Breaking bad money habits

Quick insights

• Bad spending habits may negatively impact your long-term financial health and prevent you from achieving your goals.
• A few bad financial habits include overspending, neglecting to create a budget and not setting clear savings goals.
• Tracking your expenses, creating a budget and opening a savings account may help you manage your finances more effectively.

If you notice you’re spending more and saving less than you’d like, it might be time to make a change. However, financial habits can be hard to break.  

One approach for overcoming old habits is to implement systems that encourage better financial choices. Fortunately, there are a variety of resources—online bill pay, automatic savings transfers and budgeting apps to name a few—that generally make saving easier and help curb overspending.  

In this article, we’ll cover some common bad money habits and potential ways to get your finances back on track.

7 Bad financial habits and how to change them

Money mistakes can add up over time and potentially prevent you from reaching your financial goals. Here are some common bad money habits:  

1. Overspending

From weekend trips to meal delivery apps, life is full of temptations to spend beyond your means. Without a plan for your paycheck, it’s often easy to overspend on nonessentials.  

How can you curb overspending? Here are some strategies for reigning it in:   

• Use apps or banking tools to track spending and identify areas of overspending.
• Finding a roommate or downsizing may help reduce monthly housing costs, which are often a significant expense.  
• Avoid storing credit card information with online retailers if online shopping contributes to your overspending.
• Make purchases with cash whenever possible. Some people don’t feel like they’re using “real” money when they pay with a credit or debit card.
• Remind yourself of your financial goals when tempted to make impulse purchases.

2. Not creating a budget

A budget is a financial plan that outlines your expected income and expenditures for a specific period. Creating and sticking to a budget may help you identify areas where you’re overspending and make informed decisions about what you can afford.  

Sometimes people assume budgeting is complex or are unfamiliar with how to create one. Your bank may offer budgeting resources—usually within their mobile app or online platform—to assist you. Additionally, some third-party budgeting apps can connect to your bank accounts, analyze your spending and provide insights.  

3. Not building an emergency fund

How would you pay for an unexpected, large car repair bill or medical expense? Without adequate savings, you might resort to using a credit card, potentially leading to high-interest debt.    

An emergency fund—money set aside for financial emergencies—may help you cover these unexpected expenses without incurring additional debt. It’s generally recommended to keep 3 to 6 months of essential living expenses in your emergency fund, but you can always start small. Even a small cash buffer of $1,000 can provide some financial cushion when unexpected emergencies occur.

4. Maxing out credit cards

Maxing out your credit cards can have several negative financial consequences. If you can’t make payments on time, you could incur late fees. Additionally, failing to pay the balance in full each month usually results in interest charges.  

Maxing out your credit cards can also affect your credit score, a metric that signals your creditworthiness to lenders. Your credit utilization ratio (the percentage you’ve used of your available credit limit) is one of several factors that determine your credit score. A ratio over 30% may negatively impact your credit score, potentially making borrowing more expensive.  

Aiming to use less than 30% of your available credit limit may improve your credit score. So, if you have a combined credit limit of $8,000 across multiple credit cards, you’d ideally keep your balances under $2,400 in total—generally, the lower, the better.  

Banks often report your credit utilization ratio to the credit bureaus at the close of each statement period, which is usually weeks before the bill is due. Paying off the balance before the end of the billing cycle may help lower your credit utilization ratio. Additionally, some credit cards allow you to set alerts when your spending approaches a certain limit.  

5. Not optimizing your savings account

Selecting the right type of savings account for your needs and using its account features effectively can help you maximize your savings. As you choose a savings account, here are some features to consider:  

• The interest rate you’ll earn on the funds  
• Limits on withdrawals  
• Available banking features, such as Autosave or spending tools  
• Any promotional offers for new account holders
• Integration with your checking account, credit cards, loans, etc.
• Network size of the bank’s branches and ATMs

In addition to savings accounts through your bank or credit union, you may have access to special savings (health savings accounts, etc.) or retirement accounts through your employer. These accounts often come with tax advantages, so it’s usually to your benefit to use them.   

6. Failing to set savings goals

Saving money without a clear purpose or using a single account for multiple goals may tempt you to spend your savings unwisely. Without specific goals and designated accounts for them, your savings may feel like a general pool of funds available for any expense. That could make it easier to justify impulsive spending habits.   

Following these steps may help you be more disciplined about saving:  

• Set specific savings goals, such as buying a house or going on vacation.
• Create a concrete savings plan, including the goal, its cost and a timeline for achieving it.
• Choose the appropriate savings account for your needs.
• Fund the account according to your savings plan.

7. Making late payments

Late payments can result in fees or even negative marks on your credit report. If you’re repeatedly making late payments, start by assessing why it’s happening.  

Here are some reasons people make late payments and potential ways to break this pattern:

• Forgetfulness: Keeping track of payment due dates can be challenging. Setting up online bill pay can streamline the process and may help you avoid late payments. It’s generally a good idea to confirm that the bill is paid by the due date.
• Cash flow management: If your bills are due at the same time each month, that can put stress on your budget. You may be able to stagger your bill payments by negotiating payment due dates with bill collectors.  
• Insufficient funds: If you’re living paycheck to paycheck, you may need to reduce your expenses or increase your income to pay your bills on time and reach other financial goals.  

In summary

Bad money habits can add up and may hinder your ability to achieve your financial goals. Some common money pitfalls include maxing out credit cards, neglecting to set savings goals or using a savings account not suited to your needs.  

To overcome these and other bad money habits, it may be helpful to establish systems that encourage you to create good habits and make excessive spending more difficult. Examples include using banking features like online bill pay, autosave and credit card spending alerts.