Everyone is guilty of a bad habit or two.
But it’s not your addiction to Candy Crush or your refusal to recycle grocery bags that worries us. It’s the habits that damage your finances—from overspending to procrastinating about paying bills—that set off our alarms.
In fact, we’re so committed to helping you change your less-than-stellar money habits for the better that we’re featuring a series of articles this month that specifically examine the science, psychology and strategies behind behavior change.
And what better way to kick off the series than with a month-by-month guide to financial self-improvement for the whole year? That’s why we asked six LearnVest Planning Services Certified Financial Planners™ to pick 12 of the most common bad money habits that they see (one for each month of the year)—and then offer their expert advice for breaking them in 2014.
February Bad Habit to Bust: Buying Lunch…and Coffee and Snacks Everyday
If you live or work in a city (or your commute brings you past five different drive-thrus), buying lunch out can be irresistibly easy—and problematic if your habit starts absorbing the money you’d prefer to save for something else…like a Caribbean vacation to escape the frigid cold this month.
“There’s nothing wrong with buying the occasional lunch or snack on the go,” says Stephany Kirkpatrick, CFP®, Director of Financial Planning at LearnVest Planning Services. “But when you’re aiming to conquer major financial goals, this is one of the easiest areas to cut back without seriously sacrificing your quality of life.”
While an ideal habit would be to avoid last-minute food purchases altogether, that’s not always realistic. “If it’s too much of an adjustment to go cold turkey, create a budget in the LearnVest Money Center and decide beforehand how much you’ll spend—and then challenge yourself to spend $10 less next month,” recommends Kirkpatrick. “Be sure to allow yourself one day a week when you do grab lunch—and savor it, so bringing lunch the other days won’t make you feel like you’re missing out.”
How Much You Can Save: If your lunch-buying habits are anything like that of the typical American, you probably buy a lunch that costs around $10 twice a week, spending about $1,000 a year in the process. If you cut your habit back to one lunch per week, you could save around $500.
March Bad Habit to Bust: Neglecting to Get the Best Rate
Sure, paying your bills on time is a good habit—but paying more than you should is a bad one.
Case in point? Astronomical cable bills for the 300-plus channels that you never have time to watch. And you’re not alone: The average monthly American cable bill, including phone and Internet services, was $128 in 2011—that’s triple the price from 10 years ago.
“Things fall into three buckets,” explains Natalie Taylor, CFP® with LearnVest Planning Services. “Things you can control, things you can influence, and things you can’t control or influence. Monthly bills fall into the second bucket, so use your influence wisely.”
You can start by poking around your provider’s website to see what kind of introductory and special rates they currently offer or visit lowermybills.com, which looks at your region and current bill to automatically search for better phone and Internet offers. Once you have an idea of what you could pay instead, call your provider to see if there’s any wiggle room on your rate.
How Much You Can Save: “Lowering your bills is a great way to find extra dollars for your goals without having to sacrifice your lifestyle,” explains Taylor. If you can negotiate only $10 off your monthly bills, you’ll save $120 a year. If you go a step further and cancel your cable to save $100 a month, that comes out to $1,200 a year. Put that cash into a retirement account (see October) and you could help grow your savings!
April Bad Habit to Bust: Not Prioritizing High-Interest Debt
All debt isn’t equal. So while you should always pay the minimum on your various debts—be it student loans, credit cards or a mortgage—a more productive strategy is “racking and stacking.” Essentially, you rank your debt in order of highest to lowest interest rates, and prioritize paying off the debt with the highest interest rate first by devoting any extra cash toward that debt. Once it’s paid off, you move down the list to pay down the next high-interest debt.
“Focusing on paying one debt off at a time (while making minimum payments on all other debts) can not only save you interest, but it can also give you additional cash-flow flexibility over time,” explains Taylor. “As each debt is paid off, you have one less minimum payment to worry about every month. You may still decide to dedicate just as much each month toward debt reduction overall, but you’ve got more flexibility, which always feels good!”
How Much You Can Save: If you’re sitting on a $10,000 credit card balance with 12% interest, you’re paying $100 in interest a month (and that’s a pretty low interest rate). Since most lenders require that you pay at least your interest every month, you’ll need to pay more than $100 a month in order for your balance to start decreasing.
“With payments of $150 per month, it would take more than nine years to pay off the debt, costing about $6,500 in interest,” says Taylor. “With payments of $400 per month, it would take only two and a half years to pay off the card, and cost $1,600 in interest.”
May Bad Habit to Bust: Neglecting to Take Advantage of a 401(k) Match
A 401(k) is an employer-sponsored retirement account, and some companies actually give you money just for using it, which is known as a “match.”
“Now that the days of pensions are long gone for most employees, it’s necessary that people save for their own retirement,” says David Blaylock, CFP® with LearnVest Planning Services. “Fortunately, many employers offer a matching contribution to a retirement account—once you contribute from your paycheck each pay period, your employer matches it. This contribution can have a huge impact on the amount you can accumulate for retirement.”
There’s no equivalent offered via an individual account, like an IRA or a Roth IRA, so if you aren’t contributing to a matched 401(k), you’re essentially declining free money. Changing this habit is simple: If your employer offers a match, start contributing to your 401(k)—even if it’s just the bare minimum required to get the match.
How Much You Can Save: While every company’s matching policy is different, let’s assume that your employer matches every dollar that you contribute up to 3% of your annual salary. If you make $60,000 per year, not contributing to your 401(k) costs you $1,800 per year in matching contributions. Over 30 years, at a 7% rate of return, that $1,800 per year comes out to a total of $170,000!
June Bad Habit to Bust: Carrying a Credit Card Balance
While there’s nothing wrong with responsible credit card use, if you can’t pay your entire bill on time (also known as carrying a balance), you’ll get penalized in the form of interest, which just adds to your debt.
“Getting out of credit card debt can be one of the most challenging financial things to do,” says Blaylock. “If you have several cards that carry balances, choose the one with the highest rate and attack that balance with every extra dollar you can find, using April’s ‘rack and stack’ principle, while paying the minimums on other cards.” And if you have good credit, look into lower-interest card offers that can reduce your rate temporarily when you transfer your balance—but remember to take into account any balance transfer fees before deciding to switch.
Feel that getting out of credit card debt is impossible? Blaylock recommends reaching out to the National Foundation for Credit Counseling, which can help you create a debt management plan.
How Much You Can Save: The average household carries a credit card balance of over $7,000. In December 2013, interest rates were about 15% for the average credit card account. Carrying that average balance, at that average rate for one year, will cost you $1,133 in interest charges.
July Bad Habit to Bust: Paying a Premium for Your Vacation
There’s a reason why it costs a fortune to visit the South of France in July—everyone wants to vacation there in the summer. But you can cut down on those peak season costs by planning a trip during a region’s “shoulder season,” or the months that fall just before and after peak visiting time. Another alternative: Go somewhere similar, but more affordable—like these budget-friendly alternatives for a number of iconic getaways.
“You can compare different locations if you know what general kind of trip you want, like a ‘nice beach vacation,'” says Katie Brewer, CFP® with LearnVest Planning Services. She also recommends setting a budget for your trip ahead of time, and saving toward it monthly, “so you have the funds to actually pay for the vacation.” And she suggests using travel aggregator sites, such as Kayak and Orbitz, to compare the best day, week and month to travel to the given destination.
How Much You Can Save: Of course, your individual figure depends on a combination of the destination (Brewer herself saved $1,500 by taking an anniversary trip to Costa Rica instead of a pricier Caribbean island), airfare and lodging. Let’s revisit our South of France example: By traveling in May instead of June, you can save more than $50 per night at an upscale hotel in Nice, France. For seven nights, that’s an immediate savings of $350.
August Bad Habit to Bust: Saving Your Savings Goals for Last
Many of us are in the habit of paying outside bills and obligations first, and then relegating any leftover cash to savings, whether it’s for an emergency fund, a wedding, a down payment on a home or a trip abroad.
What we probably fail to take into account is that saving money should also be an obligation—to ourselves. If we don’t prioritize it, all too often it doesn’t get done.
The fix here is a simple habit that only requires periodic action: “Pay yourself first” by setting up an automatic contribution straight from your paycheck into your savings account, either through a direct deposit coordinated through your employer or an automatic transfer from your checking account. You won’t miss the money you don’t see, and you may be inspired to tweak your budget to accommodate those savings. “It may take some adjustment at first,” says Brewer, “but you’ll feel great when you see that account increase every month with minimal effort.”
How Much You Can Save: The great thing about paying yourself first is that the potential for saving is just about limitless. If, for instance, your goal is to save $10,000 for a wedding over the course of two years, you’ll need to automate about $417 per month. So you’ll set up your automatic transfer for that base amount, and if you get a raise or your living costs go down and you rebalance your budget, you can increase your savings amount.
September Bad Habit to Bust: Overpaying on Entertainment
We’re all probably guilty of this potentially budget-tanking habit: A coworker tells you about this amazing new book that he’s reading, so you pop online and download it to your Kindle. The next day, your cousin emails you about a movie recommendation, so you order it from Amazon. Sound familiar?
“I’ve seen a number of clients who unknowingly spend hundreds of dollars a month on digital media—everything from iTunes to Amazon books and movies,” says Brandie Farnham, CFP® with LearnVest Planning Services. “I recommend creating a separate folder in the LearnVest Money Center specifically for this spending to see just how quickly all of these little purchases add up…and then rein it in!”
So instead of buying the latest titles, look up free audio and digital books on Amazon, Books Should Be Free and Open Culture. If you still can’t find what you need, Farnham recommends signing up for Scribd, a service for ebooks that’s akin to Netflix. The price: $8.99 a month.
As for movies, look into such free services as Crackle and YouTube (you can find a handful of free movies by filtering your search to show only videos over 20 minutes). Or consider joining Student, Mom or Amazon Prime to watch movies and TV episodes for free. If you aren’t a big movie-watcher, most iTunes movies offer a limited-time streaming “rental” at a fraction of the purchase price of around $5.
How Much You Can Save: Let’s say that you’re a modest reader and movie-watcher who downloads two films a month from iTunes and three books a month for your Kindle. At approximately $15 per movie and $10 per book, you’re laying out $60 a month. If you were to sign up for Amazon Prime instead—which also allows you to read free books with your membership—for $6.50 a month, you’d save $641 over the course of a year.
October Bad Habit to Bust: Setting and Forgetting About Your Savings
It’s great that you’re contributing to your retirement and savings accounts—but it’s even better if you’re automating those contributions. That said, you shouldn’t simply “set and forget” your contributions.
As you increase your goals (and hopefully your income), your savings should ramp up to accommodate those changes. “Incremental increases can have a huge impact on your future, without having a major impact on your budget today,” explains Farnham. Luckily, this is another habit you can automate: Set a calendar reminder to increase your savings contributions by at least 1% of your income every six months. (Some retirement plans even allow you to automate the increase.)
How Much You Can Save: If a person with 37 years to go until retirement increases her savings contribution by just an extra $50 each month, she could ultimately save another $105,000 (assuming a 7% annual growth rate) by the time she retires.
November Bad Habit to Bust: Dining Out to the Detriment of Your Budget
Many of us tend to use dinners out as a way to catch up with friends whom we haven’t seen in a long time—and even those who we see all of the time. Instead, why not meet up for drinks or coffee?
Even better: Stick close to home. “If you’re really just up for spending time with your friends, grab a bottle of wine, ask everyone to bring a dish, and host a movie marathon,” suggests Ellen Derrick, CFP® with LearnVest Planning Services. “It’s about the company, not the overpriced appetizers!”
How Much You Can Save: The average American spends about $2,500 a year dining out. Even if you switched from one $25 dinner a week to two $5 catch-up coffees per week, you could save over $700 a year.
December Bad Habit to Bust: Paying the Price for Last-Minute Holiday Purchases
December comes at the same time every year, so why does it always seem to sneak up on us, leaving us scrambling for gifts and shelling out extra cash?
Instead of drafting your gift list in early December, why not get into the habit of starting it in late December or early January for the following year? This way, you’ll have 12 months to use discounts, wait for deals and generally avoid last-second splurging.
Plus, a little advance planning can provide an added benefit—for your budget. “I’ve often encouraged clients to make a 12-month gift calendar,” says Derrick. “By mapping out birthdays, anniversaries, special days and holidays, along with how much you typically spend on each person, you get a better sense of your yearly cost. Then divide that by 12. In the months when you don’t have any gifts to buy, you can set that cash aside for the months that you go over your monthly budgeted amount.”
How Much You Can Save: The National Retail Federation predicted that the average American would spend more than $700 on gifts during the 2013 holiday season. If you happen to be one of these “average” spenders, and you accrue 25% worth of discounts on that $700 by using coupons, taking advantage of sales and loyalty programs and avoiding exorbitant charges for last-minute shipping, you’ll save close to $200.
January Bad Habit to Bust: Forgetting About Gift Cards
Have you happily accepted a gift card only to let it expire in the deep recesses of a drawer? Join the club.
“People tend to view gift cards and gift certificates as “I don’t know what to get you” kind of gifts, but the fact is they’re essentially cash,” says Kirkpatrick. “Even if a card isn’t for a place you frequent, you can use it to buy someone else a gift. Those ubiquitous Starbucks cards are perfect for treating coworkers or business contacts to coffee, and a restaurant gift certificate can finance a date night.”
So instead of throwing your gift cards in a drawer “for safe keeping,” stick them in your wallet or your car’s glove compartment for easy access when the opportunity arises. If you really won’t have a chance to use it, regift the card or trade it for a card you might actually use at a site like Gift Card Granny.
How Much You Can Save: Americans waste over $1 billion a year in unused gift cards. Every dollar you don’t let expire is a buck saved. If you manage to redeem or regift just three $20 gift cards left over from the holidays, you’ve saved $60 right there.