Many of us have heard the standard pieces of financial advice that seem to make sense. Save every penny, avoid credit, and pay off all your debts – these appear to be smart money moves that will put you on the path to financial success. However, certain money habits often touted as virtuous can hurt your finances in the long run if you’re not careful. This post will cover five money habits that seem smart but may secretly be keeping you poor.
1. Obsessing Over Small Savings While Ignoring the Big Picture
We all love feeling like savvy consumers by clipping coupons, scouring flyers for deals, and hunting for the cheapest gas in town. To a certain extent, being conscious about spending and looking for ways to save are essential pieces to the financial health puzzle. Frugality is an admirable trait when it comes to managing money.
However, there comes a point of diminishing returns with frugality. You can spend hours and hours each week chasing down deals to save a few bucks here and there on groceries or household items. But in the grand scheme of your financial life, the impact of those small savings pales compared to your ability to increase your income and invest for long-term growth. It’s essential to take a balanced approach – be diligent about cutting out frivolous or wasteful spending, but don’t let that come at the expense of pursuing ways to boost your earning power and grow your wealth through strategic investments.
2. Never Using Credit
Credit cards, car loans, mortgages – many personal finance gurus will tell you to avoid borrowing money at all costs. And taking on high-interest consumer debt for discretionary purchases can be a quick way to derail your finances. But swearing off the use of credit entirely is often an overly simplistic and impractical approach.
Building a strong credit history is essential for more than just qualifying for favorable loan terms. Many landlords use credit reports to screen potential tenants, and some employers even check credit before making job offers. Using credit responsibly—making on-time payments and keeping your utilization low—demonstrates that you can be trusted to handle money well. Abstaining from credit altogether can make navigating many everyday life situations much more challenging than they need to be.
3. Keeping All Your Money in a Savings Account
It’s hard to overstate the importance of having a robust emergency fund that you can tap into in the event of a job loss, medical issue, or other unexpected crisis. A plain old savings account at your local bank is an appropriate place to keep your rainy-day cash. The money will be secure and easily accessible if you need it on short notice.
However, the mistake that many people make is letting the bulk of their money languish in a savings account for years on end. With interest rates often failing to keep pace with inflation, the purchasing power of your money can slowly erode over time as the cost of living marches steadily higher. To avoid losing ground, be intentional about keeping a few months’ worth of living expenses tucked away in savings, but look to invest the rest of your excess cash in a balanced portfolio aligned with your goals and risk tolerance.
4. Neglecting Retirement Savings While Young
When you’re a young adult just starting your career, the traditional retirement age of 65 can seem like an eternity away. With so many competing financial priorities in the near term – paying off student loans, saving up for a house, starting a family – it’s tempting to put off saving for retirement until you’re more established and have more disposable income.
But the truth is, your 20s and 30s are the most consequential years for building retirement savings, thanks to the magic of compound interest. Even relatively small amounts in a 401(k) or IRA can snowball into an impressive sum over 30 or 40 years. It may require some short-term sacrifice, but making retirement savings a habit from the beginning of your career is one of the most impactful ways to set yourself up for long-term financial success.
5. Paying Down Low-Interest Debt While Neglecting High-Interest Debt
Being in debt is never a good feeling, so it’s natural to want to throw every available dollar at your outstanding balances to eliminate them as quickly as possible. And if you’re dealing with toxic high-interest debt like credit card balances or payday loans, aggressively paying down the principal should be the top priority.
But if the bulk of your debt consists of more benign loans like mortgages, car payments, or student loans, you may be better off taking a more measured approach to repayment while redirecting some of your resources elsewhere. Depending on the interest rate and your investment options, you may generate better returns by investing your extra cash rather than accelerating the payoff of low-interest debt. It’s a nuanced calculation that depends on your unique circumstances, but don’t feel like you must eradicate every penny of debt before starting to invest.
A Real-Life Example: Paula’s Story
Paula had always prided herself on being a savvy saver. She clipped coupons religiously, shopped exclusively at discount stores, and felt a rush of satisfaction every time she scored a deal. However, as the years passed, Paula felt like she was spinning her wheels financially. Despite all her efforts to be frugal, she never seemed to be able to save up a substantial amount of money.
One day, Paula’s perspective shifted when a friend shared the concept of “penny wise, pound foolish.” Paula realized that she had been neglecting the bigger picture of her financial health by fixating on small savings. She was so focused on not spending money that she hadn’t strategically invested in herself and her future.
With a newfound sense of clarity, Paula decided to make some changes. While she continued to be mindful of her day-to-day spending, she also started investing in a diversified portfolio of stocks and bonds to grow her wealth over the long term. After years of telling herself she couldn’t afford it, she finally started contributing to her company’s 401(k) plan. Rather than simply hunting for the cheapest options, she began to view her spending through the lens of value and quality.
It wasn’t an overnight transformation, but slowly, Paula started to see her financial picture improve. As her retirement account balances grew and she felt more financially secure, she had the peace of mind to focus on other areas of her life. She still loved finding a great bargain, but she no longer let it consume her at the expense of other priorities.
Key Takeaways
- Being frugal is good, but don’t let chasing small savings distract you from the bigger picture of increasing income and investing.
- Use credit strategically to build your credit history, which is essential for many financial milestones.
- Keep an emergency fund in a savings account, but ensure you invest excess cash for long-term growth.
- Start saving for retirement as early as possible to harness the power of compound interest.
- Focus on paying off high-interest debt first, but consider investing rather than accelerating repayment of low-interest debt.
- Take a balanced approach to spending, looking for value rather than just the cheapest price.
- Don’t let perfection be the enemy of progress when improving your finances.
- Be intentional about aligning your money habits with your long-term goals.
- Small changes in your financial habits and mindset can significantly impact over time.
- Remember that financial success is a journey, not a destination.
Conclusion
Developing good money habits is one of the foundational aspects of achieving long-term financial success. But as we’ve seen, not all conventional financial wisdom should be followed blindly. Some money habits that seem intelligent on the surface can work against you if you don’t take a nuanced and balanced approach.
The key is to be intentional and strategic with your financial choices. By all means, cut out frivolous spending and be discerning about how you allocate your hard-earned dollars. But don’t let frugality come at the expense of growing your income and building real wealth for the future. With the right mindset and a commitment to continuous learning and improvement, you can take control of your financial destiny and create the life you want.