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Nearly everyone has made poor financial decisions in their life whether that’s maxing out credit cards to take vacations or financing a car you couldn’t actually afford. Mistakes are a part of life; it’s impossible to avoid making them 100 percent of the time.
However, the poor financial choices we make can be used as an opportunity to teach us how to improve our financial well-being and how to make better money choices.
If you’re struggling with managing your finances, here are 10 of the biggest money mistakes you’re probably making and how to avoid them in the future.
Not having a budget
A budget is a spending plan for your money and is the best financial tool you can have. It allows you to tell your money exactly where to go instead of wondering where it went. You’ll know exactly how much money you have coming in every month, what expenses you may need to trim, and you may even “find money” to pay off debt or put towards your other financial goals.
Whether you prefer pen and paper, an excel spreadsheet, or an app such as You Need a Budget, there are many ways you can create your first budget today to take back control of your financial health.
Misusing Credit Cards
Thousands use credit cards to cover monthly expenses and discretionary spending; however, very few use them responsibly. The few that do take advantage of all that credit cards have to offer such as receiving cashback on everyday spending and getting free flights and hotels by travel hacking. This is possible by paying your bills on time monthly, paying balances in full and keeping their utilization low so that their credit scores aren’t affected.
Those that misuse credit cards are often living above their means and using credit cards to foot the bill to do so. This causes a chain reaction. Financing unnecessary spending leads to being unable to pay your balances in full which then leads to interest capitalization.
Before you know it, you’re in thousands of dollars of credit card debt and have no clue how to get out of the mess that you created. This puts a strain on your daily to day life as well as prevents you from putting money towards bigger financial goals such as saving for retirement, planning an annual family vacation or improving your credit score.
Buying a House or car you can’t afford
Having the latest and greatest is nice. Buying the biggest house on the block or the newest car on the showroom floor may impress your friends and family, but do you know what’s nicer? Being able to pay your monthly bills without living paycheck to paycheck.
Save up and buy a nice used car in cash to prevent having to pay a car note plus interest monthly. Car values depreciate so fast and you’ll never be able to make back your investment if you finance a new one.
Same thing with a house. You don’t need a two-story, five-bedroom house for your family of three. Of course, you want to be comfortable, but you also don’t want to put yourself in a financial bind if you or your spouse happen to lose a job. Be sure your monthly payment is only 20% of your total monthly income and that you’ll be able to manage with just one income source.
Not contributing to your retirement plan to get the employer match
Whether you realize it or not, we’re all going to grow old and will need money to live off once we do so. Let’s be honest. The systems that generations before us had in place will more than likely not be available in the future i.e. Social Security and many companies have done away with pension plans. It’s up to us save funds now so that we have income once we reach retirement age.
Even if you don’t have much income, company 401Ks are a great way to start saving for retirement especially if there’s an employer match. If you don’t contribute, that’s equivalent to leaving a portion of your compensation on the table. It’ll be beneficial for you come tax time as your taxable income will be much lesser.
Living outside your means to keep up with friends
Social media makes us believe that everyone is living a life better than they really are. People only post their highlight reel. At any given money, you’ll see someone with the new iPhone, a brand-new car, spending time abroad for weeks at a time, and a countless amount of weekend getaways. This causes us to feel like we need to do more to keep up. But, can I tell you a little secret? They can’t afford those things either and your favorite influencers received all those things for free. So, before you set out on a mission to “keep up with Joneses” make sure that you don’t have to finance any of those expenses. Ignore the noise by removing those temptations from your feed and adding more positivity that corresponds with exactly what you want out of life.
Living with debt
In 2019, US consumer debt hit a record high of $4 trillion. No, that’s not a typo. This includes credit cards, student loans, mortgages, medical bills, auto loans, etc. The sad reality is that most Americans fall within this number.
Being is debt is considered normal and many believe that a life without debt is unattainable. Settling for this stigma is one of the biggest money mistakes you can make. You don’t have to live with debt forever. Getting on a budget is the first step to achieving this goal. Living within your means is the second.
Working towards debt freedom is hard work. It takes dedication, focus, and determination to achieve it. Create a plan today to put your debt behind you and begin living a life you always wanted.
Spending too much on the “good life”
From eating out to retail therapy, we all feel like we deserve to live a good life. When you spend thousands of dollars money having fun, there’s nothing left to go towards your financial goals. Even with a high income, spending $1,000 a month is still a lot to spend frivolously. You can take control of your spending by creating a budget and tracking your expenses. Every week set a goal to spend less in specific categories than you did the week before. You’ll learn to spend less and will have more money to put towards your financial goals.
Not having an emergency fund
Not having a liquid emergency fund is one of the biggest money mistakes people makes and this is usually what causes debt for many people. They rely on credit cards to cover unexpected expenses and end up going further in debt. Ideally, you should strive to have up to a year’s worth of expenses in an emergency fund to protect you from a job loss or any extended time off you may need. You can get started by saving up $1,000 plus a month of your living expenses. Once you’ve secured that, you can work towards paying off your debt and saving for any additional goals you may have. Protecting you and your finances is key to effective money management.
Not understanding the importance of your credit score
Your credit score is important whether you plan to secure additional lines of credit or not. Many companies are starting to look at creditworthiness such as to gain employment, rent an apartment or to obtain insurance on your automobile. Be sure to review your credit report often and create a plan to improve your score.
The mistakes you’ve made with money in the past don’t have to dictate your future. No matter how many of these money mistakes you’re currently making, it’s never too late to turn your finances around. Little by little you can learn how to win with money and take. Start taking control of your finances today. Your future self will thank you.