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With the high cost of living and economic uncertainty in the world, now is the perfect time to take a hard look at your finances, especially your spending habits, and make some changes. This may not be the most exciting or fun thing you’ve ever done, but it’s essential to avoid ruining your financial security and well-being.
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But what if you don’t know where to start?
This is a common concern people have when it comes to money. Even if you have a monthly household budget or an emergency savings fund, it doesn’t mean you’ll find a solution right away. You may be wasting money and have no idea why or how.
But if you’re ready to cut back on excessive spending and get your finances back on track, you need to know which habits are causing the most financial strain. These are some of the most wasteful financial habits that can have a significant negative impact on your financial health.
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Unnecessary insurance policy payments
You may already know that you’re paying too much in premiums, but you may be able to negotiate this with your insurance company. But many people pay for insurance they don’t need or use. Not only is this wasteful, but it can have a negative impact on your overall finances.
“One of the problems I often see is; [people] They’re spending too much money on insurance they don’t need,” said Malcolm Ferrante, head of investment transition at CSB Group and an expert in international finance, investments and tax.
“It’s smart to be protected, but some policies cover things you can’t use,” Ferrante added. “That extra cash would be better spent elsewhere. I always tell people to think carefully about only what they really need.”
If you have multiple insurance policies, evaluate them and cancel unnecessary ones. For example, do you have life insurance for your children or personal theft insurance? These can be useful, but only in limited cases.
So what about rental car insurance and collision insurance? The former is not necessary if you already have car insurance that covers your rental. The latter can be irrelevant if the vehicle in question isn’t worth much to begin with.
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rely on debt for living expenses
It’s no surprise that debt can lead to serious financial hardship, but people still commonly rely on debt to fund their lifestyle choices. This can be especially problematic if your debt starts to pile up or if you can’t pay off your balance each month.
“Relying on debt is probably the most wasteful habit for most people in the United States,” says Jay Zygmont, CFP, Ph.D., founder of ChildFree Wealth. “Credit card interest rates are currently over 20%, and using a credit card can cost you thousands of dollars if you don’t pay it off each month. Payday loans and other debts can cost you even more than credit cards. It can be expensive.”
If you’re paying your living expenses through debt, you might want to take a look at your spending habits and cut back on a few things.
Rewarding children out of guilt
Having children brings great joy to your life, but certain financial habits can harm your financial well-being.
“Taking children out as a reward to alleviate feelings of guilt over one’s living situation or long working hours can financially strain the household budget. Guilt may be reduced and memories may be created. But there are downsides as well,” said Annette Harris, owner of Harris Financial Coaching.
For example, Harris said taking your kids out on fancy vacations and outings can quickly add up. If you’re using money to alleviate your guilt about something (for example, not being able to do what you want), you may end up spending money that you simply don’t have.
If you’re not careful, these spending habits can lead to even greater financial hardship later on, like depleting your savings account or running into credit card debt.
rely on the power of refinancing
Refinancing your mortgage isn’t necessarily a bad thing. But if you don’t consider the actual costs involved, it can have a negative impact on your finances.
Refinancing your loan may lower your interest rate and lower your monthly payments. However, it is also possible that your loan term will be reset and you will remain in debt for a longer period of time.
Not only that, but refinancing your loan comes with its own fees. Depending on your loan term and interest rate changes, you could end up spending more money than you expected. Additionally, refinancing too often can make it difficult to break even on your loan.
paying too much for a car
Buying that luxury car now may seem like a good idea, but it could cost you a lot of money.
“The decisions that do the most damage to our finances are usually the larger spending decisions,” says Brian Preston, CFP, CPA, and author of The Millionaire Mission. . “For example, a large car loan is a wealth destroyer.”
Preston gave the following example to illustrate this point.
“Consider this: If you are a 30-year-old consumer, every additional $15,000 on your auto loan could cost your future retirement self $250,000. Compare what your money would do if you invested the amount.Assuming an 8% rate of return, invest.Next time, try to convince a car salesman that he will only earn $250 more per month. Please remember this when you do.”
One way to break this spending habit is to keep your car payment low or buy your car with cash.
“If you can’t pay for a car in cash, I recommend following my car rules: 20/3/8. 20% down payment, pay off within 3 years, and car payments are based on your income. It should be below 8%,” Preston said. “This will ensure that you have access to a reliable vehicle without financial turmoil.”
Pay only the minimum amount
Having a credit card isn’t necessarily a problem. After all, they can be useful in a pinch. You can also use them to build credit. You can also benefit from using reward systems if you are familiar with how they work.
However, if you are carrying credit card debt every month, it is very likely that your finances will be negatively affected.
“Unfortunately, the vast majority of people don’t pay off their credit cards every month, costing them hundreds or even thousands of dollars a year,” Preston says. “Just as compound interest increases the army of dollar bills over time, compound interest debt destroys them.”
shop impulsively
Many people indulge in splurges here and there, but the question is when do they start making impulse purchases?
Impulse buying is basically buying something you didn’t need or necessarily wanted. They simply figured it out because they were interested in it in the moment, or because they were influenced by clever marketing and promotions.
However, impulse purchases can quickly add up to your monthly expenses. This is true whether you’re buying a lot of small items or a few big-ticket items.
“Impulse purchases are particularly insidious because of their cumulative impact. Each purchase may seem insignificant at the time, but they can collectively lead to large financial drains.” ” said Liam Hunt, director of SophisticatedInvestor.com. “Additionally, impulse purchases can also lead to clutter and waste, as many items bought on impulse are quickly thrown away or forgotten.”
Next time you go shopping, think twice before adding anything to your cart. If you don’t really need it, the purchase can be a waste of money.
ignore financial education
If you lack financial education, you may be causing yourself financial damage without even realizing it.
“Lack of financial literacy leads to silent budget losses. Many individuals fail to educate themselves on basic financial principles, such as budgeting, investing, and understanding taxes,” says Family Office Specialist said Jake Claver, a home credential and CEO of Syndicatery, an online investment platform. “This ignorance can lead to poor financial decisions, such as expensive investments and tax inefficiencies, which can significantly eat into your savings.”
I don’t know where the money will go
You don’t necessarily have to budget every nickel and dime. But if you don’t understand your financial habits and spending triggers, you could face serious financial problems down the road.
“The most important thing I can suggest is knowing where your money is going,” says Kate Mieritz, Ph.D., a certified financial counselor and AFC program manager at Beyond Finance. . “When you’re stressed, do you spend your money more rashly? Do you tend to eat out more when you’re tired? Be aware of where your money is going and eliminate things you don’t absolutely need. Let’s reduce it.”
You don’t have to do it alone. You have a small support team around you to help you.
“Let your friends and family know so they can support you,” Mieritz said. “No matter what financial goals you set, make them specific, measurable, action-oriented, realistic, timely, and smart.”
Other than that, don’t compare your goals or financial situation to others.
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This article originally appeared on GOBankingRates.com: 9 Wasteful Habits That Can Destroy Your Finances
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