I Have Terrible Money Habits. How Can I Break Them?

Dear Paco,

My learned ineptitude with money is my greatest not-so-secret shame. I had everything I ever wanted growing up (and then some), but my parents didn’t teach me a single thing about financial literacy. They spent their money until it ran out and were left with no savings or safety net. You would think I’d have learned from their mistakes, but I’ve spent my adult life making bad choice after bad choice, saving nothing and shopping like money is no object, even at times when I’ve lived paycheck to paycheck.

I’d been more or less consistently employed for the past several years, so I still managed to scrape by even with my bad habits. I was making six figures before I was abruptly laid off from a job I’d been at for less than a year. I received a decent severance, am getting unemployment benefits, and have some sporadic income from freelancing, but I’ve got NYC rent to pay, not to mention rapidly accumulating credit card debt… and yet I still can’t seem to help myself from indulging in things like $8 lattes and 30% off clothing sales.

And this might be the worst part: Before I lost my job, I had about $25,000 in my employer-matched 401k. At a particularly bad moment when my checking account was looking scary low, I withdrew about $15,000 of that. I opted to automatically deduct federal taxes, but I’ll have to pay state taxes on the sum come tax season. The entire situation has made me both anxious and embarrassed. I guess my question is, how can I get on the right track and stop (or at least slow) my descent into financial ruin? Is it possible to do so while still holding on to some of those creature comforts like buying new clothes and dining out with friends, or do I have to say goodbye to all that?

Dear scraping by with bad habits,

At the core of your financial problems lies a simple solution: taking a more mindful approach to your money. That’s it. But just because it’s simple doesn’t mean it’s easy. Mindfulness is something you have to work on daily. Some days are easier than others. And if you catch yourself slipping in your practice, simply begin again.

Even though your current financial situation feels precarious and unstable, there’s good news: For many people aiming to have a solid and secure financial life, one of the biggest challenges they face is simply earning enough to meet their current needs while saving for the future. With your previous, relatively well-paying job, you were able to do that. This means there’s good reason to believe that you’ll be able to secure another relatively well-paying job.

This brings me to one other piece of good news. You had another very good financial habit: saving for retirement. Of course, withdrawing $15,000 from your 401k was not ideal, but the fact that you were making contributions is a win in my book. And if you saved $25k in less than a year, that’s a pretty good savings rate (assuming a $100k salary, that’s more than 25%).

Even with these two solid wins, you, like many of us, still have some room for improvement. Getting yourself out of your current financial situation and into a healthier position lies at the intersection of a few things. 

First is what I’ve just addressed: earning and saving. There’s also the conscious effort you’ll need to make learning about personal finance. You’ll need to modify your habits and behaviors. This does mean curbing how much you spend on the creature comforts of new clothes and dining out, but there are ways to reframe this so that it doesn’t feel like deprivation.

The last major area you have autonomy over is your relationship with money. First, you must understand what you believe about money and where those beliefs come from. Then you can start examining how your beliefs impact your feelings, behaviors, and habits. As I say in my book, Finance for the People, “When we understand the things that have shaped us, we have a chance to change our shape.”

Even if you have an unshakable belief in your self-worth, there is still one major area of focus required for healthy finances: a stable income. Securing gainful employment is your highest priority right now. But as you look for a new job, here’s what you can do to start getting your financial house in order so that when your income rebounds, you’re setting yourself up with financially healthy habits.

Taking action and making changes will make you feel better about your financial life. One simple action that can cascade into more action is setting aside weekly finance time. 

When you set aside weekly finance time, you’re giving your financial life space, time, and room to expand. You’re pre-planning a block of time wherein you’re going to be mindful of your finances. It’s the simplest action you can take to start improving your financial life today, and your actions and energy will compound over time.

Start with 20 minutes, but aim for an hour. Make it a recurring event, and don’t allow yourself to get booked for meetings. Show up for your current self and commit to your future self.

During your first sessions, go for the low-hanging fruit. In week one, get all your account logins sorted and put them into a password manager. In week two, scroll through your accounts and look at your transactions. In week three, maybe try to find a few subscriptions to cancel or expenses to reduce and start looking into different ways to manage your spending. Over time, showing up will get easier and so will confronting the things you used to fear and avoid.

It sucks that your parents didn’t teach you anything about personal finance while also not setting an ideal example for how to have healthy finances. You’re certainly not the only person with an experience similar to this. 

If you want to change, you have to first take responsibility for the position you’re in, regardless of what got you there. Taking responsibility isn’t about feeling shame, guilt, or accepting fault — it’s about taking your power back. When you take responsibility, you have more power to exercise over your life. Accepting responsibility for your problems will be the first step in solving them.

I’m concerned that if you don’t change your spending habits to match your current financial reality, you’ll accumulate credit card debt that will put you in an even worse financial position. Credit card debt can happen quickly, and because of the high cost of interest, which can accelerate the growth of what you owe, the consequences of credit card debt have the potential to impact your life for years. Let’s try to avoid this at all costs.

Instead of continuing to spend mindlessly, take the time to look at your monthly expenses and your current monthly income. Have your expenses been exceeding your income? Is it because of non-essential shopping, or do your basic expenses exceed your current income? How much do you need to meet your monthly obligations like rent, groceries, and debt payments? Look at the cash you withdrew from your 401k account through this lens. Based on how much you’re spending on basic obligations, how soon will it run out?

Knowing this data can help you take a more mindful approach to your employment prospects. Do you have time to keep searching for the best possible job available or do you need to be less selective so you can get more financially stable for now? Once you know your current monthly needs, you can also figure out how much you’ll need for your emergency fund and how much you can afford to save each month.

There are so many different options for how to manage your spending, from the all-cash envelope method to applications that use a zero-based budgeting approach. While I used to think all budgeting apps were garbage, technology has improved a lot. Copilot has been one of the easiest apps I’ve used — it surprised me how easy it is to stay engaged. Explore options, test them out and find what works for you.

Remember that being mindful isn’t all or nothing. It’s just about trying your best to stay engaged, and that can look different on a day-to-day and week-to-week basis.

A major vulnerability in your financial life is your lack of an emergency fund. When you needed cash, you had to tap your 401k plan. Now that you’ve done that, you can see the second- and third-order consequences of that decision. Not only do you have to worry about taxes and penalties, but you’ve also undone any progress you’ve made towards retirement and you’ll be forgoing returns on the investments you’ve liquidated. I’m not trying to put salt in the wound; I’m merely highlighting a real-world example of the importance of an emergency fund.

The textbook definition of an emergency fund is cash equivalent to at least three, but maybe as many as six (or even nine or twelve) months of expenses. You’ll want to keep this money and save it in a high-yield money market savings account. Bonus tip: Save it in an online bank different from the bank where you have your other checking accounts. This forced inconvenience will help reduce the temptation to make immediate transfers from your savings for non-emergencies. 

An emergency fund is the first line of defense against unexpected expenses or events, like a layoff or medical situation. In the same way you automatically invested a portion of your paycheck into your 401k, set up automatic transfers for emergency fund savings.

Once you prioritize essential expenses and saving/investing, then you can spend whatever is left over freely. I recommend separating that money into its own checking account. This might seem redundant and require extra effort, but the benefits are worth it. Separating your non-essential spending is like putting up bumpers on a bowling lane: It’s a way to make sure you’ll stay on track.

Having a health emergency fund and limiting your non-essential spending is all in the name of being financially antifragile. When you are in a financially fragile state, you feel the impacts of economic and financial shocks more acutely than you would if you were less fragile. There are no guarantees that any of us will be spared from misfortune, which is why it’s important to work towards being antifragile.

The best way to do this is to have an emergency fund and a healthy savings (and investing) rate. Shoot for 30%. Once you’re gainfully employed, look at your spending plan based on your new income. I think 20% is probably enough, but if you can carve out 30% towards your emergency fund and retirement, please do this. 

Savings matter because this is the one up-river action you could take that would help solve a lot of down-river problems. If you can’t afford 30% right away, start with what you can afford and work your way towards 30%.

I know that you know that you could find ways to curb your non-essential spending, and knowing is half the battle. Take time to first understand the root of the issue: Why are you struggling with spending? 

When unpacking your relationship with money and shopping in particular, many roads lead to the same destination. Ultimately, you want to get curious about yourself and ask questions about money and shopping. 

Here are some questions to ask yourself: Growing up, what did you learn about how money operates in the world? What are some of those unspoken stories? When you shop, what is it you want to feel? Alternatively, when you shop, what are the feelings you’re trying to avoid? What are you unwilling to feel? Do you believe you deserve safety and security?

How you go about answering these questions is up to you. You can take one question and journal about it. Take another and think about it as you go for a walk. Ask your friends if they want to go around answering one of these questions. 

This is an ongoing process of continual self-discovery. Once you follow one thread, you’ll likely discover another, and over time you’ll have a better picture of what informed your worldview.

Parts of your financial foundation are shaky, but once you put the time and care into solidifying them, you’ll understand how small tweaks lead to big changes. If you’re serious about making a change, check out my book Finance for the People. I wrote it for people like you. It’s an illustrated, practical guide to managing your financial life, no matter your situation. It will help you completely overhaul how you think about money and give you tools to change your financial behaviors.

This is your invitation to transform your financial life, go on a journey of self-discovery, and step into your financial power. I hope you’ll take it. Always remember that your potential for change is limitless. 

Your favorite finance friend,

Paco