being. These habits may seem small or insignificant on their own, but over time they can add up and prevent you from reaching your financial goals. Some examples of unhealthy money habits include:

    1. Overspending: Spending more money than you can afford, or spending money on unnecessary items, can lead to financial strain and debt. Buffett is naturally frugal and hates to waste money as he sees it as future investing capital.
    2. Not saving: Failing to save money for the future can leave you vulnerable to financial shocks and limit your ability to make important purchases, like buying a home or paying for your child’s education.“If you buy things you do not need, soon you will have to sell things you need.” ― Warren Buffett
    3. Not investing: Not taking advantage of opportunities to invest your money can prevent you from growing your wealth and achieving financial security. Buffett believes it’s crucial to start investing at the youngest age possible to begin the power of compounding.
    4. Not paying bills on time: Incurring late fees and damaging your credit score by not paying bills on time can have long-term negative consequences on your financial well-being. This is the most basic thing to do in personal finance.
    5. Not having a plan: Failing to set financial goals and make a plan to achieve them can make it difficult to make progress toward your financial objectives. Buffett always has a plan for everything in his life.

2. No budget

A budget is a financial plan that outlines your income and expenses. It helps you track your spending, set financial goals, and make informed decisions about allocating your money. Without a budget, it can be easy to overspend and accumulate debt.

The importance of creating a budget:

    1. A budget helps you to understand your financial situation. By tracking your income and expenses, you can see where your money is going and identify areas where you may be able to cut back. People need budgets just like businesses do.
    2. A budget can help you to achieve your financial goals. By setting specific financial goals and allocating your money towards those goals, you can progress towards things like saving for a down payment on a home or paying off debt.
    3. A budget can help you to avoid overspending. By setting limits on your spending and sticking to your budget, you can avoid overspending and the financial problems that can come with it.
    4. A budget can help you to stay on track. By regularly reviewing your budget and adjusting it as needed, you can ensure that you’re on track to meet your financial goals.

3. Keeping up with the Joneses

“Keeping up with the Joneses” refers to comparing oneself to others and trying to match their material possessions or lifestyle. This can lead to financial strain, as you may feel pressure to constantly buy the latest products or afford expensive experiences to keep up with your peers. Warren Buffett still lives in the house he bought in 1958 for $31,000.

The dangers of trying to compete with others financially:

    1. It can lead to overspending and debt. If you’re constantly trying to keep up with others, you may spend more money than you can afford, leading to financial strain and potentially even debt.
    2. It can prevent you from achieving your own financial goals. If you’re focused on trying to match the financial status of others, you may neglect your financial goals and priorities.
    3. It can be emotionally and mentally draining. Constantly feeling like you need to keep up with others can affect your mental health and well-being.

The importance of finding your financial path and not trying to keep up with others:

    1. It allows you to focus on your own financial goals and priorities. By setting your financial goals and focusing on what’s important to you, you can progress toward what matters most.
    2. It can help you to live within your means. By not trying to keep up with others, you can focus on living within your means and avoiding financial strain.
    3. It can lead to greater financial security and stability. By following your financial path and not trying to compete with others, you can build a strong financial foundation that will set you up for success in the long run.

4. No emergency fund

An emergency fund is a savings account set aside specifically for unexpected expenses. It’s an important part of any financial plan, as it can provide a financial cushion in an emergency, such as a job loss or unexpected medical bills. Buffett always believes in having a huge cushion of capital on the balance sheet of Berkshire Hathaway to ensure his insurance business is ready for any emergencies. Great lesson for all of us regarding our finances.

The importance of having an emergency fund:

    1. It can help you to avoid taking on debt. If you don’t have an emergency fund and an unexpected expense arises, you may be forced to rely on credit cards or loans to cover the cost. An emergency fund can help you to avoid this scenario and the financial burden of taking on debt.
    2. It can provide financial security and peace of mind. Knowing that you have an emergency fund to fall back on can provide security and reduce stress in the face of unexpected expenses.
    3. It can help you to weather financial storms. An emergency fund can provide a lifeline during financial difficulties, such as a job loss or unexpected medical bills.

Tips for building an emergency fund:

    1. Set a goal. Determine how much money you want in your emergency fund and plan to save towards that goal.
    2. Start small. If you’re starting to build an emergency fund, don’t try to save too much too soon. Start small and gradually increase your savings over time.
    3. Automate your savings. Consider setting up automatic transfers from your checking account to your emergency fund to make saving easier and more consistent.
    4. Look for opportunities to save. Try to reduce unnecessary expenses and redirect that money toward your emergency fund.
    5. Be patient. Building an emergency fund takes time, but it’s worth it for the peace of mind and the financial security it can provide.

5. Not tracking your spending habits

Tracking your spending refers to keeping track of the money you spend regularly. This can help you to understand where your money is going and identify areas where you may be able to cut back or save. A big key to business success is tracking and managing your expenses; the same applies to our finances.

The importance of tracking your spending:

    1. It helps you to understand your financial situation. By tracking your spending, you can see where your money is going and get a better sense of your financial situation.
    2. It can help you to identify areas for improvement. By analyzing your spending, you may be able to identify areas where you’re overspending and make changes to your habits.
    3. It can help you to reach your financial goals. By understanding your spending habits, you can make a plan to allocate your money toward your financial goals and make progress toward achieving them.
    4. It can help you to avoid overspending and debt. By tracking your spending, you can be more mindful of your purchases and avoid overspending, which can lead to financial strain and debt.

How tracking your spending can help you identify areas where you can save money:

    1. It allows you to see where your money is going. By tracking your spending, you can see exactly where your money is going and identify areas where you may be able to cut back.
    2. It helps you to identify unnecessary expenses. By analyzing your spending, you may be able to identify expenses that are not necessary or that you could cut back on to save money.
    3. It can help you to negotiate better rates. By understanding your spending habits, you may be able to negotiate better rates on things like your bills or insurance, which can save you money in the long run.

6. Impulsive purchases

Impulsive purchases refer to buying something on a whim without fully considering the decision or its potential consequences. While it can be tempting to make impulsive purchases, they can often lead to financial strain and regret. Buffett has no big material desires; his daughter has to make him upgrade his car after he keeps it for too long. Not having urges to buy things is a huge edge in personal finances as it keeps most of your money in your pocket.

The dangers of making impulsive purchases:

    1. They can lead to overspending and debt. Impulsive purchases can add up quickly and may cause you to spend more money than you can afford, leading to financial strain and potentially even debt.
    2. They may not align with your financial goals. If you’re making impulsive purchases without considering your financial goals, you may hinder your progress toward achieving them.
    3. You may regret the purchase later. Impulsive purchases are often made in the heat of the moment and may not be fully thought out. This can lead to regret later on, as you may realize the purchase was not necessary or aligned with your values.

Strategies for avoiding impulsive purchases:

    1. Take a step back. If you’re considering making an impulsive purchase, take a moment to step back and consider whether it’s a wise financial decision.
    2. Sleep on it. If you’re still unsure about a purchase, give yourself time to think it over. You may find that you no longer want the item after a good night’s sleep.
    3. Create a budget. A budget can help you set limits on your spending and make more informed decisions about allocating your money.
    4. Use a shopping list. Before you go shopping, make a list of the items you need and stick to them. This can help you to avoid impulsive purchases.
    5. Avoid shopping when you’re feeling emotional. Emotions can cloud your judgment and make you more prone to making impulsive purchases. Try to avoid shopping when your emotions are running high.

7. No diversification

Diversification refers to the practice of spreading your investments across a variety of asset classes to spread risk and potentially maximize returns. By diversifying your investments, you can help to reduce the impact of potential losses in one area on your overall portfolio. Warren Buffett holds 99% of his net worth in Berkshire Hathaway stock; however, Berkshire owns 65 distinct companies, divided into a complex web of over 260 subsidiaries. This is diversification.[1]

His belief in diversification is why Buffett thinks that the best way for most people to invest that aren’t interested in research is the S&P 500 index fund.

The importance of diversifying your investments:

    1. It helps to reduce risk. Investing in a diverse range of assets can spread risk and minimize the impact of potential losses in one area on your overall portfolio.
    2. It can maximize returns. Diversification can allow you to take advantage of potential growth opportunities in various asset classes, potentially leading to higher returns over the long term.
    3. It can provide a buffer against market volatility. By investing in a diverse range of assets, you can potentially reduce the impact of market volatility on your portfolio.

How diversification can reduce risk and increase potential returns:

    1. It helps to spread risk. By investing in a variety of assets, you can potentially reduce the impact of any potential losses in one area on your overall portfolio.
    2. It can allow you to take advantage of growth opportunities. Investing in various asset classes can take advantage of growth opportunities in different sectors, potentially leading to higher returns.
    3. It can provide a buffer against market volatility. Diversification can potentially reduce the impact of market fluctuations on your portfolio, helping to smooth out returns over the long term.

8. No financial plan

A financial plan is a roadmap that outlines your financial goals and the steps you’ll take to achieve them. It helps you understand your current financial situation, set specific goals, and plan to reach them. Progressing toward your financial objectives can be difficult without a financial plan. Buffett’s financial plan as a kid was to become a millionaire by 30; it worked out.

In 1943, Buffett declares to a family friend that he will be a millionaire by the time he turns 30, or “(I’ll) jump off the tallest building in Omaha.” [2]

The importance of having a financial plan:

    1. It helps you to understand your financial situation. A financial plan can provide a comprehensive overview of your current financial situation, including your income, expenses, assets, and debts.
    2. It allows you to set specific financial goals. A financial plan can help you to identify what you want to achieve financially and set specific goals to work towards.
    3. It provides a roadmap for reaching your goals. A financial plan can outline the steps you’ll need to take to achieve your financial goals, including saving and investing strategies.
    4. It can help you to stay on track. By regularly reviewing your financial plan and adjusting it as needed, you can ensure that you’re on track to reach your financial goals.

How a financial plan can help you reach your financial goals:

    1. It allows you to prioritize your goals. A financial plan can help you to prioritize your financial goals and allocate your resources accordingly.
    2. It provides a framework for making financial decisions. A financial plan can help you to make informed financial decisions that align with your goals.
    3. It can help you to stay focused and motivated. Having a clear financial plan and regularly reviewing your progress can motivate you to work towards your financial goals.
    4. It can help you to achieve your goals faster. Having a clear plan and taking consistent action toward your goals can help you achieve them faster.

9. Paying too much in taxes

Paying too much in taxes can significantly impact your financial well-being. You can keep more of your hard-earned money and use it to achieve your financial goals by minimizing your tax burden. A primary skill of Warren Buffer underappreciated by most is his ability to minimize taxes. He avoids paying capital gains taxes on his Berkshire Hathaway stock by holding most of it all his life, not creating many big taxable events. He avoids the double taxation of dividends by Berkshire reinvesting earnings; instead of paying dividends to shareholders, he focuses on growth in business value. His magic of compounding returns always works exponentially better with pretax dollars.

The importance of minimizing taxes:

    1. It can help you to keep more of your money. By minimizing your taxes, you can keep more of your income and use it to achieve your financial goals.
    2. It can increase your financial flexibility. By reducing your tax burden, you may have more disposable income for saving and investing.
    3. It can improve your overall financial well-being. You can improve your financial stability and security by keeping more of your income.

Strategies for reducing your tax burden:

    1. Contribute to a tax-deferred 401(k) or IRA account. Contributions to certain retirement accounts, like 401(k)s, may be tax-deductible and can help to reduce your taxable income.
    2. Take advantage of tax credits and deductions. There are various tax credits and deductions available that can help to reduce your tax burden. These may include credits for things like education expenses or charitable donations.
    3. Consider tax-efficient investment strategies. Some investment strategies, like investing in tax-advantaged accounts like a Roth IRA, can help reduce your future tax burden.
    4. Review your tax withholding. If you have a large portion of your income withheld for taxes, you may be able to adjust your withholding to reduce your tax burden.
    5. Consider working with a financial planner or tax professional. A financial planner or tax professional can help you identify strategies for minimizing your taxes and financial well-being.

10. Living beyond your means

Living beyond your means refers to spending more money than you can afford. It can lead to financial strain, debt, and long-term financial problems.

The dangers of living beyond your means:

    1. It can lead to financial strain. If you’re spending more money than you can afford, you may struggle to make ends meet and may be forced to rely on credit cards or loans to cover expenses.
    2. It can lead to debt. If you continue to live beyond your means, you may accumulate debt that can be difficult to pay off.
    3. It can hinder your long-term financial goals. Spending more money than you can afford may hinder your ability to save and invest for the future.

Tips for living within your means:

    1. Create a budget. A budget can help you track your income and expenses and plan how to allocate your money.
    2. Cut back on unnecessary expenses. Look for areas where you can cut back on expenses, such as dining out or entertainment.
    3. Increase your income. If you’re consistently spending more money than you can afford, consider increasing your income, such as taking on a part-time job or negotiating for a raise.
    4. Avoid using credit cards for unnecessary purchases. Credit cards can be a convenient way to pay for expenses, but they can also lead to overspending and debt. Try to use cash or debit for purchases whenever possible.
    5. Seek help if needed. If you’re struggling to manage your finances and live within your means, consider seeking the help of a financial planner or credit counselor.

Conclusion

Many money habits can keep you broke and poor. These include unhealthy money habits, a lack of budgeting, trying to keep up with the Joneses, a lack of emergency savings, not tracking your spending habits, making impulsive purchases, a lack of diversification in your investments, a lack of a financial plan, paying too much in taxes, and living beyond your means.

Developing healthy money habits is an important step toward financial success. This may include setting a budget, building an emergency fund, tracking your spending, making informed financial decisions, diversifying your investments, creating a financial plan, minimizing your tax burden, and living within your means. These habits can improve your financial well-being and work towards your financial goals.

 

By Steve Burns

After a lifelong fascination with financial markets, Steve began investing in 1993 and trading his accounts in 1995. It was love at first trade. After more than 30 successful years in the markets, Steve now dedicates his time to helping traders improve their psychology and profitability. New Trader U offers an extensive blog resource with more than 4,000 original articles, online courses, and best-selling books covering various topics.