Many people fall into common financial mistakes that set them back. It could lead to economic hardship, with many struggling to go beyond their current means.
If you are already facing difficulties, knowing and avoiding them will help you move forward. If you are in a comfortable financial position, it will still benefit you when you encounter these situations.
In this article we will list the top 9 most common financial mistakes people are making and you can avoid.
1. Spending More than You Earn
We live in a society that promotes spending. Every day we are bombarded with advertisements and promotions that make us think about making purchases.
Once the spending train begins, it is hard to stop. If someone doesn’t have the discipline to stave off their urges, it can lead them to spend money they don’t have through credit cards and loans.
There are many ways to avoid this mentality which can turn into an obsessive habit. One thing to do is create a solid budget that you can refer back to for your spending.
“Any mismanagement can lead to unintended results.” - Akira Chiba
The ideal scenario is that you have some left at the end of each month. These can go towards your savings, investments, or even paying off debts.
Apart from that, you can also list all your regular expenses, especially the nonessential ones. Cutting a little bit on entertainment, shopping, or dining can mean lots of savings as they add up.
For example, you can dine out only once or twice a week instead of three or four. You can also examine regular expenses you no longer need, such as cable or other subscription plans.
Setting goals can also be a strong motivator for saving money. Setting goals will allow you to focus.
Each level you reach towards saving helps you get more. It can unlock a better lifestyle or set you up for one of your dreams.
2. Relying on Borrowed Money
Using credit cards is a norm, and some benefits come with it. You can earn rewards, have an emergency buffer, and build up your credit score.
However, the problem is that people often become too reliant on it. Because an option for extra borrowed money exists, they use their credit cards as if it was cash they already own.
Remember that credit cards offer borrowed money with interest. You’re paying more for the convenience of having accessible cash that you don’t own.
What’s concerning is that interest rates are increasing coupled with inflation. People don’t seem to have trouble paying for gas and groceries with double-digit interest rates because they don’t notice how much it’s costing them.
Eventually, you can rely on it so much that you’ll begin spending more than you can earn. It’s not uncommon for you to pay anywhere from 5 to 25% extra from the original price.
It’s whittling down the free income you can use for savings or other things.
One way to avoid this scenario is to use credit cards when you only have the money to spare, essentially treating them like debit cards. You’re building your credit score and accessing rewards, and you can pay the balance off quickly.
However, be aware that there are still extra fees and interest rates to consider.
An alternative is to forego the credit card lifestyle entirely. It can be unusual because so much of our society today relies on credit.
However, it can help you live within your means and look at money objectively.
3. Failing to Create a Budget
Some people don’t see the need to create a budget, and because of it, they’re spending more than they think. Even a simple cup of coffee a day from your local shop can result in hundreds of dollars down the line.
When you go beyond your regular plan, you can be cutting down on the budget meant for other things like bills.
The solution? Take the time to create a budget.
If you’re unsure, then consult with a professional.
A solid budget plan takes into account your needs and means. It will also have enough space for you to save for other wants, pay debts, and enter money into investments.
A common practice going around is the 50/30/20 allocation.
- 50% for essentials (rent, bills, and food)
- 30% for wants (entertainment, other expenses)
- 20% for the long-term (debt repayment, investing, saving)
It isn't a hard rule. You’ll have to adjust based on your current financial situation and goals. Some may want to allocate more to pay debts.
Others may need more space for their needs. However, it is ideal to have at least 20% for the long-term to help with your financial future.
4. Not Saving for Emergencies
Approximately 60 percent of all Americans don’t have enough money for emergencies. The issue with not having enough savings is that it exposes you to financial risk.
If you get into a situation where you have to spend more than you have, you’d be getting into debt or losing a lot of your assets to cover it. For example, a sudden car breakdown or medical emergency may drain your bank account fast.
Your emergency fund is your safety net, and the recommendation is to start building one. Ideally, you’d want to save anywhere from three to six months’ worth of expenses stored in your bank.
The challenge is that many people don’t know where to begin, so they delay making their emergency funds until it is too late.
The secret to creating one is being consistent with saving. You don’t have to aim to build six months of savings immediately.
Save a month's worth by putting a small amount of your money into the fund. One way to avoid spending it when it builds up is to put it into a separate account.
You can also set up automatic transfers to help keep it off your mind.
Another method is to aim for at least a percentage of your monthly expenses. For example, start with saving 5% of your monthly salary towards the fund.
From there, see how you can adjust and make the habit work.
5. Keeping Money Stagnant
It’s one thing to have accessible liquidity through an emergency fund, but it’s another to keep extra money stagnant. In the case of the former, you can place it in a high-yield savings account or something similar so that it still grows slowly.
Extra funds that aren’t doing anything are losing value over time.
Inflation is a big issue and something becoming more apparent in recent years. One of the best ways to fight against it is to have money work for you.
Some of the ways you can do that include:
- Placing it into a retirement fund like a 401k.
- Buying stock benefits available from your employer.
- Investing in assets that appreciate over time.
- Working towards completing insurance payments.
You want to maximize all financial opportunities available as it will help you have a comfortable life. Decide where to put that extra money and let it work for you as you go through your other endeavors.
6. Avoiding Life Insurance
Funeral and burial prices are at highs. Last year, it wasn’t uncommon for one to spend upwards of $7,500 to get everything in order.
During someone’s passing, another will have to be responsible if no funds are there for the funeral. The financial burden will be on their families or friends.
You can avoid this if you begin paying for life insurance. No one wants to think about dying, but planning for financial safety in the worst-case scenario is always a good choice.
If something unexpected happens, your loved ones won’t have to worry about getting the money they need. You can even leave behind money they can use for their future.
You don’t have to go into an overly expensive plan if you cannot afford it. Find the one you’ll think benefits you the most and pay for it.
The cost of it is often inexpensive, and you’ll get peace of mind as a result.
7. Forgetting Second Options and Opinions When Purchasing
When spending money, many people often look at the first thing that seems good to them and buy immediately. It can be true for electronics, groceries, and hobby items.
Placing the same mentality on big-ticket items like insurance, cars, and houses can set you back. If your goal is to save money and maximize the value of what you have, then looking at a second choice is a good practice.
In smaller items, it’s always best to seek out the most affordable source of the item available.
For example, a retail shop offers a price of $20.99, but the manufacturer is nearby and sells it only for half the price. Alternatively, there might be a competitor selling it at $14.99.
With big-ticket items, you don’t have to go in blind anymore. Many insurance companies have open lines for you to contact and check their rates.
There are even comparison tools online to help you make an informed decision on your next purchase. At the very least, you should aim to compare two similar products to see which is best for you.
You may opt to not go for the more affordable ones. Instead, you are looking at the benefits the other provides.
For example, you may find a vehicle with the same price in two dealerships. However, one offers more free items, hence giving you more value for your money.
8. Delaying Debt Payments
Getting into debt is already a problem, but staying there exposes you to greater financial risk. In the same way that investments compound their gains through interest, the same is true for debt.
Most of the debt you have contains interest rates, the reason why lenders are willing to lend in the first place. The interest rate also compounds because the added debt left on your account will also accrue interest.
The solution is allocating money to pay off that debt as soon as possible. Two strategies work in this regard:
- Pay off the debt with the highest interest first. Once you start hitting the capital of the high-interest debt, the amount you need to pay monthly lowers significantly.
- Pay off the smallest debt first. This strategy focuses on removing your debts one at a time. You reduce interest rate payments every time you take a debt off the board.
As soon as you start hitting these debts, you’ll notice how much money you can use. You’ll free up more funds which you can then use to pay others.
It’s a cascading effect that only brings positive things to your finances.
9. Buying a New Car When You’re Not Financially Ready
A brand new car is more of a luxury in the financial sense. You can buy one if you need the convenience it provides, but its value goes downhill after.
Cars are depreciating assets, and you’ll never be able to get the money used to buy them when re-selling them. Rarely do vehicles fetch higher prices in the secondary market, especially if they’re new models.
Instead of buying a new car, going through all the papers, and getting into higher debt, why not look for a second one instead? Many pre-owned vehicles in the market have barely seen any use during their lifespan.
If you can find a car with lower mileage and only a few years old, it can be worth the price. These still have warranties with a brand new feel at a lower cost.
Need Help Setting Your Finances?
Avoiding many of these mistakes requires financial knowledge that one may not have access to immediately. It can be challenging if you don’t have someone supporting your journey as you make an account for each of these steps.
Consider partnering with a company like 121 Financial Credit Union. We prioritize our members’ financial well-being. We can help you set up emergency fund accounts, work on debt, and offer better deals.
Unlike most traditional financial operators that are in it to profit, 121 Financial Credit Union puts their members first. Contact us today, and begin improving your finances.