The 7 Habits of Poor Money Managers (And How to Change Them)
“Oh, I can’t afford that—I’m poor!” Claire exclaimed, taking a long, thoughtful sip of her $5 caramel Frappuccino.
A Brief History
I didn’t grow up in a wealthy family, although fair-weather friends and acquaintances have mistakenly assumed this over the years. Born to a stay-at-home Cuban immigrant and an American-born local government worker, I had a rather luxurious childhood—or so I thought. My parents owned their home in a suburb of Los Angeles county, we had a good-sized backyard, and the house itself could accommodate a growing family (which included myself and two brothers). I ate three meals a day, had plenty of toys, and never felt deprived of any material things. When I became an adult, I was afforded shocking insight into the true nature of my childhood: it was one of pinched pennies, thrifted goods, and all manner of hand-me-downs.
Growing up, every meal was home-cooked: the wide variety consisted on any given day of plain yogurt and frozen fruit, cornmeal, cream of wheat, oatmeal, canned fish, rice, beans, fried bananas, and the occasional inclusion of chicken or thin flank steak. Entertainment was sometimes derived from a VHS collection of Disney cartoons or network TV, but we spent most of our free time buried in a large stack of books aquired at the local library each week. Nearly all of my clothing was handed down from cousins or neighbors of a similar age, and costumes or clothing for special occasions were either thrifted, curated from old pieces, or home-sewn. About twice a month, my parents would treat the family to our only fast-food intake: a bean and cheese burrito each from “The Green Burrito” near our home. As for family outings, they were rare—I recall a tiny splatter of family trips and one-time day trip to Disneyland.
As a child, I was blissfully unaware of how hard my mother and father worked to maintain a lifestyle frugal enough to pay off their home while affording a stay-at-home parent. While I noticed that we only owned old cars, saved and reviewed every receipt, and recycled and repurposed everything we had, I assumed this was the norm, as children often do. I grew up never expecting from my parents—nor receiving—a college fund, a car, or any kind of financial payout to give me a foothold in the adult world. Instead, what I learned was what was modeled to me: how to manage and maximize my income in the most efficient and long-term-focused way.
When I met Claire shortly after graduating high-school, I was mesmerized. Claire was also a first-generation child, born to parents who, like my own, were neither college graduates nor family-wealthy. Claire’s parents had saved to get into their home where she, her mother and father, and her grandmother all lived together. Claire had not attended my high-school—she was from a neighboring city—but we were near the same age and worked for the same company.
Claire was my supervisor for about a year, during which time I assumed that she was making nearly double my salary. Her new car, daily frappuccinos, and penchant for take-out and restaurant dining indicated to me that she was quite well-off, or at the very least, in possession of an alternate stream of income. This theory was further solidified in my mind when I became promoted to the same position and discovered just how meager the supervisor salary was—indeed, as our friendship became closer and closer, I realized that her lifestyle was far too lavish for our bi-weekly check: she was always in possession of the latest technology (newest iPhone, flatscreen TV, Roku, Apple Music, Netflix, cable subscription, Canon camera, HBO subscription, etc.), a premium annual Disney pass, and brand-name clothing and shoes purchased right off the rack. Claire was proud that her lifestyle was self-funded—she never asked her parents for money, and when birthdays and Christmases arrived she always surprised them with generous and extravagant gifts.
One day, Claire and I were conversing about the costs of home purchase. If I intended to ever put a downpayment on a California property, I surmised aloud that I needed to increase my savings to about 60% of my current income. Claire’s reaction was visceral and abrupt. “Oh, I can’t afford that!” she exclaimed, eyes wide. And then, with a chuckle, she continued: “I’m poor!” I blinked in silence for a moment, confused. Slowly, it dawned on me—Claire had no alternate income stream. As we changed the subject, I tucked that conversation away for future reflection. Having given it much thought in the years since, here’s what I’ve discovered:
The Seven Habits of Perpetually “Poor” People—and How to Fix Them
1. Not tracking income and outflow
Claire and I earned nearly an identical amount as supervisors—in fact, with slightly more tenure, she earned more. Without organizing her spending and saving habits, however, Claire’s checks quickly vanished to pay various expenses—expenses that were not documented anywhere but in her mind. A statistics professor once said to our class, “if you can’t define it, you can’t control it.” While this was in the context of experimental research, it certainly applies to financial income as well—simply substitute “define” for “organize.”
With various entertainment subscriptions, a car payment, a Disney pass, car insurance, a phone bill and credit card payments, Claire made sure that the money to pay her bills was available and then spent the remainder. While this seems to be a benign spending habit at face-value, it is actually a quite insidious strategy for staying “poor.” Without realizing it, Claire was spending 100% of her paycheck, and actually overextending herself by creating credit card debt that she would owe the next month.
Change it: Document all IN flow and OUT flow of money over the course of the month in a place that you can constantly refer to, down to the penny (yes, pennies matter!). Ensure that you are spending no more than 80% of your paycheck. If you’re spending more, begin shaving off any unnecessary expenses and subscriptions. Everything other than these major necessities can be eliminated: rent, food, debt. If possible, get out of unnecessary debts: switch to an older car model, shop lower car insurance, downgrade your phone model, cancel redundant entertainment subscriptions, etc.
The confidence you’ll feel from being in control of your finances and taking charge of your financial empire may well outweigh the joy of those material pleasures, anyway!
2. Kissing every paycheck goodbye
Claire thought that she was only spending 100% of her paycheck every two weeks, but because she had debt, this was not the case. What qualifies as debt (besides the obvious)? Car payments, car insurance, monthly subscriptions, credit card payments, phone bill, rent, student loans—anytime that you are obligated to spend money each month because of a contracted service or product, you are indebted. Even if you pay off all of your bills every month, if the amount that you have in savings is not equal to or greater than at least one full month’s cost of bills, you are overextended. In other words, if you pay $1000 in bills per month, but do not have at least $1000 in your immediate savings, you are spending more than you can afford—one missed paycheck and your lifestyle becomes immediately unsustainable. This is known as living “paycheck to paycheck,” and the stress of this lifestyle can often create a significant amount of mental and physical anxiety.
Change it: A good rule of thumb is to ensure you have at least 3x what one month of bills costs you in savings before taking on more debt. If you don’t—you can’t afford it! Living a lifestyle you can’t afford is one of the primary causes of financial depletion and stagnation, and promises to delay or even prevent future financial growth. If you are facing debts that are non-cancellable (like student loans, mortgage, etc.), don’t fret—there are still ways to prioritize these payments and shave off unnecessary expenses without compromising the essentials.
3. “I have the money” = “I can afford it”
Claire was correct in thinking that her money was her money, and she could do with it as she pleased. Spending was totally her right and privilege—or was it? Surprisingly, not quite. Claire’s spending habits actually were costing other people money in unexpected ways.
Claire spent just about 100% of her paycheck every two weeks, thinking that because she could pay her bills, she was living “within her means.” The only time in which spending 100% of your paycheck is a good idea is if you have several months or more of paychecks saved and this is an emergency purchase. Think of it like this: if you regularly spend 100% of your paycheck, your lifestyle will remain absolutely stagnant. You can’t multiply or save what you’re earning, and therefore, you’re limiting your opportunity for growth. This practice is feasible for someone who has already acquired financial stability, but for someone who would like to increase, enhance, or solidify their financial assets, this habit will completely sabotage them. Why? Because of the “invisible cost of living.”
For example, if you are living at home and not paying rent, you do not understand that there are costs you must factor into your future standard of living that you are not presently accounting for. You may be living a lavish lifestyle now with your parents, but that is because you are not accounting for $1700 of rent in the future (California, anyone?). If you were to factor that amount into your present budget, you would find that you cannot truly afford a new car payment and insurance, the latest iPhone model, $90 shoes, $200 of fast food every week, generous birthday and Christmas presents for friends and family, etc. In Claire’s case, her parents were paying “the invisible cost of living” on her behalf—which meant that as her parents paid for the roof over her head, she was, in essence, spending their money by not saving that expense for a future investment.
For someone who has absolutely no financial goals and is comfortable staying exactly where they are, spending 100% of a paycheck is an altogether different (although still risky) maneuver.
Change it: You’ve heard of “dress for the job you want?” Here’s a new one: save for the lifestyle you desire. For every increased level of financial security you’d like to achieve, begin saving 10% more each month. For some people, that may look like saving 20% of their monthly income. For others, it may look like saving 50% (or more!). The more you save (and “saving” can be prudent investing and diversifying, too), the more secure your financial foundation becomes. A secure financial foundation is the kind of thing that small businesses, rental properties, and major investments are built on (to name a few!).
BONUS: When possible, stop purchasing things with “payments.” A $1000 iPhone seems like a lot less split across a 24 month contract and bundled into your phone bill, but you actually end up paying more—and it’s money that you could be saving and/or investing. If it’s not a necessary expense (for example, you already have a phone that is functional), consider forgoing it completely until it becomes a necessity.
4. Not budgeting—but pretending to!
Claire used budgeting as a very flexible, multi-purpose verb in her vocabulary. For Claire, “it’s in the budget” meant that she had just checked her Chase app and seen that she had enough money to make the purchase. This is not an accurate representation of what “budgeting” is, and many people tend to miss this very functional tool that can completely transform their finances!
A “budget” is the sceptor that allows you to effectively manage and rule your empire—even if it is a small empire, for now. By “budgeting in your head,” you are really just giving yourself an excuse to spend money, often leading to a sinking feeling of buyer’s remorse (or more frustratingly, unexpected debt). A budget allows you to determine how much income you are receiving in total each month, the sum of your bills, and the remainder. This gives you an excellent idea of how much you can afford to save, where you can cut expenses, and what money you can spend without any guilt—because it’s been allotted just for spending!
Change it: Download a budgeting app that tracks all of your income and provides you an allotment of “spending money” while factoring in how much you would like to save. Follow this by opening a savings account and diverting your desired savings percentage to that account on an auto-transfer every paycheck. This way, you won’t even be tempted to spend that savings amount, and you can rest easily knowing that with every passing month, your capital is increasing!
BONUS: Don’t divert from your budget, even when tempted. Commit to that budget for six months or more before revisiting it and shrinking (or increasing) your monthly savings percentage. Get creative with free forms of entertainment, low-cost ways of shopping, and thoughtful, hand-made gifting to help maximize your spending budget. This is part of the fun!
5. Scorning the small bills
Claire’s spending habits weren’t obviously outrageous to the outside world. She didn’t drive a particularly flashy car, nor did she adorn herself with fancy jewelry or expensive purses. Claire’s spending was much more insidious—it was the repeated dropping of small amounts of cash.
On any given day, Claire might spent $20 on food, $5 on a coffee (with a $1.22 tip to the barista), $20 on some internet purchase, and an invisible $33 on bills (calculated by dividing the total cost of her bills each month by the amount of days in the month). Totaling $79.22, Claire often unwittingly spent more in one day than she earned in an eight-hour shift at work. This amount fluctuated of course—on some days she wouldn’t spend at all (except for the invisible daily cost of bills), but on another day she might purchase $120 worth of groceries, spending almost two days worth of earnings. These relatively small spending amounts add up, and quickly.
Small bills and small dollar amounts tend to be misspent because of how “little” they are. People don’t feel like they’re spending a “lot” of money unless they’re dropping several hundred (or even several thousand) dollars at a time. What they don’t realize is that pennies, dimes, dollars, and even $5 and $10 bills will add up to large sums if they are given the chance.
Change it: Don’t spend it just because it’s a “small amount.” A $10 here and a $5 there quickly end up becoming an unexpectedly large portion of your income. Have you ever heard people say “I hate carrying change!” as an excuse to drop their pennies, nickels and dimes in a tip jar? If you’re one of those people, grab yourself a container you can store in your car to collect all your change, and drop it there—it adds up! Watch the cost of things like fast-food or take-out meals. Pre-made food, whether it is fast food or restaurant quality, is wildly over-priced. Additionally, watch alcohol costs. Drinking your money is a sneaky way to wake up with more than one kind of regret!
Every denomination of money is valuable, from the penny to the one hundred dollar bill. A prudent saver treats them both equally, and accounts for both wisely. Referring back to step one, if you keep track of all your inflow and outflow each month, you can easily begin to become acquainted with areas of your budget where you can save some extra cash. This WILL make a difference at the end of any savings period—even $5 extra saved per month can afford you a delightful celebratory dinner at the end of the year!
6. The insidious “easy come, easy go”
Claire was always under the impression that she was “supposed” to spend money. I blame American consumerist culture for this in large part, as well as the American school system. Working has become culturally ingrained as what you’re “supposed to do” with the majority of your time—as natural as breathing, or pooping! You work, you earn, you spend, and the cycle continues—and Claire was no exception. Exhausting a lifetime working and spending, however, is not the only lifestyle available to humanity. Unfortunately, it’s the only lifestyle that has been widely popularized by the machine of modern civilization.
People assume that they will always work, always earn, and always spend—or at the very least, spend! During the era of COVID-19 stimulus and unemployment checks, I watched Claire’s aid disappear into a new TV, hundreds of dollars worth of takeout delivery, a new camera, and countless other non-necessities. Claire justified this spending as the mechanism through which the economy is stimulated—but that’s not quite accurate. Claire’s method of spending is how the richest corporations in the US are stimulated: corporations that typically underpay employees and withhold employee benefits.
Change it: If you believe that you will be trapped in a paycheck-to-paycheck lifestyle for the rest of your life (or until retirement), it is easy to justify spending all of that paycheck in pleasures that ease the stress of such a lifestyle. The money seems to come “easily” because the daily grind is simply an accepted part of life. While it’s true that not everyone is going to start a business, become a freelancer, or work as an entrepreneur, there are ways to build your financial capital and retire sooner, own your own home and other assets, and develop mechanisms for passive income. This is absolutely possible for you, and it can begin by starting now. Seek out free information from the multitude of podcasts, Youtube videos, and articles awaiting you on the web. If you’re truly interested, you can change your unconscious habit from “easy come, easy go” to “well-earned, well-invested.”
7. “I want it, I got it.”
Claire has never been a big fan of Ariana Grande, but if there’s one thing that two have in common, it’s their spending habits. The big difference is, one of them can afford a life of extravagant impulse purchases, and the other cannot. Much like the mentality described in item #3, Claire lives under the impression that if she desires something, and she has (or will foreseeably have) the money to purchase it, it is her right and privilege to purchase it. Whether that “thing” is a $15 meal, a $26,000 car, or a $1000 iPhone—if Claire wants it, Claire gets it.
The problem is, Claire wants other things, too. Claire wants to have her own place someday. Claire would like to have a beautiful, on-location wedding. Claire would like to have a college fund for her future children. Claire would love to start a small business. These are all things that have come up in our conversations, and yet, they will never materialize without some sort of dedicated energy flow in their direction. Prioritizing wants and needs is crucial for realizing future goals—particularly goals that can be advanced through the use of money.
Change it: Learn the difference between a “want” and a “need.” A need is something that you require to survive: food and shelter being the two non-negotiables. A want is something that makes life more enjoyable, but can be forfeited without any ill-effects. Someone may believe that they’re fulfilling their needs when they eat takeout every day after work, but they are actually fulfilling their want. Eating at home for a fraction of the price actually fulfills the need just fine—and may eliminate the “want” for a gym membership later!
Remember: When someone doesn’t learn to manage their “wants” and “needs,” they often end up requiring the financial assistance of someone who did. This most typically manifests as the use of aid from parents, partners, spouses, private companies, banks, or the government. Using financial aid prudently can absolutely be a valuable key to becoming financially independent, but the key is to make conscious, organized, and prioritized decisions.
So what ever happened to Claire? Ten years after our first meeting, does she still live with her parents? Did she ever manage that on-location wedding? Does she still have a lot of technological gadgets and gizmos and no time to use them? Well, it’s time for a confession: Claire isn’t real—at least, not in the sense that she is a singular person. Instead, Claire is the amalgamation of many, many people I’ve known and loved over the years—including myself!
It’s not possible for me to predict or describe the fate of an individual with “perpetually poor” spending habits, because each person is different. Some of us learn to prioritize our finances early on, helped by mentors or even motivated by others’ mistakes. Others learn much later, when we begin to formulate serious goals, or notice the feeling of emptiness that excessive spending only seems to multiply, not subtract. Regardless, no matter what age or stage you’re in, it is possible to begin altering and creating habits that will facilitate the meaningful growth of your financial empire.
When it comes to money, just like many other things in life, habit, routine, and consistency are key. Don’t be discouraged by a saving percentage or spending budget that seem too low, or debt payments that seem too high. One day at a time, you are building something that will not just bolster and support your future endeavors, but will foster confidence and trust in your own creativity, discipline, and courage. Prudent financial investing and planning is typically not taught when we need to learn it the most—in childhood—nor is it modeled positively in consumerist culture, so allow yourself a generous learning curve and plenty of support from the multitude of excellent free resources available on the web today.
And now, as you excitedly depart to begin your financial education, take this final thought with you as you go: the best things in life are absolutely free, and with a little creativity and love, you can begin enjoying them now.