Breaking Bad Money Habits: Insights from an Expert Accountant

Breaking Bad Money Habits: Insights from an Expert Accountant

Jan 17, 2024

Clay Raterman

Financial literacy and sound money management are critical components of a stable and prosperous life. In a world where financial temptations and pitfalls abound, understanding and overcoming bad money habits is essential. Inspired by an insightful video from an expert accountant, this article delves into common financial missteps and offers valuable advice for cultivating healthy financial practices. I chose to summarize the top 3 lessons I gained and delve deeper into them.

Paying Yourself Last: A Common Financial Pitfall

It's a scene we're all too familiar with: the paycheck arrives, and before you know it, it's whittled away by bills, rent, and those little treats we think we deserve. What's often left for our savings? Not much. This predicament has a name – "Paying Yourself Last" – and it's a common financial pitfall that can derail our path to financial stability.

Robert Kiyosaki, in his influential book "Rich Dad Poor Dad," puts a spotlight on this issue. He points out how most of us handle our finances: income comes in, bills go out, and whatever scraps remain, if any, go into savings. It's a model where saving becomes an afterthought, a residual act rather than a priority.

This approach is based on flawed logic. We tend to view savings as what we can spare, rather than what we should prioritize. This mindset leads to a vicious cycle where our savings don't grow, leaving us unprepared for emergencies or retirement.

The Shift: Treating Savings as a Non-negotiable Expense

So, how do we break this cycle? The answer lies in flipping the script: Treat your savings as a non-negotiable expense. Just as you would pay your rent or electricity bill, you need to 'pay' your savings account. It's about prioritizing your future financial wellbeing in the present moment.

Practical Steps to Implement the Shift
  1. Budget for Savings: When planning your monthly budget, include savings as a fixed item. Determine a percentage of your income that goes straight into savings.

  2. Automate Savings: Set up automatic transfers to your savings account on payday. This way, you save before you have the chance to spend.

  3. Reassess Your Expenses: Look for areas where you can cut back. Reducing unnecessary expenses increases the amount you can save.

  4. Increase Savings Incrementally: As you get more comfortable with this approach, gradually increase the percentage of income you allocate to savings.

By paying yourself first, you secure your financial future. It's a simple yet powerful shift in managing your money – one that safeguards against the unpredictability of life and paves the way for a financially secure future.

The Perils of Comfort with Bad Debt

In the modern financial landscape, debt is like the air we breathe – it's everywhere, and we've become increasingly comfortable with it. But there's a catch: Not all debt is created equal. There's a thin line between manageable debt and bad debt, which can be a silent killer of financial stability.

Bad debt is typically characterized by high-interest rates and is often incurred for purchases that depreciate quickly. The most common example? Credit card debt. This type of debt can spiral out of control due to its compounding nature, making it a dangerous financial burden.

Society's normalization of bad debt plays a significant role in how we perceive and handle our finances. It's become commonplace to finance lifestyles beyond our means, from extravagant vacations to the latest gadgets, all on credit. This comfort with bad debt is a perilous path, leading many into a financial quagmire.

High-interest rates on credit cards and similar debts can turn seemingly manageable amounts into overwhelming sums. Interest compounds, causing your debt to grow exponentially, and if not managed properly, can hinder your financial growth for years.

Breaking Free from Bad Debt
  1. Adopt a Cash-Only Policy for Non-Essential Purchases: Limit your credit card usage to essential items only. For non-essential purchases, if you can't buy it with cash, you probably shouldn't buy it at all.

  2. Pay More Than the Minimum: Always try to pay more than the minimum amount on your credit card bills. This approach reduces the principal faster, thus lowering the interest.

  3. Prioritize High-Interest Debts: If you have multiple debts, prioritize paying off those with the highest interest rates first.

  4. Avoid Unnecessary Borrowing: Think twice before taking on new debt. Ask yourself if the purchase is necessary and worth the long-term cost of borrowing.

  5. Educate Yourself on Interest Rates and Terms: Understanding the terms of your debts, especially interest rates and how they compound, is crucial in managing and avoiding bad debt.

Escaping the comfort zone of bad debt requires discipline, awareness, and a shift in perspective. It's about understanding the true cost of borrowing and making informed decisions that align with your long-term financial health. By taking proactive steps to manage and avoid bad debt, you lay the groundwork for a more secure financial future.

Lifestyle Inflation: A Silent Wealth Killer

As our income climbs, so often does our lifestyle. This phenomenon, known as "lifestyle inflation," can be a major roadblock on the road to financial freedom. It's the subtle yet persistent escalation of one's spending as earnings increase, often to the point where saving and investing take a backseat.

Lifestyle inflation is sneaky. It starts with a well-deserved reward for a promotion or a raise - maybe a nicer car, a bigger house, or more luxurious vacations. Gradually, these upgrades become the new normal, and the extra income that could have been saved or invested gets absorbed into a more lavish lifestyle.

The real danger of lifestyle inflation lies in its ability to hinder wealth accumulation. When you increase your spending in tandem with your income, you miss the opportunity to build your savings and investments. This can leave you unprepared for emergencies or retirement, despite a high income.

Strategies to Combat Lifestyle Inflation
  1. Maintain Financial Discipline: Resist the urge to increase spending with every pay raise. Keep your lifestyle consistent and direct extra income towards savings and investments.

  2. Set Financial Goals: Establish clear, long-term financial objectives. Whether it's saving for retirement, investing in stocks, or buying property, having specific goals can keep you focused and prevent unnecessary spending.

  3. Budgeting is Key: Continually update your budget to reflect your financial goals. Allocate a portion of any income increase to savings and investments before you adjust your lifestyle expenses.

  4. Reward Yourself Wisely: While it's important to enjoy your hard-earned money, choose rewards that don't drastically increase your recurring expenses. Opt for one-time experiences or purchases instead of upgrades that require ongoing financial commitments.

  5. Embrace Simplicity: Simplifying your lifestyle can be both liberating and financially rewarding. Focus on what truly brings you happiness rather than expensive habits or status symbols.

Lifestyle inflation can quietly erode your financial future. By recognizing and resisting it, you can ensure that increases in income translate to greater financial security, not just bigger bills. Remember, true financial freedom comes not from the latest luxury, but from the peace of mind that a well-funded savings account can bring.

Here’s the full video I used as inspiration in writing this if you’d like to learn more:

Conclusion: Charting a Course Towards Financial Empowerment

In this article, we've navigated through three critical areas in the realm of personal finance: the pitfalls of paying yourself last, the hidden dangers of comfort with bad debt, and the deceptive nature of lifestyle inflation. Each of these topics sheds light on common financial challenges and offers practical strategies for overcoming them.

However, knowledge is just the starting point. The real change happens when you apply these insights to your daily financial decisions. Tools and platforms that aid in managing and tracking your finances can be invaluable allies on this journey. One such tool is Fina, a comprehensive platform designed to help you take control of your financial life. Fina offers a range of features to track, analyze, and plan your finances, making it easier to implement the strategies we've discussed. Whether you're looking to budget more effectively, reduce debt, or save for the future, Fina is equipped to guide you on your path to financial freedom.

Embarking on the journey of financial management can be daunting, but with the right tools and a solid understanding of fundamental principles, it's a journey that can lead to profound and lasting change in your life. Good luck and as always we are here to help if you need anything.

Go transform your financial future! 🙂

Love, the founders of Fina

-Clay, Shawn, Xiao