People make money mistakes. It’s part of being human. Society calls on us to overspend, to chase the brass ring that does not exist, and above all, to judge our success by financial accomplishment. It is perfectly natural to fall into these traps. The trick is to learn from these mistakes so that we can avoid repeating them in the future. Here are some easy ways to avoid financial pitfalls and how to dig yourself out if you’ve fallen into one.
#1 Excessive Spending
You might think that this is straightforward – but spending money on things you don’t need is dangerously common. The line between ‘need’ and ‘want’ is becoming increasingly blurred. Wasting time and money on excessive pleasure, recreation, and even maintaining a particular image – are all hallmarks of the information and social media age. These can include luxury items like designer clothing, jewelry, electronic devices, and dining out. Next time you open your wallet to buy another pair of designer jeans or the latest electronic device, ask yourself: Do I really ‘need’ this? Odds are, you don’t, and you’ll be much better off in the long run if you save that money instead.
#2 Never-Ending Payments
Payment plans for essential items and bills can be a financial godsend – but using them for everything can be a drain. Monthly fees for music or movie streaming services are touted as a ‘no fuss, no muss’ way to pay for content – and they are. The only issue is that they add up – and quickly. Netflix and Spotify spring to mind as two prevalent culprits, but don’t forget about unused gym memberships, gaming subscriptions, and cable television. Automatic payments for these things are particularly insidious because they make you pay continuously but leave you owning nothing. Where possible, try paying manually for the services you actually use and enjoy. It can go a long way toward benefiting your bank account.
#3 Living On Borrowed Money
Credit cards play an integral part of modern life. They can also offer the benefit of building up your credit score, making it more likely to receive much-needed bank or car loans. But credit cards are also being used nowadays to purchase everyday things from gasoline to groceries, and many other common items that should rightly have a place in your monthly budget. The problem is that credit card companies charge astronomical interest rates for the privilege of buying things without having to pay for them right away. And when you depend on credit, there’s a higher possibility that you’ll spend more than you earn.
#4 Chasing Credit Card Rewards
Capturing rewards points is fun, especially when it comes to saving up miles and points for a much-needed vacation. It’s like playing a game. But it can quickly get out of hand when you’re only making purchases to collect points. It’s tempting – as we all live to win and to feel accomplished – but overspending to reach those points and imaginary miles can lead to ruin. For that reason, always make sure to revisit your goals, financial and otherwise, to make sure your priorities are in order.
#5 Buying A New Car
So many people fall into the trap of purchasing a new vehicle, and just as often end up with buyer’s remorse – for many reasons. One of those reasons is financial. A car depreciates very quickly. As soon as you leave the dealership in your new ride, its value has already dropped. Plus, registration, insurance, dealer fees, and maintenance all add up – over and above high monthly payments. Purchasing a used car or maintaining an older vehicle long after it’s been paid off may not be as fun – but your wallet will thank you.
#6 Borrowing To Buy Stuff That Loses Value
Cars may be the number one ‘value depreciating’ item, but there are many others. People often take out loans or use credit cards to pay for things such as smartphones, big-screen TVs, tablets, laptops, and so on. All these items can be useful and perhaps necessary in some cases, but they are also quickly outdated. While a certain intangible ‘status’ seems to come from owning the latest and greatest luxury item, this kind of thinking is very expensive in the long run.
#7 Not Having A Budget
Coming up with a doable budget can seem impossible. But once in place and adhered to, it can create much needed financial discipline and security. A flexible way to stay within your budget is by following the 50/20/30 Rule. Basically, out of your take-home pay, you should allocate:
- 50% to Essential Expenses – which include: housing, transportation, utilities, and food
- 20% to Financial Priorities – which are: retirement, savings, and debt
- 30% to Lifestyle Choices – which are: gifts, travel, dining out, shopping and other nonessentials
Also, remember to track how you are spending your money. You can use free apps or websites to do this. Often these will alert you if you are overspending and can help you further improve your budget.
#8 Lack Of Financial Planning And Investing
Achieving financial independence isn’t just about planning and saving – it’s also about generating new income streams through lucrative investment opportunities. Saving money through smart planning can lead to a surplus, which can then be invested. Some smart investment choices include stocks, bonds, real estate, or starting your own business. Having a tidy sum set aside to invest, can benefit from the compound factor – the projected amount an investment can grow over time. However, if you’re always running short on money and your expenses are higher than your income, you must get your costs under control – so you spend less than you make and save the balance. Remember, savings equals income minus expenses.
#9 Living With No Safety Net
The concept of having a ‘rainy day’ fund isn’t a new one. Many people have a few thousand dollars set aside for an emergency. And this may help with small issues cropping up, but it is only a drop in the bucket compared to an actual emergency. Save like you live: according to your needs. If you make $100,000 a year, having an emergency fund of only $25,000 is not going to last long – should you become unemployed. A good guideline is to save up six months’ worth of income in your emergency fund – and only use it for true emergencies. If your income or expenses fluctuate, you can always increase or decrease your emergency savings accordingly.
#10 Not Understanding The Importance Of Building Good Credit
While you are saving diligently, spending carefully, and living within your means, other factors are at work that determines your financial future. One of those is your credit. Credit is a multi-headed beast, but mostly, the better your credit rating is, the less interest you pay. Thus, you should work on developing some good credit habits, which include:
- Paying credit cards and other debt payments on time
- Using only 10 – 30% of available credit
- Checking your credit score and credit report regularly
- Diligently reviewing your report and disputing any mistakes
#11 Buying A House That You Can’t Afford
Buying a house will probably be the biggest expense you make – a significant investment that can last a lifetime. Our home is where we live, have parties, throw cookouts for our neighbors, celebrate holidays, and raise our children. Thus, your mortgage should be manageable in the long run, and your home’s maintenance and upkeep should factor into your expenses. However, you shouldn’t be living so far beneath your means that you and your family are uncomfortable. If you buy ABOVE your means and you cannot afford your home’s monthly mortgage payments, the bank has the right to act – often with disastrous results to your credit score. If you don’t feel like you are ready to buy, then don’t. Just rent for now, until you are prepared to buy.
#12 Staying At A Dead-End Job
Another financial mistake is choosing to stay at a dead-end job – with no room for advancement, additional earnings, or job satisfaction. Not everyone is going to love their job all the time, and sometimes you may have to take a job as a stepping stone or because you are desperate for work. However, you should create a plan to move on to a better job. Acquire the skills needed to land a position that’s better suited to your interests. Of course, it’s best to begin this process BEFORE you’re ready to leave your job – that way, you will be prepared when the time comes.
#13 Relying On Family To Fill Financial Gaps
Families tend to hold us less accountable for our mistakes, hoping we will grow, and rarely realizing that sometimes these mistakes are necessary to grow. This includes finances. Don’t get me wrong. Starting out in adulthood is not easy: having to deal with student loans, trying to save enough to buy a car or a home, or not finding a suitable job as a young adult can be overwhelming. The easiest and most comfortable option is to reach out to parents for help. And while it can be helpful in the short term and early on, long term financial reliance on family is extremely detrimental. It robs you of valuable life lessons on how to save money and live within your means.
When you are short of money, what you should do is let go of something. Sacrifice some aspect of your lifestyle to make ends meet. This is crucial to your long-term success with personal finance. All in all, keeping an eye on your finances can really pay off in the future. So do your best to budget carefully. Stay away from overspending, and monitor your expenses both big and small. Also, make saving some of your monthly earnings a ‘priority,’ along with developing a sound financial plan. As always, let us know what you think. Share your thought and comments below!