If you want to know how to save money, it’s also important that you understand how not to save money. While you can follow top investing tips, read blogs, and listen to industry-leading podcasts, it won’t help you hit your investment and savings goals if your bad habits are costing you money.
The difficult part is that, oftentimes, we don’t even know when we have these bad habits, let alone how we can break them. Whether you follow the stock market, invest in real estate, buy mutual funds, or you’re trying to build a more robust savings account, bad habits can harm your finances in the long run.
Whether you struggle with financial temptation or rely on credit cards a little too much, here are a few bad financial habits that can cost you money when you’re investing.
1. You spend more than you earn.
It’s a poorly kept secret that credit cards and credit lines often lead to vicious cycles. It often goes like this: You start by spending a bit too much of your paycheck. Then, to navigate ongoing expenses and costs, you have to rely on your credit card. Unfortunately, this traps you into high-interest-rate debt. This can derail savings goals, eat up your paychecks, and cost you a lot of money over the years. So, if you’re ready to start investing, the best way to hit your financial goals is to stop spending more than you earn.
Often, this means you need to sit down and review your spending habits and how those align with your long-term goals. Start by looking at your spending over the last year and how much money you have in your bank account. In some cases, a great way to hit your savings goals and continue investing is to cut down on unnecessary expenses. These include retailer subscriptions (such as Amazon Prime or your gym membership), credit card debt, and discretionary spending. You can also set a tighter budget for your groceries, use more coupons, and look for discounts. It’s a great option that often equates to “free money” in a sense.
For some people, however, this may even mean that you need to earn more money. If you don’t have enough money to tackle your credit card debt, invest in a retirement plan, and consider index funds or individual stocks, you need to find ways to earn money. A simple way is to invest in a part-time job or a side hustle. This will impact the amount of money you make in the short term and help you grow your portfolio in the long term.
2. You’re not prepared for emergencies.
If you don’t have an emergency fund, it’s a good idea to set one up. Even if you have automatic savings and a robust retirement plan, there are plenty of ways that unexpected expenses can derail your savings account, short-term goals, and financial success. At a minimum, many financial advisors and experts recommend saving a few months’ worth of expenses to navigate job loss, medical bills, or other emergency expenses. Then, if you have to replace your water heater or pay unplanned utility expenses, you’ll be prepared.
While you don’t need to contribute to this account at regular intervals, you should always review it at regular intervals, determine when it needs more or less money, and take note of your account averages.
3. You’re missing out on tax breaks.
If you’re not using the right financial products for your taxable income, it might be time to hire a financial planner and review your past performance regularly. Often, your tax refund is the easiest way to find additional money each year. With an experienced financial advisor, you can find tax break opportunities and get a good deal on your tax return each year. This helps preserve your hard work during each fiscal year and helps you reap the rewards in the near future.
The government even offers tax-advantaged accounts that are great for someone looking to build a diversified portfolio. They offer IRA (individual retirement account) and 401(k) options. It’s a good idea to review your current retirement savings and taxable brokerage account to ensure that it’s helping you build wealth. If not, it won’t require a lot of time to correct, though this should be your top priority.
4. You tap into your retirement accounts too early.
The bottom line is that a little bit of greed now can cause you a lot of grief in the next year. A sound piece of financial advice: Don’t pull from your retirement savings accounts unless you absolutely have to. You shouldn’t treat a retirement account like a payday advance opportunity. Even if you’re using that money to purchase financial products or look into the real estate marketplace or stock market investing, you’ll still face higher interest rate penalties. You also miss out on those financial growth opportunities.
The first thing you need to keep in mind about these accounts is that you should leave your money invested at all costs. Unless you have no other options for securing funds, this route carries too much volatility, and it can take you a long time to rebuild. If you’re facing true financial hardship over the course of a year, you may want to reach out to a professional in the financial world to discuss early withdrawal options.
5. You’re impatient with diversification.
An easy way to cost yourself money while investing is to get impatient. While nobody has a great time watching a low-cost index fund or a Roth IRA underperform, you need to focus on the essentials and your portfolio’s overall goals. The downside is that it’s understandably difficult to stay the course, but you must do your due diligence and avoid tinkering with your portfolio in a reactionary way.
If you’re ready to learn more about how to manage your finances while you’re investing, the first step is to join the Goodegg Investor’s Club. With helpful insights on anything involving U.S. investing, from equity to ETFs, the Goodegg team can help you ditch your bad financial habits and invest in financial products that can help you hit your goals.
About the Author:
Annie Dickerson and her partner Julie Lam are founders of Goodegg Investments — an award-winning real estate private equity firm — and creators of the Real Estate Accelerator Mentorship Program. They are authors of the book Investing For Good and hosts of the popular Life & Money Show podcast: https://goodegginvestments.com/