Let’s face it, we all have some bad financial habits.

For most of us, bad spending or financial habits come from what we learned as a child (or didn’t learn). Others develop bad habits due to stress or a personal crisis.

Whatever the reasons, we need to figure them out and end those habits. Your retirement simply can’t afford bad spending habits.

The Toxic Financial Habits to Avoid

There are more than just a few ways to screw up your finances, but here are a few of the top ones.

1. Comparing yourself to other people

Your backyard probably won't look like this after you install the pool. Stop pretending like it will. Your backyard probably won’t look like this after you install the pool. Stop pretending like it will.

There is a saying in economics and politics called a “race to the bottom.” Without getting into the politics of it, basically, it is saying that when you compete on certain things the competition hurts you instead of helping.

Spending and possessions are two things that you don’t want to compete to have more of. By competing to have nicer things you are setting yourself up to have no money, a lot of debt, and a bunch of useless trinkets and doo-dads.

I’ve seen it before – the neighbor gets a pool so they have to get a bigger pool and a screened patio. A friend gets a new car, so you start plotting to get your new car.

The worst part is that many people who fall into this trap actually convince themselves they need these things. For some reason, many don’t even realize they are competing with their neighbors.

2. Emotional Spending

I’m sure you’ve already heard about it, but what list would be good without talking about retail therapy.

When people are feeling down, some rely on shopping, food, or alcohol to try to lift their spirits. You are trading long term financial (and health) sacrifice for very short term benefits.

Realistically, spending $20 or $30 won’t break the bank –  if a tub of chicken and a 6-pack is going to help you out after a really stressful life event, who am I to judge. In my opinion, it only becomes an issue if this becomes a regular thing or if it is very expensive.

Doing this twice a week will affect your overall financial health.

3. trying to convince yourself You Need It

If you find that you are arguing with yourself or trying to convince yourself that you need something, you probably don’t need it. It ties in with the first two rules.

If you are trying to convince yourself to get something, you may be subconsciously competing with someone or battling something else. If you needed it and have the money, you probably won’t struggle with the thought of buying it.

A couple years ago I convinced myself that a $45,000 truck would actually make me more money than the one I already had and paid off. I’m pretty ashamed of that. I didn’t need the truck, nor did it make me more money – it still served the exact same function as the cheap truck…so obviously it didn’t make me more money.

I still don’t know why the ‘need’ for this truck overcame me. I fought myself for a month and ultimately lost. Unfortunately, I can’t take back that mistake, but after the ‘honeymoon’ wore off, I realized I was stuck with a very expensive mistake.

I made moves to fix it – needless to say I’m no longer burdened by that expensive mistake. I’m lucky that I’m in a financial position to make that sort of mistake and eat the cost of fixing it. No matter what, I could still be further ahead if I didn’t do that.

4. Stop burying your head in the sand

I don’t know the psychology behind it, but when faced with an overwhelming situation, people just shut down. The 2015 Paris attacks, Orlando, Charlie Hebdo, and literally thousands of other examples show that people rarely fight back when faced with certain death.

What’s the difference between those situations and when 2 American military members fought and subdued a terrorist in Belgium or other examples like it?

I believe it’s about preparation.

A long time ago, the militaries around the world realized that people rarely ‘rise to the occasion’ but instead fall to their level of training and preparation. Some people do rise up when under pressure, and there are awards for that. Most people don’t.

You're not an ostrich, so don't act like one. (OK, yes I know they don't really bury their heads in the sand.) You’re not an ostrich, so don’t act like one. (OK, yes I know they don’t really bury their heads in the sand.)

I think this is all true for finances as well.

I’ve seen it literally a hundred times. People get into a terrible financial situation and don’t know how to get out of it, so they shut down.

Some owners still haven’t called anyone to try to fix the problems the day before foreclosure auction.

I’ve had tenants stay until the bitter end during eviction thinking they would never be kicked out. Then they were.

Recently I’ve been buying my head in the sand about insurance on my properties. I know I need new policies. I know I’m paying for terrible coverage. I just hate dealing with insurance and deciding coverage and everything…so I avoided it for a couple years. The reality is that it could hurt me either by paying too much now or having poor coverage in the event of a loss. Either way, hiding from it doesn’t make it better.

5. Stop Forgetting about the unexpected

Even if you have a great budget and you are saving some money, you probably will have unexpected expenses. Each time something pops up you think it’s not a big deal because next month you won’t have to spend on that.

Then next month comes and you have to spend on something else.

I personally believe that people should always build in an extra 5-10% for the unknown expenses. If your budget has you saving 10% of your income, after unexpected expenses you will probably save nothing.

So, build it in. Plan to save 20% knowing that you may have a lot of unknown expenses. After paying for that, you may have 10 or 15% left, which is your target anyhow.

If your goal is saving 20%, then actually budget for 30%.

Ways to Solve Toxic Financial Habits

I’ve identified some of the biggest bad habits, now I’ll go over some ways to help overcome them.

1. Understand opportunity cost.

Opportunity cost is an economic term that simply means “what you have to give up in order to get something else.” If you are working, you are giving up leisure time. If you buy an expensive car, you might have to give up that vacation.

To solve toxic spending habits, you should consider everything against how many hours of work you have to put in.

Steak dinner – an hour at work. Coffee and lunch every day for a week – 3 hours. Add up all your bad spending habits and you’ll realize you might be working 3 to 5 days a month (or more) just to cover them all.

Once you start thinking about opportunity cost, it’s easy to start thinking about ways to save money. Once you realize how much of your life you are giving up, you will start to change those spending habits.

Eating out and coffee runs really aren’t worth a quarter of your working time, are they?

2. Put your budget on a diet

I generally budget on a quarterly basis because my income is erratic. If you have regular income every week or two, you can probably budget on a month-to-month basis. Unexpected things will pop up randomly, so it is probably still best to look at a 3 month period to help smooth out random fluctuations.

Put your budget on a diet. Dieting isn't fun.

Look back at your spending and budget for the last 3 months. Now, cut 1% from it.

If you are earning around 4k/month like the average American, that’s only a $40 cut in your spending. That’s only $10/week. Do you think you can find ten bucks in savings?

Once you are successful, cut it another 1% in the following month.

Not sure how? Start by learning how to become a financial stud over at FreedomisGroovy.com. They are working on living on a budget that is only 50% of their income.

Once you’ve cut through all the discretionary  spending, you’ll find yourself having to decide if you really need 400 channels, all the movie channels, and the fastest internet for $400 per month, or if the $150 package cuts it.

The goal of living on a crazy low percent of your income may seem tough, but if you take off 1% at a time, you’ll get your budget down pretty fast.

3. Take a vacation

Woah, what?

Hear me out before you send the angry email. I only mention it because I’m experiencing it while planning my extended trip overseas.

First of all, you are more likely to have toxic spending habits if you are stressed out. Vacation will help you relax and refocus on your priorities. When you get back recharged, you can focus more on slashing that budget.

But here is a more important piece – Make your vacation come out of your existing budget. This will motivate you to slash and burn your expenses to pay for that trip to Hawaii or wherever.

Once you’ve cut those expenses, you are unlikely to ever go back to them.

Recently I’ve cut out coffees at Dunkin Donuts (or Starbucks), lunches out, dinners out, drinks in the evening…everything we used to do that cost us hundreds per month. That overseas trip has motivated me to literally cut everything. After a few weeks of it, I don’t even have any desire to do that anymore.

4. Try the $20 budget

We decided to try something interesting – I call the $20 budget. Basically, I get $20 to spend on anything I want each week (food, drinks, etc). The caveat is that I can add things I want to the grocery list.

It’s hard to explain, so let me give some examples. I can buy coffee grounds from the grocery store and brew it at home without counting it against my spending budget, but coffee from Starbucks counts and I have to spend my cash for it. Eating at Chic-fil-a comes out of my pocket but chicken and bread from the grocery store doesn’t.

So I haven’t sacrificed the things I enjoy, but I have slashed the cost of them. Coffee at Starbucks is $3 per cup, but brewing it at home is about $0.50 per k-cup (I could go cheaper too if I used a coffee pot). It’s at least $8-10 to eat a quick lunch out, but I can prepare lunch at home for a couple bucks.

The $20 is because I’m not a hermit. I still want to be able to do something when I want to.

Crushing Toxic Spending Habits

There are a ton of bad habits that are detrimental to savings and retirement.

The key is through preparation: By creating a budget and preparing, you will be attacking these habits head-on and preparing for the unexpected situations that will inevitably pop-up.