Have you ever made any big money mistakes? I know I have. In this post, I will share with you some of the biggest mistakes people are making managing their money. I hope you can learn from the mistakes of others to improve your own situation.
So here goes, here are some of the biggest money mistakes people make.
Going without a cash plan – One common financial mistake is failing to have a written cash plan. Your cash plan is your road map to accomplish your financial goals. If you don’t know how much net cash income you have each month you can’t make decisions on how to spend, save and invest.
Focusing on spending instead of increasing income – Most people look to improve their cash flow by cutting what they spend. They should, however, equally focus on raising their income. Once they focus on increasing income, many people discover they are underpaid for their skills, or they need to take on a side gig to improve their financial situation.
Not having an emergency fund – We have learned with the pandemic that unplanned events happen. Your household must have an emergency fund of at least six months of living expenses, including debt service. I know that sounds like a lot for so many people, but you need the discipline to build your fund to that level. When you don’t have any extra cash set aside, you’re forced to use expensive ways to finance your life. This can include racking up high-interest credit card debt, taking out a cash advance or relying on payday loans.
Not paying off debt – If you have student loans and a car payment and credit card debt and a mortgage, it can be hard to know what to tackle first. When working on your debt payoff plan, start by writing down all your balances and the corresponding interest rates. Consider tackling your highest interest rate debt first, like credit cards, then moving onto lower rate debt, like mortgages. The key is to get your debt levels down as much as possible so that they fit comfortably within your cash plan.
Not getting employer matching contributions – Does your employer offer matching funds for your 401(k) retirement plan? Don’t leave the free match money on the table! Many employers offer a 401(k) program as part of your benefits package, and some will match your contributions up to a point. If your employer offers to match your retirement contributions up to 3% of your income and you don’t take advantage of it, it’s like turning down free money.
Not monitoring your credit scores – Even if you’re careful with your credit, it’s important to regularly monitor your credit reports and ensure that you’re actually responsible for all the items on them. Identity theft is a growing type of crime, and it’s also possible that a creditor or the credit bureau could make an error that reflects poorly on your credit.
Allowing too much lifestyle creep – As household income grows most people also increase what they spend on their living costs. Some lifestyle creep is fine, but good financial rule of thumb is not to spend more than 50% of your raises on a better lifestyle. The reason is simple—every dollar you don’t save is a dollar you spend.
Not having life insurance – No one wants to think about their mortality. Don’t let that force you into the mistake of not planning for the security of your loved ones or the causes you care about if you die prematurely. Life insurance will help your family transition to not having you and the financial resources you provide in their lives. Life insurance can create a legacy that can improve charities, religious and cultural organizations. Life insurance is significantly less expensive than what people think, especially for younger adults in good health.
Making recurring purchases without comparison shopping – When it comes to recurring expenses that exceed say $500 per year such as car insurance, consumers often stick with what they have. However, it pays to shop around. Consumers who review their accounts before renewing and comparison shop can often save hundreds of dollars per year! Even if you stick with the same company, review your coverage to see if you’re carrying more insurance than necessary.
Not investing in your future – Not putting your money to work to accumulate funds for the time period when you stop working full-time is a huge financial mistake. The best way to meet long-term financial goals is with a smart investment strategy that takes advantage of not only your 401(k) but tax-advantaged programs such as life insurance, annuities and IRAs. The earlier you begin to invest, the better off you’ll be later. As I have written in prior posts, a qualified financial advisor can help you develop a strategy that meets your individual needs.
Improperly using credit cards – One of the most common financial traps, especially for individuals in the early stages of their adult life, is accumulating large amounts of expensive credit card debt. A credit card is a powerful tool to help build your credit history, but a high credit limit can encourage living beyond your means. While many Americans have debt from student loans or car loans, adding expensive credit card debt on top of other debt causes pressure on household budgets.
Not spending 17 minutes per day on financial education – Most public high schools offer very limited education on personal finances, so many Americans get by with what their parents taught them and what they pick up along the way. It’s easy to think you’ve got things handled, but by learning more about financial literacy and best practices, you could avoid many financial mistakes and find your path to financial well-being. As I have written, spend 17 minutes per day improving your money knowledge. It will help you fill the void your lack of formal money education has left.
Summary
In this post, we have presented a dozen mistakes people commonly make in managing their financial affairs. There is nothing wrong with making a financial mistake. What is important is that you learn from those mistakes and put yourself in a place where you do not make the same mistake again. Your money success depends on it.
Harry discusses this topic and much more on The FinancialVerse, available wherever you get your podcasts. Learn how to improve the quality of your financial life, reduce sources of money stress, and make the most of each stage of your financial journey.