How Bad Spending Habits Can Lead to Bad Investing Habits

by | Dec 2, 2021 | Financial Wellness

Have you ever considered how your spending habits are directly impacting your investment portfolio? If not, you should. According to a study by the life insurance company, Ladder, Americans spend approximately $18,000 per year on non-essential purchases. Imagine how fast your retirement account could grow with even half that sum in additional savings each year.

The fact is many of the people who are saving the most are also terrible spenders. These people generally have plenty of income, but they put all their focus on getting a good return on their investments [ROI], with less focus on their spending. Having an effective plan for retirement certainly involves choosing the right investments, however, there is more to a retirement plan than simply maximizing your ROI.

In our experience, the most overlooked area of wealthy people’s retirement plans is their spending plan. On the other hand, those who avoid bad spending habits have a key advantage in growing their wealth.

What Are Bad Spending Habits?

In order to identify bad habits, it is helpful to be financially literate and also to understand how habits develop. Habits form through repetitive behaviors, which are often referred to as the “habit loop”. In this multi-step process, the first step is a trigger, which tells your brain to enter an autopilot phase. Next, you will find the actual behavior or habit, and last comes the reward.

To understand your own spending habits, it helps to understand the psychology behind them. For example, as you spend money each day, what are the emotional outcomes of your spending – do you feel positively rewarded, or dissatisfied? Referencing back to the habit loop, those transactions that leave you feeling rewarded are likely to become your habitual expenses or spending patterns. To minimize financial uncertainty and maximize your saving potential, it is helpful to identify which spending habits are bad and stop them. Bad spending patterns are commonly related to speed, convenience or vanity, so focus on purchases that fill those needs.

Some common bad spending habits include impulse shopping, unnecessary laundry services, eating out too often, purchasing bottled water when alternatives are available, atm withdrawals with accompanying fees, carrying credit card debt, falling victim to late-payment fees, failing to set aside funds for emergencies, and overspending on luxury items – just to name a few. Any of these activities can have an adverse impact on your bottom line, which directly affects your investment opportunities and your retirement options. An experienced financial professional can help you identify your own spending patterns and help you to build better spending habits.

How do Bad Spending Habits Relate to Bad Investing Habits?

Obviously, if you are in a cycle of bad spending, you will have less cash available to invest than you would have otherwise. The fact that most people overlook is the loss of compounding growth on those funds can be astonishing over time. Younger people tend to be the least disciplined savers, and unfortunately, they are hurt the most by this loss of compounding.

An even more dire situation is when bad spending habits create the need to sell investments. Selling your investments to cover non-essential spending is one of the worst things you can do to your retirement savings. Not only are you shrinking your wealth, but you are also extending the amount of time it will take to reach your retirement goals.

What Are Some Possible Solutions?

Wherever you are in the retirement planning process, there are a number of strategies to consider that could allow you to “right the ship,” so to speak. Here are a few actions you can take to improve your spending patterns.

Gain Control of Your Expenses

Start by creating a budget: what is your income and what are your essential expenses? Choose a method for tracking your expenses – you may decide to review your banking history on a regular basis or take advantage of more modern financial tools. Regardless of your methodology, identify and prioritize expenses into needs versus wants, and take action to reduce unnecessary costs. By knowing where your money is going, you can begin to gain control over your spending habits and apply any newly achieved surplus to your retirement savings.

Other common ways to reduce spending include cancelling unused subscriptions or recurring expenses, committing to cooking rather than eating out, and making your morning cup of joe at home instead of stopping by the coffee shop. Any additional amount you can regularly add to your investment portfolio, no matter how small, can provide exponential returns over time.

Set Goals

Now that you are in the driver’s seat with your spending, identify your short-term and long-term financial goals. Are you looking to purchase a home, start a family, send kids to college, create an emergency fund, get out of debt, or grow your retirement fund?

By putting your goals on paper, you can begin to strategically plan for your future. As you work toward short-term goals, you can experience early successes that will help to redirect the “habit loop” and achieve more desirable behaviors over the long-term.

Boost Savings and Investments

When it comes to investing, the earlier you start, the better – even if you have limited funds. The point is to get started as soon as possible, and by controlling spending and establishing goals, you can grow your wealth even faster.

As you invest, create a plan to serve as your roadmap to your retirement destination and stick to it. Your roadmap may change along the way, but that is fine. With consistent monitoring of your financial plan and consistent investing practices, you can grow your portfolio with less need to take on additional risk. Also be sure explore opportunities with your employer’s retirement plan that can grow your saving faster, and never hesitate to reach out to us for assistance along the way.

Get Your Spending on Track with Financial Fingerprint™ at Brookstone Wealth Management

An experienced financial advisor can help you to quickly identify and evaluate your spending habits. This will allow you to make course corrections and expand your investment portfolio. If you need assistance with navigating your financial future, contact the team at Brookstone Wealth Management. We offer a complete suite of wealth management services, supported by an experienced team of financial, legal, and tax professionals.

At Brookstone Wealth Management, we can develop your Financial Fingerprint™ – a custom financial plan that is quick to assembleeasy to understand, and simple to modify as your circumstances change – in about an hour. Our focus is on coaching, teaching and mentoring our clients and we would love the opportunity to help you find your True North.