In this blog, we will take a look at the most common financial mistakes that eventually lead to serious financial pitfalls.
Most individuals struggle to manage their finances at the start, and it is perfectly normal. Even after rigorous planning and cautiousness, you are bound to make some mistakes. But it's not just about making mistakes, it's about the opportunities you could be missing because of those mistakes.
Most common financial mistakes stem from poor spending and lifestyle habits. It is crucial to keep in mind that the habits you form and the choices you make today can have a significant impact on your financial well-being in the future.
However, the good news is that it’s never too late to learn from your mistakes and recover from them. Moreover, managing finances will get a lot easier once you figure out the basics. Here are some of the biggest money mistakes to avoid. Even if you are already in a financial rut, avoiding these money problems can help you survive.
Let’s get started.
Most Common Financial Mistakes to Avoid
Here are some of the most serious financial problems that you must avoid to ensure healthy financial well-being.
Living without a Plan or Budget
One of the most common financial mistakes is to carry on your life without creating or maintaining a financial budget.
Your financial budget is like a roadmap to achieve your ultimate financial goals. It is all about making smart financial decisions, establishing proper investments and saving strategies to reach your goals. One of the best ways is to consult a financial advisor who can set you up on the right path.
A strong budget ensures that you take care of your necessities, saving a substantial amount, as well as using some money to fulfil your wants. A good rule of thumb is to practice the 50-30-20 rule-
- 50% for needs (housing, car, healthcare, etc.)
- 30% for wants (entertainment, etc.)
- 20% to savings, debt repayment and investments
Moreover, it is important to maintain flexibility according to your income and expenses. If you can comfortably allocate more than 20% towards savings, it will be beneficial for you in the long run.
A wise man once said- “Great fortunes are often lost one dollar at a time”
Another common mistake individuals make is spending excessively to satisfy their wants. Remember, one extra coffee, takeout dinner, hanging out with friends, and more may not seem like large expenses but they eventually pile up.
If you do the math, spending $20 per week to dine out costs around $1040 per year. This money could be better utilised as payment for loans, an extra credit card, or just extra savings for your emergency fund. Avoiding this mistake will be extra helpful if you are already facing a financial slump. If you are making ends meet, every dollar counts.
Needless to say, this doesn’t mean that you shouldn’t dine out or hang out with your friends. The catch is to keep your expenses in moderation while fulfilling your wants.
Unnecessary Bill Payments
Never-ending bill payments that you keep paying every month like streaming services, music services, high-en gym memberships, cable television, and more can quickly turn into a burden and eat a chunk out of your income and savings. Moreover, these are inherently unnecessary expenses that you pay but leave you owning nothing.
If you are already facing financial hardships, or you simply want to save more, creating a well-crafted budget and following a simpler lifestyle can make all the difference. It can help you build a substantial nest egg and cushion you from any potential financial hardships.
Buying a New Car
Buying a new car is a financial goal for many individuals as having a brand-new, swanky car can alleviate your status. However, it is also one of the biggest money mistakes that can land you in money problems.
Millions of cars are sold each year but only a few buyers can afford to pay in cash. The inability to pay in cash also translates to an inability to afford a new car. Sure, you can just make loan payments for years but then you will be paying interest on a depreciating asset, which increases the difference between the value of the car and the price paid for it.
Even worse, some people trade in their cars after only using them for one or two years and lose money. A large SUV may seem nice but do you really need it? Such vehicles are quite costly and are expensive to fuel and insure. Unless you need an SUV to make a living or have practical use for it, it is a disadvantageous purchase.
Furthermore, if you do need to buy a car with a loan, consider buying one that offers the best mileage and has low maintenance. This way you can avoid serious financial problems, save some money, and spend it on other necessary expenses.
Not Taking Advantage of Employee Perks
Not taking full advantage of the perks offered by your employer is one of the biggest money mistakes individuals make.
If your employer offers a 401(k) retirement plan or the opportunity to buy certain stocks at a discount, you should jump on that offer. It is unwise to leave free money at the table.
Most employers offer a 401(k) retirement plan and even match your contributions up to a certain point. If your employer offers to match your retirement payments up to 3% of your income and you don’t use it, it’s like turning down free money.
Furthermore, if your employer offers health insurance or life insurance plans as part of benefits, make sure to list a beneficiary on them to maximize your potential benefits. Your benefits are an integral part of your compensation and it is wise to utilise them properly.
Living Paycheck to Paycheck
In the United States, many households live paycheck to paycheck and this could transform into a serious financial problem if you are not prepared.
Overspending causes people to burn through their savings and puts them in a difficult position where they need every penny of their paycheck just to make ends meet. The situation could be financially disastrous with just a single missed paycheck. Moreover, if you are in this condition during a financial recession, you will be left with very limited options with dire consequences.
Most financial planners advise keeping at least three month’s income as savings in a separate account to be used for emergencies. Loss of employment or unexpected expenses are two of the biggest money mistakes which could deplete your savings and throw you into a cycle of debt and borrowing. Having an emergency fund is one of the best financial decisions you can make to ensure financial stability.
Overusing Credit Cards
Another common financial mistake that can land you in serious financial problems is overusing credit cards. A credit card is a great tool to help you build your credit score and get decent perks and benefits, but it can also tempt you into spending more than you earn. This is especially seen in young adults who are fresh out of college.
Most Americans fail to realise that minimum payments only cover interest. To top it off, many Americans already have student loans or car loans. In this case, stacking credit card debt on top of that will be one of the biggest money mistakes you can make.
If you do use credit cards responsibly, they offer many perks and benefits. If you are already in a pile of credit card debt, consider using a low-interest credit card or a personal loan with low-interest rates to transfer your debt to a low-interest vehicle. Find a credit card with lower interest rates and great perks to use for everyday expenses while paying off your payments every month to gradually improve your credit score.
Paying Off Debt With Savings
Most people make the financial mistake of paying off debts with their savings, such as retirement accounts. First of all, it is not advisable to do so as rebuilding a retirement fund is extremely hard even for the most disciplined planners.
You also lose the power of compounding and it is quite difficult to pay back those retirement funds. Moreover, you can also incur a hefty fee. With proper planning, borrowing from a retirement account can be a good option in some specific situations but it is not advisable for an average individual.
When the debt is paid off, the urgency to pay it back diminishes too. This can tempt you into overspending and slowly land you in debt again. If you do pay off debt with savings, make sure to maintain your lifestyle like you still have a debt to pay towards your retirement fund.
Neglecting Life Insurance
While thinking about your mortality can be quite disheartening, don’t let it stop you from planning the security of your loved ones if an unexpected event occurs.
The cost of an average funeral in the United States is $7000 to $12000. In the case of untimely death, a proper life insurance policy can help your family handle these expenses and ensure that they have the proper resources to get through the tough times.
Life insurance is a relatively cheap investment for healthy adults and it offers peace of mind that your family and loved ones will be taken care of financially after your demise.
Not Investing in Your Future
One of the biggest money mistakes that can land you in serious financial problems in the future is not saving for retirement. The best way to achieve long-term goals is to have a solid investment strategy that takes advantage of your 401(k)s as well as Individual Retirement Accounts.
If you don’t make monthly contributions towards your retirement fund, you may never be able to stop working. It is important to build a nest egg to retire comfortably without any worries.
You can take advantage of tax-exempted retirement accounts and your employer-sponsored plan. Whenever you start saving, understand the time your investments will have to grow and how much risk you can tolerate. If you are unsure about the technicalities, you can consult a financial planner who will set you on the right path.
In order to avoid serious financial problems, start by planning a budget for yourself. It is also crucial to track your expenses, both big and small to get a general idea of where your money is going. Moreover, analyse your financial condition and think carefully before taking an additional loan and adding new debts. Also, keep in mind that being able to afford EMI payments doesn’t mean being able to afford the purchase.
It is also beneficial to build an emergency fund to cushion unexpected expenses. Most experts advise having at least three months of your income in your emergency fund. Lastly, make saving a habit and a priority. Maintain, track, and review your budget from time to time to ensure a safe and secure financial future.
Frequently Asked Questions(FAQs)
Q. What are the biggest financial mistakes to avoid?
Ans. While there are a ton of financial mistakes, there are some especially disastrous ones that can impact your long-term financial plans. Here are the biggest financial mistakes to avoid at all costs-
- No emergency savings fund.
- Not saving for retirement.
- Ignoring a low credit score.
- Paying too much for financial services.
- Unnecessary and frivolous spending
Q. How to properly save money?
Ans. If you want to save money there are plenty of small things that can do. Firstly, you can follow the 50-30-20 rule. This rule implies 50% of your income for necessities like food, shelter, etc. 30% of your income for personal wants like hanging out, movies, and dining out, and 20% of your income towards savings.
Q. What is a bad financial habit that has long-term effects?
Ans. While there are many poor financial habits to avoid, one of the most disastrous has to be living paycheck to paycheck and allocating any money towards savings or retirement.
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