7 financial habits of people who are always either broke or in debt, according to psychology

At my lowest point, I was a 30-something guy who was perpetually broke, drowning in debt, and always stressed about money. It felt like a never-ending cycle that I couldn’t break free from.

The problem was clear: I had developed some seriously harmful financial habits. But I didn’t understand why I kept repeating them or how to change them.

That’s when I delved into psychology to understand what was going on. And in doing so, I discovered 7 financial habits that were keeping me – and many others – broke or in debt.

I’m Lachlan Brown, founder of Hack Spirit and a psychology enthusiast. In this article, I’m going to share these 7 habits with you, in the hope that it might shine a light on your own financial struggles and offer some guidance towards financial freedom.

Let’s dive in.

1) Living beyond their means

The first damaging financial habit I discovered was living beyond one’s means.

Sounds straightforward, right? But when you’re caught in the cycle of debt and constant worry about money, it’s easy to lose sight of this basic principle.

Living beyond your means is more than just spending more than you earn. It’s about not understanding the true value of money and how hard you have to work to earn it.

It’s about instant gratification – buying things you don’t need to impress people you don’t know. It’s about trying to fill an emotional void with material possessions.

I was guilty of this for years. Always chasing the next thing, thinking it would bring me happiness. But all it brought was more debt and more stress.

Understanding this was a wake-up call for me. It forced me to take a hard look at my spending habits and start making changes.

2) Not planning for the future

I remember when I was stuck in my cycle of debt, I lived paycheck to paycheck. I had no savings, no emergency fund, and no plan for my financial future. I was simply reacting to whatever financial crisis came my way.

It was a famous quote by renowned psychologist Carl Jung that really made me realize the importance of planning: “We cannot change anything unless we accept it.”

I realized that I had to accept my financial situation before I could start to change it. I couldn’t keep burying my head in the sand, hoping that things would magically improve.

This meant creating a budget, setting financial goals, and sticking to them. It wasn’t easy, and it required a lot of discipline and sacrifice, but it was worth it.

Today, I’m no longer living paycheck to paycheck. I have an emergency fund and am actively saving for my future.

If you’re constantly in debt or broke, take a moment to consider your future. Do you have a plan? Are you setting aside money for emergencies or retirement? Or are you living solely in the present with no thought of what’s to come?

3) Ignoring financial education

I can’t tell you how many times I found myself perplexed by financial jargon, interest rates, or investment options. It was like trying to understand a foreign language.

Because I didn’t understand it, I avoided it. This meant I was making financial decisions without fully understanding the implications of those decisions. And this lack of knowledge cost me dearly.

I remember the day I decided to change that. I picked up a book about personal finance and began to educate myself. It was daunting at first, but the more I learned, the more empowered I felt.

Suddenly, terms like ‘interest rates’, ‘investment portfolios’, and ‘compound interest’ didn’t seem so intimidating. I understood how to make my money work for me, rather than the other way around.

Remember, knowledge is power. The more you understand about money, the better equipped you’ll be to make sound financial decisions and break free from the cycle of debt.

4) Succumbing to social pressure

I’ll admit, I’ve been there.

I remember feeling the need to keep up with friends who seemed to be living a more lavish lifestyle than me. Whether it was eating out at fancy restaurants, going on luxurious vacations, or buying the latest gadgets, I felt compelled to join in – even when I couldn’t afford it.

And I’m not alone in this. A study conducted by the American Psychological Association found that social comparisons significantly influence our financial decisions. We often measure our worth based on how we stack up against others, leading us to make financial decisions that may not be in our best interest.

When I came across this study, it was a real eye-opener for me. I realized that my financial decisions should be based on my own goals and circumstances, not on what others were doing.

Now, whenever I feel the urge to spend money just to keep up with others, I remind myself of my own financial goals and the progress I’ve made. It’s not always easy, but it’s a necessary step towards achieving financial freedom.

5) Relying on credit

I remember when I got my first credit card. It felt like free money. I could buy things even when I didn’t have the cash for it. But soon, the bills started piling up, and I found myself stuck in a cycle of debt that was hard to get out of.

Credit isn’t inherently bad – if used correctly, it can be a useful tool for managing cash flow and building a good credit score. But it becomes a problem when we start using it as a crutch to fund a lifestyle we can’t afford.

When I realized this, I started being more mindful of my credit usage. I made a rule to only use it for necessary expenses and always paid the balance in full each month to avoid interest charges.

If you’re constantly finding yourself broke or in debt, take a look at your credit usage. Are you relying on it too much? Are you paying off your balance each month, or are you just making the minimum payments?

Being mindful of how you use credit can be a significant step towards breaking the cycle of debt and achieving financial stability.

6) Avoiding difficult conversations about money

This was a big one for me. I used to feel uncomfortable discussing money, even with close family and friends. I would avoid the topic at all costs, which only led to more financial stress and confusion.

Then I came across a quote from psychologist Jordan Peterson: “In order to be able to think, you have to risk being offensive.” I realized that avoiding these conversations was doing more harm than good.

So, I started opening up about my financial struggles. It wasn’t easy, but it was liberating. I found that many people were going through similar challenges and we could learn from one another.

If you’re constantly in debt or broke, consider how open you are about discussing money. Are you avoiding conversations about it? Do you feel uncomfortable discussing your financial situation?

Remember Peterson’s words: sometimes, we need to risk being uncomfortable in order to grow and improve. Open up the lines of communication about money – with your family, friends, or a financial advisor – and you might be surprised by the support and advice you receive.

7) Saving too much

Yes, you read that correctly. There were times when I was so focused on saving every penny that I neglected to invest in things that could potentially grow my wealth in the long run.

Being frugal is important, but it’s equally important to strategically use your money to create more wealth. This could mean investing in stocks, starting a side business, or even investing in personal development like education or training.

I started small, setting aside a portion of my savings to invest in a low-risk mutual fund. The returns weren’t huge, but it was a start, and it taught me the value of letting my money work for me.

Here’s a practical tip: Start by setting aside a small portion of your income for investments. Do your research or seek advice from a financial advisor to understand where and how to invest. Remember, the goal is not just to save money, but to use it to create more wealth.

Conclusion

Breaking the cycle of being constantly broke or in debt isn’t easy, but it’s definitely possible. By identifying and addressing these seven damaging financial habits, you’ve already taken the first big step.

Remember, it’s not about making drastic changes overnight. Start small. Maybe it’s cutting back on unnecessary spending, starting a budget, or setting aside a small portion of your income for investments.

Above all, be patient with yourself. Change takes time. But with persistence and determination, you can break free from these habits and take control of your financial future.

After all, money isn’t just about numbers in a bank account. It’s about freedom, security, and peace of mind. And that’s worth fighting for.