In a country where financial stability is considered a cornerstone of the American Dream, it is surprising how quickly wealth can slip through one’s fingers due to poor financial habits. Many Americans find themselves struggling financially despite having a substantial income or inheritance. Recognizing and correcting these habits is crucial to ensuring long-term financial health.
Read on to learn 12 habits that can make you poor despite your wealth.
Failing To Budget
Budgeting helps you understand where you spend your money and identify areas where you can cut back. Without a clear budget, it is easy to lose track of spending, leading to unnecessary expenses. According to a 2022 survey by Credit.com, 27% of Americans said they don’t need a budget, and 24% said they won’t stick to it even if they budget.
Spending More Than Your Means
Lifestyle inflation is a common phenomenon where increased income leads to increased spending. Many Americans upgrade their lifestyle by upgrading their car or taking international trips with each raise or bonus, which can lead to financial instability. A Forbes Advisor survey in 2023 revealed that nearly 70% of respondents live paycheck to paycheck. Furthermore, according to the Getting Paid in America Survey by PAYO in 2023, almost 50% of almost 39,000 respondents said it would be challenging to fulfill their regular expenses and debt if their paycheck was delayed by a week. Overspending on non-essential items can quickly deplete your wealth.
Not Having Multiple Streams Of Income
A single source of income does not give enough risk protection. Diversifying income streams provides financial security and opportunities for wealth growth. According to Bankrate’s Side Hustles Survey, one-third of US adults side hustle, reflecting a growing trend in seeking additional income sources. Though side hustling is new to America, almost half of Gen Z and Millennials have a side hustle in 2024. Multiple income streams can include side businesses, investments, or freelance work. Having just one income source can leave you vulnerable to economic downturns and job loss.
Impulse Buying
Impulse buying is a habit that can drain your finances quickly. Research by OnePoll and Numerator found that an average American is spending $151 per month on impulse buying. Though it is significantly down from $314 in 2022 and $276 in 2021, it is worrisome because 88% of Americans are still making spontaneous purchases. These unplanned expenses increase over time, reducing the money available for savings or investments. Planning purchases and avoiding the temptation of sales and promotions can help curb this habit. Financial discipline and mindfulness are crucial to avoiding impulse buys.
Running Up Credit Card Debts
Credit card debt is one of the most significant financial burdens for many Americans. The Quarterly Report on Household Debt and Credit says Americans’ credit card balances totaled $1.142 trillion in the second quarter of 2024. High interest rates and fees accrue, leading to a cycle of debt. Accumulating credit card debt can significantly hinder financial growth and stability.
Not Investing Adequately
Planned investments can grow your wealth over time. However, many Americans do not invest enough or at all. Statista reports that 63% of American adults invested in the stock market in 2023; the figure has remained steady in the last few years but is still below the levels before 2008. Investing in stocks, bonds, real estate, gold, and other assets can provide significant returns and build long-term wealth. Without adequate investment, your money’s growth is limited to traditional savings accounts, which often have low interest rates.
Ignoring Insurance
Insurance provides a safety net that can prevent financial devastation in the event of an emergency. Whether it is health, life, or property insurance, having adequate coverage protects you from unexpected expenses. As per the National Health Interview Survey, an estimated 27.1 million (more than 8%) Americans did not have health insurance during the first three months of 2024, an increase of 3.4 million Americans compared to the same time in 2023. Ignoring insurance needs can leave you exposed to significant financial risks.
Lending Money Without Accountability
While helping friends and family can be fulfilling, setting boundaries and ensuring accountability is essential. Regularly giving away money without proper tracking can strain your finances. According to a 2019 Bankrate survey of nearly 2500 US adults, 60% of Americans said they lent money to friends or family. However, 35% were negatively impacted as they lost money, resulting in a damaged relationship or credit score. Establishing clear terms and conditions for financial assistance can help maintain your financial health. It’s crucial to balance generosity with financial responsibility.
Neglecting Retirement Savings
Saving for retirement provides financial stability in your golden years. However, many Americans are not saving enough. They need $1.46 million to retire comfortably, while the average amount in a retirement account is $88,400, far below what is required. Planning and contributing regularly to retirement accounts like 401(k)s or Roth IRAs help. Neglecting retirement savings can lead to financial difficulties in your later years.
Falling For Fraud Investment Schemes
Many investment schemes promise high returns with little effort but are usually too good to be true. These schemes can lead to significant financial losses. The Federal Trade Commission data shows that American adults lost more than $10 billion to fraud in 2023, out of which more than $4.6 billion was lost to investment scams. It is essential to conduct thorough research and be wary of investments that promise guaranteed returns.
Poor Tax Planning
Effective tax planning can save you a substantial amount of money. Many Americans miss out on deductions and credits because of poor tax planning. The IRS reported that taxpayers left an estimated $1 billion in unclaimed refunds for tax year 2020. It is advisable to understand tax laws and seek professional advice to maximize your returns. Poor tax planning can lead to overpaying taxes and missing out on potential savings.
Ignoring Financial Education
Many Americans lack basic financial literacy, leading to poor financial choices. A MarketWatch survey shows that only 57% of American adults are financially literate. Furthermore, only 26% of Americans could answer four out of five financial literacy questions correctly. Engaging in financial education through courses, books, or advisors can improve your financial knowledge. Ignoring financial education can prevent you from understanding complex financial matters and making informed decisions.