Yahoo Finance Why We Keep Making the Same Money Mistakes
In theory, money management should be easy. Finance experts like Dave Ramsey and Mary Hunt say it boils down to spending less than you earn and saving enough for retirement and a rainy day.
But in practice, people struggle to master managing their finances. As of December 2017, Americans collectively owed $13.15 trillion in debt, including $3.8 trillion in non-housing debts for credit cards, auto loans, student loans and other personal loans. According to the Federal Reserve Bank of New York Center for Microeconomic Data, 2017 was the fifth consecutive year that household debt increased.
Meanwhile, 44 percent of those surveyed for a Federal Reserve System report issued last year said they wouldn't be able to cover a $400 emergency expense without selling something or borrowing money.
[See: 10 Foolproof Ways to Reach Your Money Goals.]
If good money management principles are so simple, why do Americans appear to do such a dismal job of it? Financial experts say it's because we fall into bad money habits that have us making the same mistakes over and over again. Here are a few reasons why we struggle to gain control of our finances.
It's hard to forget lessons learned in childhood. Melanie Halstenberg, co-founder of Arch Financial Services in Fayetteville, West Virginia, says people's attitudes and approaches to money are often shaped by what their parents modeled. "If they are learning from their mothers and fathers, they are destined to repeat what their mothers and fathers did," she says.
There's research to back up the idea that money habits are generational. A 2014 study published in the Quarterly Journal of Economics that used data from Norway found that reliance on welfare in one generation appeared likely to cause greater reliance on welfare in the next generation.
We look for help in the wrong places. We refuse to ask for help or if we do ask for help, we turn to friends and family members for assistance. Unless those acquaintances and relatives have a finance background, you may be setting yourself up to receive inaccurate advice.
"It's a good thing to hold your hand up and say, 'I could use some help,'" says David Freitag, a financial planning consultant with insurance and financial services firm MassMutual. However, be sure to ask for help from someone knowledgeable. What's more, be wary of financial advisors who may be paid commissions to promote a particular product. Finding a professional who gets paid a fee rather than a commission is the best avenue to benefit from unbiased advice.
Our friends make it hard to be smart about money. Motivational speaker Jim Rohn is credited with originating the idea that we are the average of our five closest relationships. It's hard to prove whether that axiom is right, but David Hays, president and founder of Comprehensive Financial Consultants Inc. in Bloomington, Indiana, says spending time with the wrong crowd is one reason we repeat the same money mistakes time and again.
"You cannot underestimate the value of association," he says. In terms of money, that means if your friends are constantly spending, you will likely spend, too. If your close friends are savers, you might be inspired to become thrifty. "Hang out with people you admire and look up to," Hays says.
We expect to always be broke and in debt. Given the statistics on American debt and meager savings, it isn't surprising that people think being broke is a normal way of life. According to a 2016 report from Credit.com, which uses data from the credit bureau Experian's FileOne database, 73 percent of consumers die owing money.
Financial experts say there is no reason to spend your life living paycheck to paycheck, but the belief that this is the American way leads many to repeat money mistakes and fall into bad habits. "Netflix is a good example. Starbucks is another good example," Freitag says. Consumers don't try to reign in unnecessary spending like this because they don't think it will make an impact on their overall financial situation.
"The coffee's great, but is it worth $3 a cup?" Freitag asks. He thinks having that extra money to pay off debt or save for retirement might taste better in the long run.
[See: 8 Financial Steps to Take After Paying Off a Debt.]
Our kids dictate our spending patterns. From sports lessons to private schools to holiday vacations to birthday gifts, the cost of caring for children drives much of the spending in households nowadays. A 2017 report from the U.S. Department of Agriculture estimates the total cost of raising a child born in 2015 until age 17 for a middle-income married-couple family to be $233,610. Child care alone can eat up 31 percent of a median income, according to a Care.com study based on 2015 data from the government, private associations and a survey of website users.
While some expenses associated with parenting are unavoidable, Hays says parents need to prioritize saving for retirement and their personal needs, particularly once their children become adults. "That's one of the biggest mistakes people make," Hays says. "Letting kids get into their pockets once they are grown."
We get emotional about our money. Halstenberg says allowing emotions to take over the decision-making process is a key reason people repeat money mistakes. It's something she sees in some of her clients when it comes to investments in the stock market.
During the last recession, people panicked when the stock market plunged and pulled out their money when the value of their investments bottomed out. Then, they were too frightened of more losses to invest in the market going forward. "We've had some clients that completely missed what happened in the past year," Halstenberg says of the recent market growth. "They've taken all the losses and missed all the gains because they are so emotional."
She worries current retirees and pre-retirees may be setting themselves up for similar setbacks. The gains from the long bull market have led some to feel overconfident. While they should be moving their money to more conservative investments, older workers have become used to the double-digit gains some funds have seen in recent years. They may not want to move into investments that are safer but have smaller gains. Halstenberg worries that if the market dips, these people will find themselves entering retirement with a diminished balance in their funds.
Financial illiteracy gets us into trouble. Money mishaps also occur because people don't understand how credit, debt and interest works. Known as financial illiteracy, this lack of knowledge can lead consumers to sign up for investments or loans that are not in their best interest.
Freitag points to zero percent financing as one example. "These promotional interest rates are all over the place," he says. They promise no interest if a debt is paid off within a certain period of time. However, if the loan is not paid off or a payment is late, the lender will charge interest all the way back to the purchase date. "God help you if you miss a payment," Freitag says.
We lack self-discipline. The most common reason people can't break bad money habits may be that they lack willpower. "Why do people not diet and exercise?" Hays asks. In the same way people find it difficult to head to the gym, they also resist making due with what's in their closet or cooking at home rather than dining out. "That change is hard," Hays says.
[See: 8 Big Budgeting Blunders -- and How to Fix Them.]
For those who want to avoid repeating money mistakes, a multipronged approach is needed. They need knowledge of how money works, a support team of like-minded friends or a professional mentor and the self-discipline to follow through on actions that will help them meet their goals. Only then will people be able to break free of their bad money habits and prove that debt and empty savings accounts don't have to be a way of life.
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