Five Habits That Break the Bank

Habits are hard to break.  But nothing hits home harder than a habit that breaks your relationships, your health, or your finances.  Let’s face it.  Over time, little habits can become a big problem.  After all, many of us know someone whose life has been ruined by habits, addictions and out-of-control behavior.   Bad financial behavior can stem from lack of discipline as well as vices and addiction. Being financially aware can break habits that undermine our financial wellness.  Study these five, stealthy habits that break the bank.

No. 1 Weekly Items that Cost Under $5

You stop by Starbucks every morning and buy a Grande, skinny latte that costs $4.80.  Later in the afternoon, maybe you get another cup of specialty coffee, tea or a smoothie.  That’s another $4.80.  It’s simple math, $9.60 a day in non-essential beverage or food purchases equates to $48/week or almost $2500/year.  Add that up over 15 years and you’ve spent over $37,000 on premium priced beverages.  Ridiculous?  There is no more simple way to eliminate a huge portion of your daily/weekly spending than to cut out the specialty coffees, smoothies, yogurts and other pleasure drinks.

How many other purchases do you make that contribute to the “latte factor” in your life?  Do yourself a favor a keep a journal for one month of everything you spend –focusing primarily on the smaller, cash purchases, those under $5, such coffees, soft drinks and snacks.  You may surprise yourself with the amount of money that goes out of your wallet and into your mouth.

No. 2 Financing Purchases (Other Than a House or Car)

Typically a major “use asset” such as your home or your car are only affordable if you take out a mortgage or a loan.  These are acceptable and common forms of debt – provided they don’t consume too much of your disposable income.  A general rule of thumb is this:  expenses associated with your house – principle, interest, taxes and insurance (PITI) — should not account for more than 28 percent of your gross income.

What tends to be the problem though is the debt we amass when financing non-essential purchases such as televisions, electronics, furniture and appliances.  Retailers advertise, “No payments until 2012!” “Financing Available!”  “No credit check!”  We are lured into thinking these easy purchase options make something more affordable than it really is because we are making monthly payments.

Do yourself a favor. Stash away the cash and only when you have enough to make the entire purchase should you permit yourself to buy it. Two things go to work here.  First, you force yourself to actually save for something you really want to buy.  More importantly, when it comes to shelling out, say $3000 for a new high def flat screen television, you think twice.  This is the kind of discipline we need to instill in ourselves to keep from breaking our bank accounts.

No. 3 Rationalizing that You “Deserve It”

You work hard, take care of the children, the house, and maybe even your elderly parents.  So, when it comes to spending money on yourself, you rationalize.  A new pair of shoes here, a dinner out with girlfriends there, a romantic getaway with your loved one to recharge your batteries, a brief little shopping spree on a Saturday afternoon.  Although you most certainly do deserve a rest, time away, to be waited on, you are doing yourself no favors in these circumstances by behaving as though you can afford something you otherwise can’t, simply because you “deserve” it.

Instead, find rewards for yourself that are affordable and within your means.  Instead of a fancy meal out, make a picnic and dine under the stars, next to a water fall or overlooking the city lights.  Go through your closet and organize your shoes.  Instead of buying a new pair, donate several to a women’s resource center.  You get the picture.  Spending money on yourself because you deserve it undermines financial planning and your families’ budget.  Ultimately we simply add to the stress of our extensive responsibilities by spending money to make ourselves feel good.

No. 4 Keeping Up with the Joneses

A common insecurity is that we are not as successful as our friends, family members or neighbors.  So, to prove to them (and to yourself) that you are every bit as accomplished as they are, you may overspend to compensate.  By driving a fancy car or dressing in an extensive designer wardrobe, many feel accomplished and outwardly successful.  Yet, we are oftentimes spending way more money than we can reasonably afford.

In the continually popular book, The Millionaire Next Door: Surprising Secrets of America’s Wealthy there is described in great detail personal habits and values of families who live well within their means.  Rather than choosing over the top lifestyles, they spend to save rather than spend to pay later.  What happens then is personal finances are manageable, savings is paramount and self-confidence grows exponentially.

Those with the largest incomes too frequently spend the most and save the least.  Fancy cars, houses, clothes, vacations, electronics and an ever-growing monthly overhead become monsters to manage.  The smallest hiccup in income causes disruption in the flow of money out, meaning the margin is too tight.  Needless to say this causes a great deal of stress and many times it means having to get rid of something during a difficult time at a fraction of the price.

Those clients with modest lifestyles and an overhead that is manageable are the ones who amass a small fortune over their lifetimes.  Generally speaking, total debt payments should never exceed 38 percent of the gross income.  This includes your mortgage, car payments, credit card payments, other financed purchases, student loans and outstanding medical bills.  And if you are not saving 20 percent of your gross income in 401(k) plan deferrals, other qualified retirement plans and after-tax savings accounts, you cannot expect to have sufficient funds to retire.

No. 5 Eating Out

Eating out is often the biggest waste of money.  You will absolutely break the bank if you eat out two or more nights a week.  Couple that with eating out every day for lunch and you have just identified your biggest waste of money.  Remember the journal mentioned for tracking your smaller, less expensive, but certainly indulgent purchases?  Flip the page and now track every dollar you spend eating breakfast, lunch and dinner at a restaurant or fast food joint.

We all know how to address that problem, but so many of us haven’t exercised the discipline to make it happen.  But you can break this habit. First, plan your menus weekly.  Buy simple breakfast items that can be prepared at home in 10 minutes or less, so we don’t excuse a quick stop in the morning because while in a hurry.  Make coffee at home and take it to work in a travel cup or thermos.

Lunches are really the easiest to tackle.  Pack up leftover dinner items for the next day.  Better yet, make extras when you do cook, so there is an extra portion or two for lunch.  Make packing your lunch for the following day an after dinner activity.  Moms who have been packing children’s lunches for years can attest to the creativity it takes to keep your children eating healthy.  Now, do it for yourself.  Sandwiches and salads are easy  to make before bed than when you’re tired and in a hurry in the morning.  Stock some canned soup, tuna and crackers in your desk for easy preparation at the office.

Dinners at home are the biggest challenge for most people, especially for those who don’t like or know how to cook very well.  Step out of your comfort zone and find recipes you can make on weekends.  Package up and reheat for dinners later in the week.  Use your new resolve to save money and eat healthier.  Even pre-cooked dinner items available at grocery stores and gourmet markets are less expensive than moderately priced restaurants, when you include other factors such as alcohol and gratuity.

Commit to save at least 50 percent of what you were once spending eating out.  You will probably spend half of your savings on additional groceries, but that still leaves 25 percent in the bank.  Sock it away in a separate account and watch the balance grow over a six month period.

Final Note: The New Year is an excellent time to change the way you view discretionary expenses.  Spend this month tracking your spending and then on the 1^st begin with your plan.  Give it a six month time frame.  And then just sit back and count the savings.

Written by : Lisa Boone

Boone is a Vice President and Financial Advisor for Morgan Stanley Smith Barney and a CERTIFIED FINANCIAL PLANNER™.