Money Habits That Can Keep You Poor

With talks of the looming recession, now is a great time to revisit your money habits and start saving. People form habits early on that can be difficult to break, but it is essential to reflect on the ways we think about money because bad money habits can keep you financially insecure. 

Poor money management comes from behavioral patterns, rather than knowledge about money. Most people know the general rules of money management like the 50/30/20 rule – 20 percent of your income should be saved, 50 percent of your income should pay for necessities, and the remaining 30 percent goes toward discretionary items. 

The 50/30/20 rule is an easy way to budget, hypothetically, but with inflation on the rise in nearly every industry, people have been forced to modify these percentages to keep up with the rising cost of living. A recent study by Capital One shows that 56 percent of Americans struggle to keep up with the cost of living and a major factor is the cost of rent. Around half of Americans spend 30 percent or more of their income on housing alone. 

With prices on the rise, the 50/30/20 rule needs to shift as many people are finding they don’t have any money left to save at the end of the month. Even in an unstable economy, there are many ways we can change our mindset around saving money that will lead to effective saving techniques.

Identifying behaviors that cause money problems

Money problems tend to arise because of a certain mindset around money. People fail to think about the long-term consequences of spending money when they’re in the moment. This is called local thinking, where you only think about the consequences that are right in front of you. 

Local thinking can manifest itself when you’re walking around a store and “impulse buying” items that you see, want, but don’t need such as a new pair of shoes. Local thinking can go hand in hand with another behavioral problem which is present bias. Present bias is when people tend to settle for a smaller, more immediate reward rather than waiting for a larger reward. 

Sure, that might be a nice pair of shoes. But if you’re saving up for a big expense such as a car or a vacation, you need to save up thousands of dollars and sacrifice the immediate gratification of getting a new pair of shoes. 

It’s much easier to see the local reward than the long-term reward, especially when our phones and social media are targeting marketing campaigns specifically at you, which brings us to another behavior pattern: herd behavior. Herd behavior is when everyone is doing something, you tend to do the behavior as well. 

If there is a trendy product that hits the market, it will end up being subliminally marketed to most of America through social media ads, influencers, and product placement. It can make it seem impossible to avoid until you join in and buy the product. Studies have shown that marketing a product via social media has a 100 percent higher lead-to-close rate than outbound marketing tactics. 

To be aware of these behavioral problems is the first step to being more financially secure. Let’s take a look at how to break these behavioral patterns and make some lifestyle changes to prevent you from falling into these habits again.

How to change poor money habits

Here are some ways people can work on breaking those bad spending habits and start to save more money.

Pay yourself first 

At the beginning of each month, allocate a certain amount of your income to go into a savings account that you don’t touch. This will ensure that you’re saving at least a little bit of your money and future-you will thank yourself later. 

Instead of thinking about your paycheck as your payment, think about this amount that you’re setting aside as your payment. You’re paying your future self, and this will break the behavioral pattern of thinking locally. Even after just a couple of months, you will see the benefits of saving as your savings start to grow.

Typically, 20 percent of your income should go towards savings. But habits are broken by making small changes, so if this is a new concept for you, start with 10 percent for the first couple of months and then, once you’ve broken the thought pattern, up the amount to 20 percent.

Stick to a budget 

Around 82 percent of Americans plan a monthly budget. But if you fall into that other 18 percent, then this is an easy change to make that will save you money and give you more financial freedom.

Lack of budgeting is a combination of thinking locally and present bias. Someone who tries to budget but doesn’t stick to it is only thinking of the short-term gain and not valuing the long-term benefits of sticking to a spending plan. If you’re not already making and living by your budget, this will help you to think long term and also aid in breaking the local-thinking habit. 

Pay with cash 

Once you establish what your monthly budget is, take out cash from your checking account to pay for items. Studies have shown that people tend to spend less when they have to pay with cash and that using cash invokes an emotional response to the purchase, making people not want to spend as much money. These same studies also showed that people who paid with cash had less revolving debt six months later. 

Get a financial advisor 

Although we try our best to break out of these habits, it may be helpful to hire a financial coach to help you budget and save up money. Sometimes, we just need to hear from somebody else just how important good money habits are. Having someone else advise you on money-related issues will hold you accountable for overspending, because at the end of the month, you’re going to have to sit with this person and explain why you spent the way you did. 

Think of getting a financial coach as an investment. If you have a really hard time saving money and following these tips, hiring a professional to help you out will get the results you want and your money will start saving up.

Now, start saving

Now that we’ve identified poor money management habits and behaviors that form them, it’s time for you to take action and start saving. Making the changes we’ve discussed will start to build up your savings. Around 64 percent of Americans live paycheck to paycheck, but these methods will pull you out of that 64 percent and help you build better money habits for the future. 

Lisa L. Baker is a Personal and Executive coach and founder of life coaching company, Ascentim. Prior to focusing on helping others reach their potential, Lisa worked as a senior executive for several Fortune 500 companies including Synchrony, Microsoft and Citigroup. This year, Lisa was named a 2022 Brightside Trailblazer in Business by Brightside Global Trade.