Examples of Bad Financial Decisions that are Causes of Financial Problems

35+ Bad Financial Decisions to Avoid

stop making bad financial decsions

Bad financial decisions are one of the major causes of financial problems.

So today, I would like to cover some money management mistakes that people frequently make.

Don’t let these bad financial habits cause you serious financial problems.

Bad Financial Decisions Sounds So Negative

I usually come at topics from a more positive angle.  Specifically, what you should do with your money, investments, time, and other resources.

I don’t mean to come off in a negative light. But I think there is value in knowing what you should not do with your finances.

So, stop making these common money mistakes to avoid financial problems in the first place. However you want to look at it, this is a good old fashion list of financial tips.

5 Broad Categories of Bad Financial Decisions

As I reviewed all of these bad financial habits, they seemed to fall into 5 broad categories.

  • Bad spending habits
  • Poor financial management
  • Irresponsible investing practices
  • Shaky personal judgment
  • Difficulties with debt

Your financial objectives should include understanding the decisions that fall into these categories. Everyone makes mistakes. But aim to never make the same bad financial decision twice.

Examples Of Bad Financial Decisions

So let’s move on to 30+ examples of bad financial decisions that cause financial problems.  Stay away from these bad financial decisions and you will be on your way to better financial decision making.

We will start with spending habits.  It’s not a surprise that bad spending habits center on our largest and most common expenses:  transportation and housing. Why?  We all spend money on a place to live and transportation to get us where we need to go.

Buying An Expensive Vehicle Is A Bad Financial Decision

buying a luxury car is one of many examples of bad financial decisions

Buy an efficient, reliable vehicle that will get you from point A to point B.  Avoid the high-cost of a luxury vehicle.  Buying high-cost vehicles is a poor financial decision.

Buying A New Vehicle Instead Of A Used One Is Another Bad Financial Decision

It’s a known fact that a new vehicle depreciates significantly as soon as you pull it off the dealer’s lot.

Buy used vehicles.  And, let someone else incur those depreciation costs.

Replacing Your Vehicle Too Soon Can Create Financial Stress

Buying another vehicle before you need one is an example of a bad financial decision.  Hold on to your current vehicle as long as you can.

Buying More Home Than You Need Is A Bad Financial Decision

buying more home than you need can cause financial problems

Buying a larger house than you need is a bad financial decision.  In my experience, houses are money pits.  The costs for repairs, maintenance, renovations, and furnishings all add up fast.

The bigger the house and the pricier the neighborhood, the more you will spend. So, find a cheaper state, location, and place to live!

Buying Wants, Not Needs Can Cause Financial Problems

I find that buying just what I need gets easier as I get older.  When I was younger, it seemed like I wanted everything.

Stick with affordable basics when you are buying food, clothes, transportation, and shelter. Find and move to a better location that fits your financial situation.

Pause before spending money on something you want.  After a few days, maybe whatever it is won’t seem so important anymore.

Making Impulse Purchases Are Bad Financial Decisions

Impulse purchases are another type of bad financial decision.

This one’s easy for me.  I tend to over-analyze everything.  I rarely do anything on impulse.  Being boring has its advantages!

Okay, so maybe I bought a candy bar in the grocery check-out line once or twice.

Increasing Standard of Living In Line With Income Growth

Save those bonuses and raises.  Or, use them to pay down debt.  If you didn’t need the money before, then you shouldn’t need it now.

That covers the spending area.  If it was only that easy. We are just getting started. So let’s move on to poor financial management decisions that cause financial problems.

Not Having A Budget Is A Bad Financial Decision

not having a budget is poor financial management

Having a budget is very important. Make it part of your early financial goals in life to start budgeting today.  Because not having a budget is an example of poor financial management.

Budgeting doesn’t have to be complicated.  Pencil and paper will suffice.  A spreadsheet or free online software is okay too.

When preparing your budget, expenses should be no more than income.  Look for ways to create excess cash where income exceeds expenses by as much as possible.

Research shows that most millionaires keep a budget.  Budgeting helps, even for millionaires, to know how much money is coming in and where that money is going. In other words, they have a good grip on money in and money out.

Not Sticking To Your Budget Is Also A Bad Financial Decision

Once you set that expense budget, stick to it.

Overspending your budget categories is poor financial management.  And, it is an example of a bad financial decision.

Not Creating An Emergency Fund Is A Bad Financial Decision

Financial planning experts suggest having an emergency fund.  Keep 3-6 months of living expenses on hand in cash.  Put the cash in a high-interest savings account.

The money will be there for you in case of an unexpected job loss.  Or, an unexpected expense.

Not Saving Enough Money Is Bad Financial Decision Making

Learn to pay yourself first.  Carve out 10% of your income and save it every month.

Then, as your income increases, save a greater percentage of it.  Spending everything you make, or more is a bad financial decision.

Resource – Even A College Student Can Save Money from Incomefizo

Not Having A Plan For Your Savings

Letting money sit idle is another example of poor financial management.  Get your emergency fund set.  Then next look to tax-advantaged accounts like an employer-sponsored 401(k) or an IRA.

Do you still have some money left over?  That is great.  Then turn to taxable investment accounts for any excess that you can invest.

Keeping Too Much Savings In Cash

Interest on cash savings won’t keep up with inflation.  Keeping too much of your savings in cash is poor financial management.

Once you have your emergency fund set, look for higher returns from your investments.  Specifically, stocks and bonds.  History shows that these investments generate greater returns over the long run.

Forgetting About Insurance Can Cause Financial Problems

when you have a fire, not having insurance is a bad financial decision

A major accident can cripple your finances.  Whether that accident is health-related or property related.

But remember not to over-insure.  Insure only what you can’t afford to lose.

That means having enough insurance on big-ticket items like vehicles and homes. Especially if you live in a state prone to severe weather. And natural disasters.

Also, not carrying medical insurance is a bad financial decision.  Health care costs can be very expensive. 

So, avoid this common money mistake.  Carry the right amount of insurance.

Of All Bad Financial Decisions, Not Paying Your Taxes Could Be The Worst

not paying your taxes can have dire financial consequences with the government

It should go without saying.  But I will say it anyway.  You can’t hide from the tax authorities.

Not paying your taxes is an example of a really bad financial decision.  Sooner or later, they will catch up with you.  Tax authorities can impound your assets and shut down your business.

I just walked by a business the other day in our downtown area.  It had been shut down.  There were big yellow stickers put on the door and windows by our state’s department of revenue.

Paying Bills Late Is A Bad Financial Decision

Get organized and pay your bills on time.  Set them up to automatically pay from your checking account.  Avoid the penalties and interest charges that come from paying bills late by simplifying your finances.

Paying bills late is another form of poor financial management that can cause other financial problems.  For example, late payment history will damage your credit rating.

Resource – How to dispute and correct errors on your credit report from Dollar Financials

Withdrawing Your Retirement Funds Early Is One Of The Worst Financial Decisions You Can Make

Having money in tax-advantaged retirement accounts is valuable.  The tax benefits are tremendous.

By withdrawing your money from qualified retirement accounts you are making a bad financial decision.  Then throw in taxes and early withdrawal penalties, and it becomes an expensive money mistake very quickly.

Resource – Maxed out my retirement accountsnow what? from My Own Advisor

So far we have covered bad financial decisions that relate to a person’s spending habits and financial management activities.  But that’s not all. Let’s move on to financial decisions in the investing area.

Not Investing Is A Bad Financial Decision

Some folks let investing intimidate them.  So, they never get started.

Don’t let that happen to you.  Not investing is another example of a bad financial decision.  It is very important to invest for your future. 

Investing doesn’t have to be complicated.  Look to invest in assets that appreciate.

Not Understanding Your Risk Tolerance Can Cause Money Problems

Investing wisely is a big financial decision

There has been an ongoing bull market in stocks for many years.  So, I think people have forgotten about investment risks.

The stock market will go down again someday.  And it may drag down other asset values with it.

Understand the risks you are taking with each investment you make.  Stick with a level of risk that you are comfortable with.

Not Investing Aggressively Enough Can Lead to Financial Stress In Retirement

On the other hand, getting too conservative with your investments is a bad financial decision.  Now, I know I just said to not overshoot your risk tolerance.

But you have to take some risk to generate adequate investment returns.  By thinking and investing for the long-term, investment risk is reduced. 

Investing Too Aggressively In Retirement

Investing too aggressively in retirement is an example of a bad financial decision.  After you retire, you don’t have the earnings potential you possessed earlier in life.

So being too aggressive with your investments in retirement can lead to financial losses that are hard to recover from.

We already talked about risk tolerance.  You should have less tolerance for investment risk as a retiree.

Chasing The Latest Hot Investment Is A Bad Financial Decision

I fell into this bad financial habit as a young investor.  Why? Because I paid too much attention to the financial media.

What do they talk about more often than not?  Whatever investment is hot.  That is what attracts people’s attention.

Make a high-quality investment plan. Then stick to your plan.  Don’t make the money mistake of chasing the latest hot investment.

Resource – Investing mistakes made in my 20’s from Gen Y Money

Investing In Risky Assets Is A Bad Financial Decision

Putting your money in risky assets is a bad financial decision.  Commodities, cryptocurrencies, speculative real estate, and penny stocks are just a few risky assets that come to mind.

Now don’t get me wrong.  Investing a small amount in any of these, or other risky assets can be okay. As long as they are part of an overall investment plan and diversified portfolio.

Just don’t overdo it.  And understand what you are investing in.  If you have any doubt, stay away.

Letting Your Emotions Rule Your Investment Decisions Is Will Cause Financial Problems

Investing is a business.  If you follow economic and business measures, you know there are ups and downs that can swing our emotions.

Invest in what you know.  Make smart investments.  Invest for the long-term.

Letting your emotions dictate your investing is an example of bad financial decision making.  I know many people that sold out of the stock market at the bottom in 2009.

Their emotion of fear heavily influenced decision making.  The same goes for greed.  Keep these emotions in check.

That covers the investing area.  But that’s not all. Let’s move on to one of the most important resources we have in life.  That is our judgment. Here’s the deal. Exercising poor judgment can lead to bad financial decisions that create financial distress.

best practices for your money

Defining Wealth In Terms Of Income

I like the saying, “It’s not what you make, it’s what you have.”

Having a high income can go a long way to securing your financial future.  But, thinking that income makes you wealthy is poor financial judgment.  And, spending all of that income is a bad financial decision.

Define wealth in terms of your net worth.  Not your earned income from your job or career.

Leveraging Your Future To Pay For Today Is A Bad Financial Decision

Student loan debt comes to mind here.  I’m a big believer in higher education.  Without it, I doubt I would have much of anything.

But college has become so expensive.  And large amounts of student debt is an example of leveraging the future to pay for today.  So is buying expensive consumer goods on credit.

Think long and hard when you are making financial decisions that leverage your future.

Falling For Schemes Or Scams

falling for scams is a bad financial habit

Falling for schemes or scams is another example of bad financial decision making.  If “it” seems too good to be true, it probably is.

It feels so long ago now, but I remember the whole Bernie Madoff scandal.  And how the victims would say their investment returns were too good to be true.  But they turned a blind eye.

The money they were making on their investments was just so great, they couldn’t ask the hard questions. Or face the reality that is was too good to be true.

Loaning Money To Family Or Friends Is A Bad Financial Decision

Wealth managment is about how much you have, not what you make

It is usually not a good idea to loan money to family members or friends.

I remember my Dad saying he would never do business with family members or friends.  He didn’t want a money issue to ruin a family relationship.  Or, jeopardize a friendship.

It is easy to let your emotions get in the way when dealing with people you are emotionally attached to.  Don’t make that financial mistake. It can cause financial problems.

Bad Financial Decisions Stem From Addictions

Whether it is gambling, alcohol, drugs or something else, getting addicted can lead to bad financial decision making.

Addiction clouds a person’s judgment.  Addictions cost money.  And that is money that can quickly drain a budget.

Putting The Kids Or Grand Kids On Financial Child Support

Most everyone wants to do the best for their children.  But doing too much when it comes to financial support can be a bad financial decision.

Doing so will tap your finances.  And perhaps more importantly, delay your children from becoming independent adults.

Getting Divorced Is A Bad Financial Decision

Most research shows that divorce causes serious financial problems.  Splitting up assets and legal costs can have big financial consequences.

Debt.com and MoneyWise recently conducted a survey about money, debt, and divorce. Here’s some data from the survey:

  • 40% reported incurring a debt of more than $5,000 as a result of their divorce
  • 43% said they’re now responsible for a joint debt from their marriage
  • 39% indicated that debt and financial difficulties played a role in their divorce 
  • 88% did not consider separation as a way to avoid incurring debt from divorce   

So, marry right the first time.  Commit to making it work.  And avoid the financial consequences that come with divorce

Ignoring Professional Advice Is A Bad Financial Decision

get professional advice when you need it for big financial decisions

By all means, if you need professional advice, go get it.  We live in such a complex world that is can help to get the advice of an expert in their field.

Lawyers, accountants, insurance and investment professionals all can have their place in our financial lives.  If you get professional advice, evaluate it and follow it.

Trying To Keep Up Or Being Cheap Is A Delicate Balance In Your Financial Decision Making

You have likely heard the saying about trying to keep up with Joneses.  Or, going along with the gang.

Don’t do it.  Trying to keep up with Mr. or Mrs. Jones is an example of a bad financial decision.  Cut your own path and live within your means.  Not somebody else’s.

In contrast, don’t be cheap.  Be sure to pay your fair share.  No one wants to hang around with a mooch.

It is a fine balance here.  So have good judgment and choose your friends wisely.  You will avoid common money problems this way.

Not Learning About Personal Finance Is A Bad Financial Decision

Congratulations.  You have made it through 75% of this article.

I can conclude that learning about personal finance and money management is not a financial problem for you.

It’s important to learn all you can about money management and financial decision making.  Otherwise, your lack of education can cause financial problems.

And our final category of bad financial decisions is debt.  It seems like all the examples of poor financial decision making can lead to only one place.  And that place is where you have too much debt.

Financing Purchases Rather Than Saving For Them Can Cause Serious Financial Problems

Ideally, there is only one type of debt to carry.  And that is mortgage debt.  Okay, maybe a car loan and student loans.  But, can you see how fast debt adds up when making exceptions like these?

Pretty soon you are servicing all that debt and need more debt to fund everyday living expenses.  So, avoid this common money problem, do your best to save for purchases before making them.

Resource – 11 financial mistakes lawyers make from Biglaw Investor

Carrying Balances On Your Credit Cards Is A Bad Financial Decision

running credit card balances can cause money problems

Getting into credit card debt is a bad financial decision.  Credit card debt is the worst kind of debt and a big cause of financial problems.

It’s typically debt on consumer purchases.  Unlike debt on your home, car or education, consumer goods carry little value.  And credit card companies charge some of the highest interest rates around.

Letting Your Debt Go To Collections Is An Example Of Bad Financial Decision Making

Just like paying your bills late, letting debt go to collections is an example of a bad financial decision.  It’s best to stay out of debt in the first place.

But, if you have debt, pay the balances due on time.  Otherwise, your credit score will get hammered.

Being A Cosigner On Someone Else’s Debt Is A Bad Financial Decision

cosigning on a loan means you could be responsible for the debt

Becoming a consigner of a loan can be a bad financial decision that leads to financial problems.  If the person who takes out the loan can’t pay it off, you are legally on the hook for it.

Before cosigning on a loan ask yourself what would happen if you become responsible for paying off that debt. If you can’t handle the debt payments, then stay away.

Concluding Thoughts About Bad Financial Decisions

If you make a money mistake or two from time to time, learn from it.  And remember, failure isn’t fatal. 

Not learning from your money mistakes is what will hold you back from financial peace, financial stability and having more money.

Knowledge is power.  Identifying the problem is the first step to solving it.

Get professional help if you need it. So, identify and avoid these bad financial decisions in your daily life whenever possible.

Recap: Bad Financial Decisions

All in, I came up with nearly 40 bad financial decisions. Make it an everyday personal financial goal to stay away from these poor choices for your money. Here is a summary:

Bad Financial Decisions – Spending Habits

  • Buying a new vehicle instead of a used one
  • Replacing your vehicle too soon
  • Buying more home than you need
  • Buying wants, not needs
  • Making impulse purchases
  • Increasing one’s standard of living in line with income growth

Bad Financial Decisions – Poor Financial Management

  • Not having a budget
  • Refusing to stick to your budget
  • Not creating an emergency fund
  • Saving too little money
  • Not having a plan for your savings
  • Keeping too much savings in cash
  • Forgetting about insurance
  • Not paying your taxes
  • Paying bills late
  • Withdrawing your retirement funds early

Bad Financial Decisions – Investing Practices

  • Not investing
  • Mis-understanding your risk tolerance
  • Not investing aggressively enough
  • Investing too aggressively in retirement
  • Chasing the latest hot investment
  • Investing in risky assets
  • Letting your emotions rule your investment decisions

Bad Financial Decisions – Personal Judgment

  • Defining wealth in terms of income
  • Leveraging your future to pay for today
  • Falling for schemes or scams
  • Loaning money to family or friends
  • Getting addicted
  • Putting the kids or grandkids on child support
  • Getting divorced
  • Ignoring professional advice
  • Trying to keep up or being cheap
  • Not learning about personal finance

Bad Financial Decisions – Debt

  • Financing purchases rather than saving for them
  • Carrying balances on your credit cards
  • Letting your debt go to collections
  • Being a cosigner on someone else’s debt

Now that you are fully informed. Make it a financial goal. To never make these bad decisions.

Related Articles To Improve Your Financial Decision Making

Don’t Let Bad Financial Decisions Cause A Money Problem For You!

20 thoughts on “Examples of Bad Financial Decisions that are Causes of Financial Problems”

  1. Hi Tom,

    I have to say that excessive lifestyle inflation is my “favorite” bad financial decision, and the one I see most often. I think that most increases in income should go towards saving and investing, and just a bit towards fun. Of course, we’ve made mistakes, but fortunately nothing too bad.

    Cheers,
    Miguel

    • I’ve made my share of money mistakes too, Miguel. Like most anything in life, it’s best to learn from those poor financial decisions and not make the same mistake twice. Tom

  2. Hey Tom,

    Great post with so many truths. I have certainly made my share of mistakes. I’m sure I’ll make more too, but I’ve really committed to making smarter financial decisions. I really like the point on expensive cars and buying used. Getting divorced is another one that stood out to me. Thanks for sharing!

  3. Thanks for the mention Tom 😉

    When I read your excerpt about not falling for the hyped up stocks, Tesla comes to mind. Everyone is talking about it, but they don’t talk about boring dependable companies that provide dependable dividends 🙂

  4. Uh oh…I don’t even wanna say how many of these I am guilty of 🙁

    Trying to get better on a few of them though…hah

  5. I do not budget. But I do all the others, so therefor I do not need to budget. Thanks for interesting Reading/Swedish Investor.

    • Thanks for visiting/commenting from Sweden! Maybe consider a cash flow forecast. It’s basically the same as a budget, but the reason to do it is to know how much extra cash you will have each month. In that way, it becomes a tool to plan the amounts of your savings/investments. Best wishes…Tom

      • Enjoy Reading US blogs, 99% of my holdings are US or Canadian. You have a nice market. Right now I am 75% liquid but plan to change that over the coming years. Dividend and divgrowth stocks mainly.

        • Good luck with the investments. Maybe we will get a correction in the coming months that will improve our buying opportunities. Tom

  6. Devo dizer que cometi poucos erros de decisões financeiras.Sou considerada uma pessoa de outro planeta por gostar de cuidar bem do meu dinheiro.

    • Geovana, Thanks for commenting! My foreign language skills are pretty poor. If I got it right, good money management skills are an important part of having more money over the long-run. If I got it right, I agree! Tom

      • I’ll translate to you. Rsrsr.
        I must say that I made few mistakes in financial decisions. I am considered a person from another planet because I like taking good care of my money.

        • Thank you for translating Lidia! No matter our language, we have all made a few financial mistakes. I appreciate your candor. Tom

  7. Hello Tom,

    Your guide is very useful for the beginner’s like to when we plan for financial budgets.

    I had a bad experience when I start my business without planning my current financial state. 🙁

    However I recovered quickly and I’m running a successful business now.

    • Hi. I am glad you found the article useful. Everyone should do their best to avoid costly financial decisions. And being aware of our decision making is the first step. Furthermore, I am very happy for you that your business is successful. Congratulations! Tom

  8. As you said (also many researches) divorce is the worst situation which tends to a bad financial decision. Many people are suffering from bad financial decisions like divorce.

    • Hi. You got it. A good marriage pays dividends in more ways than one. And avoids a lot of stress from the financial issues of dividing assets. Tom

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