5 Bad Money Habits and How to Break Them

Just like any other bad habit can bring you down, bad money habits can be a source of great frustration and harm. When it comes to bad habits surrounding money, the effects can be painful: You might, for instance, pay thousands more in interest, leaving you with no cash to cover your emergency expenses. Worse yet, bad money habits can hurt your credit and finances enough that it blocks the path to realizing dreams like owning a house or retiring.

But don't let that get you panicked—bad habits can be broken, after all. The first step toward accomplishing that is to recognize which of your habits might be working against you. Then you'll work to replace a bad habit with one or more good habits. Once that's done, you'll be well on your way to a rewarding financial future. Here are five bad money habits and the steps you can follow to break them.

How to Break the Habit

Here are a few actions you can take to pull back on unnecessary spending:

• Make purchases with cash. Research shows buying with cash causes more psychological pain than paying with plastic. Therefore, people who pay with cash tend to spend less than people who pay with credit or debit cards. Furthermore, leaving your credit and debit cards at home and shopping only with cash can curb impulse spending.
• Fix food at home. Eating dinner at restaurants, ordering takeout or delivery meals and forking over money for lunch instead of brown-bagging it are some of the top categories for wasteful spending, according to the Ladder spending survey. Cooking at home is an effective way to trim the fat from your food spending. Sure, you can treat yourself to a restaurant meal from time to time, but home-cooked meals can help you conserve funds for essentials like rent and utilities—and are usually healthier, to boot.
• Pause before purchasing. Whether you're looking at buying a new TV or a new pair of shoes, take a second to contemplate and ask yourself these questions: Is this item a need or a want? If it's a want, can you truly afford it? What is the true cost? Will making this purchase prevent you from depositing money in your savings account? Will it mean you're going to rack up more credit card debt? If the answer to any of these questions causes you to rethink the purchase, consider holding off for now.
• Resist the discount temptation. While savings are always tempting, don't buy something simply because it's on sale. Stick to purchasing items that you actually need. And if that happens to be an item that's discounted, then go ahead and snag it.
• Review your memberships and subscriptions. Americans on average cough up more than $325 a month for memberships and subscriptions, including those for cable TV service, video streaming services and gym visits, according to the Ladder survey. Eliminating even some of your memberships and subscriptions could free up hundreds or even thousands of dollars a year for more pressing needs.

How to Break the Habit

This one has a pretty simple answer: Stockpile money for emergencies by creating an emergency fund. Typically, you'll want your emergency savings stored separate from your other accounts so you're not able to dip into it for day-to-day spending.

The amount of money you should sock away in an emergency fund likely differs from the amount your sibling or best friend should sock away. A standard sum for an emergency fund is three to six months' worth of living expenses. Based on that formula, if your monthly living expenses like rent and car payments total $2,500, your emergency fund should contain $7,500 to $15,000.

Now, the not-so-simple part of an emergency fund is building it up in the first place. Don't worry about filling it up in a hurry; begin with what you can reasonably afford and make sure you're consistently making deposits. This should become a habit, after all. That might mean earmarking $25 a week for your emergency fund at first, and then raising that amount to, say, $75 a week or more when you can make it work with your budget.

How to Break the Habit

Although credit card debt can cause financial headaches, you can take matters into your own hands to escape it. Here are five ways to do it:

1. Create a household budget. A budget can help keep your income and expenses in balance. Monitoring the money that's coming in and going out offers a big-picture look at your finances. (More on this later.)
2. Make more than the minimum payment. While it can seem appealing to pay just your minimum payment on your credit card bills each month, doing so can result in a heap of interest charges. So, how do you dodge interest charges? Pay your balances in full every month whenever possible. Paying more than the monthly minimum can help you save money on interest and wipe out your debt faster.
3. Put yourself on a credit diet. To rein in spending, consider establishing a strict limit on how much you're allowed to charge on your credit cards every month.
4. Take credit cards out of your wallet. It might sound extreme, but leaving your credit cards at home, or locking them away somewhere that's not easily accessible, is a surefire way to stop yourself from using them. Taking that a step further, you might opt to "freeze" a credit card so that you can't make any charges on it.
5. Erase your credit card information. If you have a spending habit, the convenience of online shopping could be a big contributor. One thing you can do to address this is to remove your payment information from retailer websites or your browser's autofill feature. Doing this will force you to manually punch in your credit card data and billing address every time you buy something online. This will eliminate the ability to make one-click purchases, potentially decreasing your impulsive spending.

How to Break the Habit

It's never too late to save for the future. You can start right now by doing the following:

• Automate your savings. Depending on the feature your bank offers, you might be able to automatically transfer a percentage of your paycheck to a savings account that earns interest. Because everything will be taken care of whenever your paycheck hits your checking account, it becomes much easier to stick with.
• Look for ways to trim expenses. You can allocate more money for savings by searching for places to cut costs. For instance, you might cancel unused subscriptions, shop around for cheaper home and car insurance, refinance your home or car loan or consolidate your debt.
• Find a side gig. To supplement your regular income and carve out more money for savings, seek a side gig. Don't know what to do? Try earning money from a hobby like baking, photography, painting or graphic design.
• Build a budget. A budget enables you to track your spending and savings, and to achieve your financial goals.
• Focus on your retirement funds. If you feel like you're behind on saving for retirement, it's not a lost cause. What can you do? If your employer offers a 401(k), make sure you're taking full advantage of it (especially if your contributions will be matched). If a 401(k) isn't an option, look into opening your own Individual Retirement Account (IRA), and placing money into it regularly. Both these options are long-term saving solutions that will grow your contributions by investing them (possibly on a pre-tax basis). Once you retire, these accounts will be ready for you to draw from.

How to Break the Habit

Breaking this habit is not complicated: Create a budget and commit to following it. There are, however, many different ways to budget (zero-based budgeting, for instance). It's important to find the budgeting method that works for you, since you'll be more likely to stick to it that way. At a minimum, your budgeting process should include the following three steps:

1. Do the math. Comb through your bank records, credit card statements and other financial documents to calculate your income and expenses. Add up the previous month's paychecks if you're paid on a set schedule; if your income is more irregular, average the past three to six months.
2. Set short- and long-term financial goals. An important part of budgeting involves figuring out what you want to do with your money. Are you eager to get out of debt? Are you eyeing a home purchase? Are you trying to build up your retirement savings? Think with these goals in mind when setting your budget.
3. Monitor your spending. This is critical to both creating your budget and sticking to it. You'll want to begin by picking a method to track your spending. This might be a spreadsheet or a budgeting app. Regardless, it's crucial to collect all of your income and expense information in a central place so that it's easier to keep an eye on your goals. Also, be sure to schedule time, perhaps once a week, to go over your budget.

Your Future Is in Your Hands

No matter your path forward, acknowledging any financial bad habits you may currently have means you're already making progress. There's no one-size-fits-all solution to managing money, so figuring out how to improve your financial situation requires some creativity and critical thinking. Keeping track of your spending and monitoring your credit are two good ways to start. If you're in need of outside help, consider seeking the advice of a certified credit counselor. Credit counselors work for nonprofit organizations and provide free or low-cost services that help people learn more about financial literacy and how to tackle their financial difficulties.

With the above information in hand, you should now be better equipped to think effectively about your own finances. Hopefully, this means those financial dreams are just around the corner.