This year, let’s focus on becoming smarter with our money. Make this the year that you become debt free! If you are looking to come out of debt then there are some habit’s that you will have to break to achieve that goal. I know we all have our creature comforts – those habits that, for better or worse, we indulge on a daily basis. However, while a regular morning latte or a new pair of shoes might seem harmless at the moment, you should consider their effect on your bottom line. A dollar here and there adds up over time – despite your efforts in other areas, they could be one of many reasons you’re still mired in debt.
Those of us who find ourselves experiencing chronic debt problems often share similar behaviors and financial habits. If you catch them early enough, you can avoid trouble. Even if you’re already in the red, recognizing and adjusting these behaviors can help you get back on track.
Bad Habits of Perpetual Debtors
According to data compiled by the U.S Census Bureau and the Federal Reserve,the average household credit card debt in 2014 was a whopping $15,191, with Americans owing more than $854 billion to their credit card providers. It’s a set of consistent habits that sets those prone to debt apart from those who stay in the black. By watching out for the following behaviors, you might be able to stop some of those bad habits in their tracks and reassess the way you think about and approach debt.
1. Impulse Buying
Those who are constantly in debt are often the type to snatch up something whether it’s on sale or not – even if the purchase wasn’t exactly planned. However, impulse buying can lead to a series of dangerous spending behaviors:
- Justifying Unplanned and Poor Purchasing Decisions. By justifying a “need” for an expensive bag or new gadget, you allow yourself to overspend and find reasons why it makes sense.
- Using Your Credit Card for Impulse Purchases. Because impulse shopping is unplanned, you may not actually have the funds to cover costs. That means you’re using credit to purchase items you can’t afford.
- Losing Track of Your Budget. Even the most diligent budgeter can mess up every now and again. Impulse spending causes you to lose sight of your budget and your financial goals. When you decide your budget is already blown, you might just keep swiping that card – and that’s a slippery slope.
While an impulse buy here or there may not leave a lasting impression on your finances, making it a habit can seriously derail your goals. Develop a plan that helps you cope with that irritating itch to spend without thinking.
2. Using Credit Cards for the Points
Not all rewards credit cards are bad. In fact, when used responsibly, some definitely have their place in your wallet. However, there’s a reason credit card companies offer those rewards, and it’s definitely not out of the goodness of their hearts. Rewards encourage you to spend more, plain and simple.
A 2010 study presented at a meeting of the American Economic Association found that simply using a reward or point-based credit card with a 1% return actually increased monthly spending by $68, and overall credit card debt by $115 per month. Suddenly, that pursuit of points doesn’t seem so savvy.
While you might score a little cash back on that purchase, many cards impose heavy restrictions. From annual caps, to higher cash-back rates only for limited purchases (such as gas and groceries), you might not be getting back as much as you think. Going deeper into debt in pursuit of the almighty credit card point is simply not worth it.
3. Keeping Up With the Joneses
Real estate agents often say that it’s better to be the worst house on the best street than the best house on the worst street. However, when your neighbors seem to have it all, the drive to be the best house on the best street can overshadow your spending savvy. Competition is a psychological trigger that can cause spending. Keeping up with the Joneses – or competing against others can lead you to overspend.
While some people simply don’t care about measuring up to others, it can be a real challenge for certain families. When a friend purchases a new vehicle or home, takes a pricey vacation, or even wears expensive jewelry, it can trigger competitive behavior that leads to poor spending decisions.
It’s important to remember that success is hard to measure from the outside. When you see a neighbor pull up in a shiny new car, remind yourself of your priorities and goals. No one can see your retirement account balance, but you know that you’re working to secure a comfortable future by contributing to it, instead of that new watch.
4. Excessive Lifestyle Inflation
As you get older, you probably expect to achieve a better financial status than you had as a young adult. A better job, a raise, and even natural economic inflation can all affect your earning power. However, the difference between those who are always in debt and those who stay in control of their own finances is that the perpetual debtors buy more than they can afford.
It’s tempting to put that raise to work to increase your living expenses. This could land you back at square one. For example: If Bill earns $60,000 per year and spends $45,000, but Jeff earns $150,000 and spends $175,000, who is truly in a better financial position? Although Bill earns less, earnings aren’t the only factor when it comes to staying out of debt. It’s how you manage your money.
Lifestyle inflation is a natural part of earning more and moving up the chain at work. This is only acceptable if you’re spending within your means. As soon as you start going into debt to afford a certain way of living, it becomes problematic. Make sure you only spend what you can afford, and maintain your valuable financial freedom.
5. Taking Interest-Free Loans
You know how credit cards that offer points and rewards? Stores offering no-interest loans are luring in potential debtors and enticing them to spend more than they can afford. The sad part is many who bite on such offers won’t pay off their loans before the interest-free period ends. Afterward, they’re often slammed with fees and even retroactive interest from that so-called “interest-free” period.
Remember. ALWAYS read the fine print! Unless you’re certain you can pay it off before the grace period ends, interest-free loans are anything but.
If you are ready to ditch your debt for good, then register for the Death to Debt masterclass.
You will learn:
- Why breaking free of debt is the most powerful wealth creation strategy
- The biggest mistake people make when trying to get out of debt that actually keeps them in debt, and how you can avoid it
- How to save thousands on your debt repayment so you can pay it off even faster
- What type of debt is worse for your wealth