12 Things People Do That Completely Destroys Their Finances

How you handle and manage your money significantly impacts every aspect of your life. Discovering how to maintain a healthy relationship with money is vital to ensuring you stop doing destructive things toward your finances.

How Do People Destroy Their Finances?

Neglecting your credit score can destroy your finances, as can unforeseen life circumstances like bankruptcy and divorce. Here are the more common ways people ruin their finances without even realizing it.

1. Not Budgeting

People who do not budget their money do not know where it goes, and this problem quickly evolves into financial destruction.

It may manifest as paying for subscriptions without knowing, spending hundreds of dollars on coffee every month, or overpaying for car insurance because you never revise your budget and shop around for discounts.

Budgeting is essential for money management. The 50/30/20 budgeting style is quite effective. Many people prefer using budgeting apps, but I firmly believe in having a written budget, especially in the beginning budgeting phase.

2. Living Above Your Means

Living above your means, or overspending, is a significant financial issue plaguing Americans today. Between not being adequately educated about money management and indulging in mindless consumerism, it’s easy to identify the disconnect.

Living above your means means having more than enough money for basic needs but overindulging in ‘luxuries’ such as vacations, fancy cars, designer clothes, and eating out.

People with sound financial plans choose to delegate their money to building retirement savings, fund their children’s college educations, and take care of other financial obligations like final arrangement costs so they don’t burden others later.

3. Not Setting Financial Goals

Setting clear, reasonably obtainable financial goals is a practice that helps prevent people from destroying their finances. Unfortunately, not enough people are setting and crushing money goals.

Examples of reasonable financial goals to set:

• Increase your salary.
• Save for a down payment for a car or home.
• Save for a vacation.
• Pay off student loans.
• Eliminate credit card debt.
• Build additional income streams.

Start by setting short-term money goals so that you get into the practice and quickly feel how amazing it is to achieve them. Setting long-term financial goals, such as buying a home or saving for retirement, doesn’t happen overnight. But yields significant satisfaction when it’s time to celebrate those wins.

4. Not Having an Emergency Fund

Did you know that 28% of Americans have savings below $1,000? Forbes Advisor reports that this is the case for 32% of Gen Z’ ers, 31% of Millennials, 27% of Gen X’ ers, and 20% of Baby Boomers.

The first thing you need for a solid financial foundation is an emergency fund with three to six months’ worth of expenses, making these statistics problematic.

Not having an emergency fund is the pitfall of many people destroying their finances. When emergency strikes (and it always does), people are forced into making poor financial decisions like taking out high-interest loans or maxing out credit cards.

However, if they had an emergency fund, they could handle the issue and then work quickly to replace the money used from the fund.

5. Impulse Shopping

Impulse shopping is prominent in this consumerist world, which is run by targeted advertising and social media algorithms designed to keep you spending and comparing so you try keeping up with the Joneses.

You must commit to planning for the future by exercising self-control today. If you struggle with a shopping addiction, seek professional help. If you’re unable to tell yourself ‘no,’ you’ll continue to destroy your finances and succumb to the debt cycle.

6. Getting Stuck in the Debt Cycle

The prevalent American habit of perpetuating a debt cycle, often involving borrowing at exorbitant interest rates without the means to repay, is a significant threat to financial independence.

Debt demographics reveal a staggering reality-Americans are burdened with a record household debt of $16.9 trillion. This includes $986 billion in credit card debt, $11.92 trillion in mortgages, $1.55 trillion in auto loans, and $1.60 trillion in student loans.

7. Misuse of Credit Cards

I remember the first thing that happened when I turned 18 was receiving numerous solicitations for credit cards. Unfortunately, no one explained them to me; I needed to be educated about them.

Instead, I signed up for multiple cards and entered that debt cycle immediately. This is an all-too-common experience that establishes negative money habits that develop into a lifetime of financial disasters.

Mismanagement of credit cards involves:

• Having high-interest cards.
• Carrying high balances.
• Maxxing out cards.
• Making minimum payments.
• Missing payments.
• Taking cash advances.

If you can responsibly use a credit card, you may enjoy the perks of a good credit score, cash-back discounts, rewards, and airline miles. Responsible credit card use means paying off the entire balance before the bill is due.

This practice boosts your credit score while demonstrating that you are financially responsible in the event you need a loan or to finance something at a reasonable rate.

8. Buying a Home Too Soon

While home ownership and real estate investment are both sound financial goals, buying a house too soon can devastate finances.

Several risks of buying a home too early include a housing market drop or an unforeseen economic crisis you’re unprepared for, like losing your job, a sudden disability, etc.

9. Buying Too Much of a House

Another money mistake first-time homebuyers make is buying too much of a house for their budget. People get pulled into the allure of stainless steel appliances, vaulted ceilings, and the appearance of modern and new.

Buying a house is one of the most significant financial commitments people make. With 15- or 30-year mortgages, staying within your budget is crucial.

People who exceed their home-buying budgets often struggle and may need to start a side business to supplement their income.

10. Financing Addictions

People waste an obscene amount of money financing addictions, including alcohol, substances, casino gambling, lottery, sports betting, eating out, and shopping.

Spending money on addiction is one of the biggest wastes of money, and it leads to poor decision-making that often results in spending even more money.

11. Borrowing Against Retirement Plans

Reducing the balance of your 401(k) account means missing out on investment growth because you have less money growing with the market’s potential gains.

Borrowing against your retirement is a loan, so it adds another monthly payment to your budget. Finally, you’re risking a balloon payment situation that could result in expensive consequences.

12. Not Diversifying Investments

Not diversifying your investment portfolio can result in losses when the sectors you invest in suffer significant hits. Diversification is important because it can assist with mitigating losses during periods of stock market and economic uncertainty.

Assets to diversify your portfolio:

• Stocks.
• Bonds.
• Real Estate.
• Cash.
• Crypto.
• Precious metals like silver and gold.

Learn how to invest your money with a diversified portfolio by reading books by finance leaders, following educational finance blogs, and listening to money podcasts. Additionally, consider hiring a financial advisor to better understand how to invest.

In Conclusion

Learning how to budget your money, set financial goals, use credit cards to your advantage, and live below your means is the only way to stop making decisions that lead to financial destruction.