Whether we want to admit it or not, money plays an important role in most areas of life. It stands to reason then that if we don't get personal finance right, life is likely to be more difficult for us. Learn to manage money properly however and life will be easier, less stressful and (arguably) more enjoyable. Firstly, let’s remember that personal finance is exactly that - personal. Each of our individual relationships with money and our abilities to manage it are nuanced, multi-faceted and sometimes complex. There is a plethora of reasons why someone will be “good” with money, whilst someone else will be “bad” with money: our individual experiences, the examples we’ve been set by those in our sphere of influence when growing up and our financial education levels, to name a few. After years of looking through the personal financial data of strangers, I’ve noticed some common behaviours and traits which indicate that someone hasn't yet gotten personal finance quite right. The reasons for these behaviours will be various and so it’s important to note here that the purpose of this article is to highlight what these behaviours and traits are rather than explain the causes of them (more on that in future articles…) Before we go any further let me say this: if you have any of the below behaviours and traits, don’t panic. Being great at personal finance is a learnable skill and no matter how “bad” your financial situation is you can always improve it by educating yourself and working to develop different habits and behaviours.
So, what are the behaviours and traits which indicate you might still have a bit of work to do when it comes to your personal finances?
High levels of consumer debt
The strongest indicator that someone hasn't yet gotten to grips with good personal finance practices is the presence of consumer debt: personal loans, credit card debt, store card debt, buy now pay later schemes and debt consolidation agreements. High levels of consumer debt are an indication of:
not sufficiently budgeting
prioritising spending on the wrong things
an inability to delay gratification
a lack of forward financial planning
All of the above aren't great for personal financial hygiene. As a general rule of thumb: if you don’t have the cash to buy something out right and have to rely on credit to be able to purchase it, you can’t afford to buy it right now.
Not everyone who earns money actually has money. A frightening amount of people live payday to payday. The reason for this isn't always because people don't earn enough* – it’s because they don’t control their spending. Any earnings that come into their account are quickly spent. (*Let’s not dismiss that there are people who genuinely don't have enough income to cover the basics - these aren't the people I'm referring to here and the structural problems in society which enable this is an entirely different problem in itself. Something else to explore in future articles…)
3. Spending on non-essential items instead of repaying debt or saving
If living payday to payday is a symptom of poor money management, prioritising spending on non-essential items is one of its causes. Takeaways, holidays, Amazon purchases, nights out, trips to the pub, taxis, Amazon again - these are typical purchases I see whilst looking through people's bank statements, all of which are luxuries and in most cases are not essential for a decent standard of living. Spending on luxuries alone is not an indication that someone doesn’t manage their money well. Not having the right priorities in how money is allocated is. Consistently spending on luxuries instead of repaying debt and instead of saving is where the problem lies. You can have it all, you can’t have it all at once. Spending on luxuries after debt has been repaid and after an emergency savings pot has been built up is a much better approach for a solid financial foundation.
4. Absence of regular transfers to savings and investments
Not saving and investing regularly is an indication that someone hasn’t yet nailed the personal finance fundamentals. Granted, it’s not always possible to make regular transfers to savings and investment accounts - for example, when repaying high interest debt (smart move, btw). In this instance, it’s usually much better to repay high interest consumer debt first rather than using that cash for savings. Once debt has been repaid though, making regular transfers to savings and investments should be a given to build up a financial cushion for retirement.
To repeat: if we don't get personal finance right, all areas of life are likely to be more difficult.
High levels of consumer debt, living payday to payday, prioritising spending on non-essential items and not making regular provision for savings and investments are 4 common themes which indicate that someone hasn't yet gotten personal finance quite right.
Again, if you have any of these traits though, don’t panic. The first step towards change is awareness, so knowing these traits and where you have some work to do will help you start planning to make improvements.
All the knowledge, habits and behaviours that you need to be great with your money are all learnable and you're in the right place to learn with Classhouse Money - an education platform to help people get money savvy and establish the right habits and behaviours to create financial success for themselves.
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