5 Bad Financial Habits You Need to Break

Assorted letters with past due notices
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By Geoff Williams

If you want to make extra money, you might consider getting a second job or paring back your budget. Both are smart strategies, but first consider whether you have any bad money habits you need to curb. After all, if you're always paying bills late and getting hammered with late fees, that may be what's draining your bank account.

So if you're the reason your money never seems to stick around, here are some strategies to help break five bad financial habits, culled from research and interviews with members of the National CPA Financial Literacy Commission.

Paying bills late. Late fees can be as much as 10 to 15 percent of your monthly bill. If you're frequently late with most bills, you're probably spending 10 percent more each year on bills than you should. And if you're constantly late with some bills, like credit card payments, the credit bureaus are probably taking note and dinging your credit score.

How to break the habit. It sounds so easy: Pay on time. But it isn't easy if you're living paycheck to paycheck, and you never have enough money on hand.

If that's the case, being more organized will help. Clare Levison, a certified public accountant in Blacksburg, Virginia, suggests setting up calendar reminders through your email or phone to alert you when bills are due. If you have ample money but are just forgetful, she says, "you might also consider setting up auto pay so the bills are paid automatically from your bank account each month."

You could also do it the old-school way, says Armando Roman, a CPA in Phoenix. "A simple, old-fashioned way to budget is to put money into different envelopes for specific purposes," he says. You put cash in the envelopes the moment you have it and "after each envelope is filled on each payday, the money left over is what the person can spend until the next payday."

If it's only one or two bills you're paying late, contact the company and ask for a new monthly due date. It's worth a shot.

Getting hit with bank fees. Every fee you pay your bank for having insufficient funds in your account is money you could have spent on yourself or your household. If you rack up three bank fees a month at $36 a pop, that's $1,200 a year you could save by ending the overdraft fee madness.

How to break the habit. If you're constantly collecting bank fees, it's probably due to a lot of reasons, from not making enough money to overspending. If it's a joint account, you may be communicating badly with your spouse about how the money should be managed.

Analyze everything you're doing to pinpoint the culprit. And don't be afraid to consult your bank manager, who might go easy on you and reverse some recent fees. The manager might also have some practical suggestions for curbing your fees, like opening a savings account so if your checking account goes into overdraft, money would be pulled out of savings.

There are often fees to that approach, too, but smaller fees -- and there's also the matter of funding the savings account.

Taking out a loan for everything. If you're putting daily purchases on credit cards and not paying them off every month, or if you're taking out payday loans or drawing on a home equity loan, you're collecting more interest every month and digging a financial hole.

How to break the habit. Like collecting bank fees, you need to do a financial exam to see exactly where you're going wrong. But you would help yourself a lot if "whenever you get paid, pay yourself first," says Ernie Almonte, who owns an accounting and consulting firm in Providence, Rhode Island, and is the chairman of the National CPA Financial Literacy Commission. "Set aside an amount, automatically deducted from your pay, to set up an emergency fund. Start with a small amount and build from there."

Almonte adds that if you could put away $10 a week, you'd have $520 by the end of the year for emergencies. Of course, the problem for a lot of people is that financial emergencies crop up every few months or so. Still, if you can create your own cash stash and borrow from that instead of borrowing from a lending company that will charge a high interest rate, you'll be far better off.

Overspending. This leads to just about every financial problem and bad habit, from mounting debt to feeling like you need to take out a loan -- to pay for the loans you already have.

How to break the habit. Your overspending problem may be due to a lack of clarity on how much money you have to spend. Almonte suggests keeping track of your expenses online or with an app on your phone.

Mint.com is one of the most well-known personal finance management tools, but there's also LearnVest.com, Manilla.com, DailyCost.com, Toshl.com, LevelUp.com and Checkme.com (to name a few). Luckily for the financially beleaguered, many are free.

You could also try to delay your purchases. For instance, if you're buying something online, Almonte suggests leaving the purchases in the shopping cart. "Wait a couple of days and ask yourself if you still need or want this item. I started doing this a long time ago and most times, I don't make the purchase," he says.

Spending money as soon as you get it. Spend your paycheck without thinking things through and putting savings aside, and you'll never have money on hand when you need it.

How to break the habit. Break all of the other habits first. You're probably spending money quickly because a bill is due, or overdue, and hanging onto it isn't an option.

Or perhaps you've been going without something for so long that you're grateful to have a little money in the bank, and you can't help but spend it. But if that's the case, it's quite possibly because you're paying bills late, collecting bank fees, taking out a loan for virtually everything and doing a lot of overspending. In other words, break your worst financial habits, and you'll stop breaking the bank.

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5 Bad Financial Habits You Need to Break

Plenty of Americans live beyond their means but don percentt even realize it. A 2012 Country Financial survey found that more than one-half of respondents (52 percent) said their monthly spending exceeded their income at least a few months a year. Yet only 9 percent of respondents said their lifestyle was more than they could afford. Of the 52 percent who routinely overspend, 36 percent finance the shortfall by dipping into savings; 22 percent use credit cards.

Blowing your entire paycheck (and then some) each month isn percent an ingredient in the recipe for financial success. Neither is draining your savings or running up card balances. To rein in spending, start by tracking where the money goes every month. Try to zero in on nonessential areas where you can cut back. Then create a realistic budget that ensures you have enough to pay the bills as well as enough for contributions to such things as a retirement account and a rainy-day fund. Our household budget worksheet or an online budgeting site can help.

If you're like most folks, your savings habits could use some improvement. The personal savings rate in the U.S. is just 4.9 percent of disposable income, down from a high of 14.6 percent in 1975. Only about one-half of Americans (54 percent) say they have a savings plan in place to meet specific goals, according to a 2013 survey commissioned by America Saves, a group that advocates for better saving habits.

Saving needs to be a priority in order to build wealth. Begin with an emergency fund that can be tapped in the event of an illness, job loss or other unexpected calamity. A 2012 survey by the Financial Industry Regulatory Authority found that 56 percent of individuals say they have not set aside even three months' worth of income to handle financial emergencies. Once your emergency fund is well under way, you can divert small amounts toward other goals, such as buying a home or paying for college. These six strategies can help you save more, no matter your income.

Americans have $846.9 billion in credit card debt alone. That's $7,050 per household, according to NerdWallet.com, a Web site that analyzes financial products and data. If you're only making minimum monthly payments on $7,050, it'll take 28 years and cost you $10,663 in interest before you're debt-free, assuming a 15 percent interest rate. And that only holds true if you don't make any additional charges.

Some debts can lead to financial success -- a mortgage to purchase real estate, a credit line to start a business or a student loan to fund a college education -- but a high-interest credit card balance usually doesn't. Pay down credit cards with the steepest rates as quickly as possible. Putting $250 a month toward that same $7,050 debt will retire it in three years and save you about $9,000 in interest versus making minimum payments. See Escape the Debt Trap for more strategies to chip away at what you owe.

Late fees, banking fees, credit-card fees -- the amounts might seem insignificant when taken individually. After all, an overdue library book or Redbox DVD might only run you a dollar. But if you're regularly paying penalties and fees, these charges can quickly eat a hole in your budget. Consider this: The average bank overdraft fee is $32.20, according to Bankrate.com, and the average charge for going outside your ATM network is $4.13. Late-payment penalties for credit cards can climb as high as $35.

So how do you avoid pesky fees? Read the fine print so you understand fee rules, and stay organized so you avoid breaching those rules. Here are 33 common fees you can avoid -- or at least reduce -- with just a bit of effort. With the extra cash, you can pay down debt or boost your savings.

Would you ignore a hundred-dollar bill on the sidewalk? Of course not. You'd bend over and pick it up. So why are you passing up other opportunities to get free money? If your employer matches employee contributions to a 401(k) but you're not participating in the retirement plan, then you're passing up free money. If you let rewards points from loyalty programs or credit cards expire, then you're passing up free money. If you claim the standard deduction on your tax return when you qualify for itemized deductions that could lower your tax bill even more, then you're passing up free money.

Believe it or not, there might even be free money out there that you forgot about -- or never knew of in the first place. There are more than $41 billion worth of unclaimed assets ranging from old tax refunds and paychecks to forgotten stocks and certificates of deposit being held by state agencies, according to the National Association of Unclaimed Property Administrators. Do a search on MissingMoney.com to find out if there are unclaimed assets that belong to you.

It's easy to focus on the present -- the bills you have to pay, the things you want to buy -- and assume you'll have time in the future to start saving for retirement. But the longer you wait, the tougher it will be to amass a sufficiently large nest egg. For example, if you wait until you are 35 to start saving for retirement, you'll have to set aside $671 a month to reach $1 million by age 65 (assuming an 8 percent annual return). But if you start at age 25, you'll need to save just $286 a month to hit $1 million by the time you're 65.

Even if you're creeping closer to retirement, it's not too late to start putting away money. In fact, Uncle Sam makes it easier for procrastinators to catch up on retirement savings. If you're 50 or over, you can contribute up to $23,000 annually to a 401(k) (versus $17,500 for those younger than 50). The contribution limit for older savers to traditional and Roth IRAs is $6,500 a year (versus $5,500 for everyone else). Use our Retirement Savings Calculator to figure out how much you need to save.

Does this sound like your investing strategy? You hear about a stock that is soaring, and you want to get in on the action, so you impulsively buy. But soon after, the stock starts tanking. You can't bear the pain of watching your shares decline further in value, so you immediately sell at a loss. As a result, you're wasting money rather than building wealth.

Unfortunately, many investors buy high and sell low because they follow the herd blindly into the latest hot stock. You can resist the urge to go with the crowd if you adhere to smart investing techniques. One such technique is dollar-cost averaging, a simple system of investing at regular intervals no matter what the market is doing. While it doesn't guarantee success, it does eliminate the likelihood that you're always buying at the top -- plus, it takes the guesswork and emotion out of investing. See the 7 Deadly Sins of Investing to learn how to overcome common missteps.

New stuff is nice, but it's often not the best investment. Take cars. Estimates vary, but some experts say a new vehicle loses 30 percent of its value within the first two years -- including an immediate drop as soon as you drive off the dealer's lot. According to Kelley Blue Book, the average vehicle is worth 44 percent less after five years.

If you're not comfortable buying something that someone else has owned, get over your hang-up because you're missing a big money-saving opportunity. Many pre-owned items can cost up to 50 percent to 75 percent less than the price you'd pay if you purchased them new. From designer jeans to college textbooks, here are 11 things that you should consider buying used because you often can find them in good or almost-new condition at a fraction of the price.

An early retirement is a dream for many, but calling it quits if you're too young has several potential drawbacks. For starters, you could incur a 10 percent early-withdrawal penalty if you tap certain retirement accounts, including 401(k)s and IRAs, before age 59½. (There are exceptions.) You can claim Social Security as early as age 62, but your benefit will be reduced by as much as 30 percent from what it would be if you wait until your full retirement age, which falls between 66 and 67 depending on your year of birth.

Health care is another big issue. You must be 65 to qualify for Medicare. In the meantime, without access to an employer-sponsored plan, you might have to pay a lot more out of pocket for individual coverage until you're eligible for Medicare.

And speaking of health, the longer you live in retirement, the more likely you are to outlive your nest egg. Let's say you make it to the age of 90. A $1 million portfolio evenly split between stocks, bonds and cash has a 92 percent likelihood of lasting until you turn 90 if you retire at 65, according to Vanguard. But retire at age 55 and the likelihood drops to 66 percent. Use our Retirement Savings Calculator to determine when you can really afford to retire.

This might be the single biggest obstacle on your path to riches. If you're not investing in continuing education, training and personal development, you're limiting your ability to make more money in the future. "Your own earning power -- rooted in your education and job skills -- is the most valuable asset you'll ever own, and it can't be wiped out in a market crash," writes Kiplinger's Personal Finance Editor in Chief Knight Kiplinger in 8 Keys to Financial Security.

Consider taking nondegree courses online to boost your knowledge of your field or enrolling in a graduate program (see 5 Advanced Degrees Still Worth the Debt). If you don't have a college degree, see our picks for best college values or check out these four alternatives to a four-year college degree. Just keep in mind that some college majors (think finance, computer science or nursing) lead to more lucrative careers than others (sorry, arts and humanities lovers).

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