Why We Are Bad With Money

Money management is a challenge that many people face, often leading to stress, debt, and a lack of financial security. Understanding why we struggle with money and learning how to improve our financial habits are crucial steps toward achieving financial freedom. Below, we’ll explore the reasons we often find ourselves in financial difficulties and the steps we can take to overcome these challenges.

One of the most significant reasons people struggle with money is a lack of financial education. Many of us are not taught how to manage money effectively during our formative years, leaving us to navigate complex financial systems on our own. This can lead to poor decisions, such as overspending, under-saving, and mismanaging credit.

According to a survey by the Money and Pensions Service in the UK, nearly 9 out of 10 adults said they did not receive financial education at school. As a result, they feel ill-equipped to make informed financial decisions.

Emotional spending is another common pitfall. When we’re stressed, bored, or unhappy, many of us turn to shopping as a form of therapy. This impulse to spend money in response to our emotions can lead to overspending and accumulating debt, especially when purchases are made on credit.

A 2019 study by Finder UK found that 43% of Brits admitted to emotional spending, with the average person spending an additional £29 per month on items they didn’t need.

Another reason we struggle with money is that we often live beyond our means. With easy access to credit and societal pressures to maintain a certain lifestyle, it’s easy to spend more than we earn. This lifestyle inflation can lead to a cycle of debt and financial stress.

The UK Office for National Statistics reported that in 2019, UK households spent an average of £2,548 per month, while the average monthly disposable income was only £2,530, highlighting the prevalence of living beyond one’s means.

Procrastination is a major barrier to effective money management. Many people avoid dealing with their finances, whether it’s budgeting, saving, or investing, because it feels overwhelming or they believe they have time to address it later. This lack of planning can lead to missed opportunities and financial instability.

Research from the Money Advice Service shows that 47% of UK adults admit they don’t have a budget, and many put off saving for retirement until it’s almost too late.

Once in debt, it’s easy to become trapped in a cycle that’s hard to break free from. High-interest debt, such as credit cards or payday loans, can quickly spiral out of control, making it difficult to pay off the principal amount while also covering interest payments.

The Financial Conduct Authority (FCA) in the UK reported that in 2021, 14% of adults were struggling to pay their bills and were caught in debt cycles, with many unable to make minimum payments on credit cards.

The first step to improving how you manage money is to educate yourself on personal finance. This includes learning the basics of budgeting, saving, investing, and debt management. There are numerous resources available, from books and online courses to free budgeting tools and financial planning apps.

Websites like MoneySavingExpert.com offer guides on everything from creating a budget to choosing the right mortgage, making financial education more accessible.

Budgeting is a fundamental tool for managing money effectively. Start by tracking your income and expenses to see where your money is going each month. Categorise your spending, set limits for discretionary expenses, and allocate funds toward savings and debt repayment. Sticking to a budget helps you live within your means and avoid unnecessary debt.

Using apps like YNAB (You Need a Budget) or Mint can simplify the budgeting process by automatically tracking your spending and providing insights into where you can cut back.

An emergency fund is essential for financial stability. It provides a safety net in case of unexpected expenses, such as medical bills or car repairs, preventing you from relying on credit and accumulating debt. Aim to save at least three to six months’ worth of living expenses.

If you set aside just £100 a month, you could build an emergency fund of £1,200 in a year, which could be crucial in a financial emergency.

If you’re carrying debt, prioritise paying it off as quickly as possible. Focus on high-interest debt first, as it costs you the most over time. Consider using strategies like the snowball method (paying off the smallest debts first) or the avalanche method (paying off the highest-interest debts first) to stay motivated and make progress.

By paying off a £3,000 credit card debt with a 19% APR over three years instead of just making minimum payments, you could save hundreds of pounds in interest.

To combat emotional spending, practise mindful spending by being more intentional with your purchases. Before making a purchase, ask yourself if it’s something you truly need or if it’s just an impulse buy. Waiting 24 hours before buying something can also help you avoid unnecessary purchases.

A study by Barclaycard revealed that 64% of Brits regret impulse purchases, with many items bought never being used. Practising mindful spending could help reduce this waste.

Setting clear financial goals gives you a roadmap to follow and helps you stay focused. Whether it’s saving for a house deposit, paying off debt, or building a retirement fund, having specific goals can motivate you to make better financial decisions.

If your goal is to save £10,000 for a house deposit in three years, break it down into smaller, manageable monthly savings targets. This makes the goal less daunting and more achievable.

Automation can simplify money management by reducing the temptation to overspend. Set up automatic transfers to your savings account, automatic bill payments, and direct contributions to your retirement fund. This way, your financial goals are prioritised before you even have a chance to spend the money.

By setting up a standing order to transfer £200 from your current account to your savings account each month, you can steadily grow your savings without having to think about it.

If you’re struggling to manage your finances on your own, don’t hesitate to seek professional help. Financial advisors, credit counsellors, and debt management services can offer personalised advice and strategies to help you get back on track.

The UK’s Citizens Advice Bureau provides free financial advice and can help you create a debt management plan, negotiate with creditors, or explore options like debt relief orders.

By understanding why we struggle with money and taking proactive steps to improve our financial habits, we can break free from the cycle of poor money management and work toward achieving long-term financial stability and freedom.