These are 5 Common Money Habits That are Destroying Your Finances

Imagine this, you wake up on a weekend with the sun streaking through your bedroom. You hop out of bed, and say to your partner and kids "Let's go somewhere fun today". With no stress of money in the back of your mind, you build a plan with your family for your dream weekend, and then you just do it. No second considerations, no worries, you just do it. Building this life can be achieved with the right money habits, and i'm going to teach you about some of the habits to avoid today.

The habits we build around money are largely responsible for the financial situation we're in. The right money mindset gets you into the habits that can help build wealth to retire early or live the lifestyle you want.

What do you think about money right now and how might it be affecting your financial situation? To explore this question, here are 5 money habits shackling your finances:

Not Caring

The first and most common habit that I've seen is to never pay attention to it at all. The majority of Aussies go about their financial lives like a leaf in a river, they just go with the flow. These people are living on autopilot and are never on the front foot when it comes to making decisions.

These people are occasionally influenced by a family member or friend and just wait and see where it takes them. My suggestion? Get aggressive, and take charge of your finances, you want to be on the offensive making decisions with a plan for the future.

The first step is to understand your financial situation, take out a pen and paper, or open a fresh Excel sheet. You want to start by listing out all our assets (assets are those things that have value or we could sell for value) this includes:

• Bank accounts

• Cars

• Houses

• Jewellery

Next, you want to list out all your liabilities (liabilities are what you owe) this includes:

• Credit Cards

• Car or Personal Loans

• Mortgages

• Student or HECS debts

Add up all your assets and then minus all your liabilities, this is your net worth.

Having this information allows you to begin making educated decisions about your personal finances. For example, if you have a negative net worth (meaning you owe more than what you own) you may re-think taking out another car loan because that will just push you further into the negative.

Now that we have a mathematical representation of our situation, we need to mentally take responsibility for the situation.

Take a second with this exercise and sit with your net worth number for a minute. How does it make you feel? is it higher or lower than you thought? The feeling you get here is going to be your motivator for change.

Taking responsibility includes, forgiving yourself if your situation was not what you had hoped for and accepting that changes will have to be made to get into a better situation. On the flip side, you may want to congratulate yourself for being in a better situation than you thought you were. Now that we're educated on our situation and we have mentally taken responsibility for it we can begin working on the best way forward, learning and reading about personal finance is a great first step. By taking charge of your personal finances, you’ve already done more than the majority of Aussies and are ready to start your journey to wealth.

Paying yourself last

Paying yourself first is a relatively new term that relates to paying an amount into your savings or investments when you first get your paycheck.

If you're like most Aussies, you get your paycheck, spend it on bills, groceries, rent, dinners, clothes, and whatever else, and then anything left you pop into savings for next week. This strategy is called paying yourself last, the default state of most Aussies is they pay themselves last. That is, they go about their lives and once they get their next paycheck, the leftover amount from the first paycheck goes into savings or investments. By living this way we never get on top of our finances. We never contribute a consistent amount to savings or investments, it might be $50 this week and then $150 next week. Part of owning your finances is making a plan for the future and that involves contributing a consistent amount to investing or saving.

The best way to maximize your savings and give your financial health a boost is to allocate a fixed amount to savings every pay. Putting an amount to savings first means that your savings or investments reliably increase every month. It means that you can have a savings plan and actually stick to it.

Consumer Debt

Consumer debt relates to personal debts such as car loans, credit cards, and mortgages.

According to Nerd Wallet, there were over 13 million credit card accounts in Australia as of July 2023. With so many credit cards in circulation, it’s easy to see that a lot of Aussies are stacking up loads of credit card debt.

Credit card debt and other high-interest debt like car loans end up costing us far more than what we spent on the cards themselves once we account for interest. Short-term consumer debt is incredibly easy to fall into and ends up costing far more than initially calculated.

If you’re looking to reduce your credit card debt you have to look at either reducing your spending or increasing your income. Once you have freed up some extra cash you can follow two routes:

1. Pay off the smallest debt first, this is a psychological strategy that gets us a win early which snowballs into a positive feeling where we want to pay off the rest. This is a powerful strategy for snowballing our debt down.

2. Pay off the highest interest first, this is mathematically the better way to do it as we pay the least amount of interest but getting the job done is more important than getting it done perfectly.

Lifestyle creep

The term lifestyle creep relates to when you get a pay rise and your expenses slowly increase to the level of your income, your "new normal". Most Aussies will slowly increase the cost of their lifestyle to match their new earnings. Does this sound familiar "I can never seem to get ahead even though I'm earning more" or "The bills just seem to keep up with what I'm earning?" This is extremely common and results in situations where you may be earning twice as much as what you were last year but you don’t seem to have any more in savings or investments. It just all seems to go somewhere, but you’re not sure where. This is because when you got a raise or a better job, you felt that you could afford a little more luxury in life. You felt that you could go out to dinners more often or get some new clothes.

Don't get me wrong, if you earn more you should be able to renjoy life a little more. But you also need to allocate a portion of that raise to savings or investments.

Lifestyle creep needs to be managed, but not ignored, my philosophy is that our lives should increase in cost and lifestyle quality when we get a raise, but we should also increase our savings and investments. My recommendation is to take the raise or bonus, split it in half, enjoy half of it on fun things and the other half goes to savings or investments.

Sunk Costs

Finally, a common problem I see is a sunk cost fallacy with money decisions. The sunk cost fallacy relates to where you’ve committed a certain amount of money or time to an idea or project and you feel that you can’t quit that idea because you’ve put all this money into it. This can lead to over-committing to failing plans. If you’ve bought a car that’s costing you too much, sell it. I know there is an emotional attachment and a feeling that you’ve committed this money to it but if it’s causing damage, cut it off. It’s okay to make mistakes with our money, just don’t get stuck in them.