Think back…How many money mistakes have YOU made in your lifetime?
Money mistakes made in your youth can give you a hard time in the long run. There is a saying which goes like this: “Great fortunes are often lost due to poor spending habits”. That’s why, when it comes to money, it’s best to assume that we all sometimes screw things up and make mistakes that have a detrimental effect on our financial health.
But here’s the thing: these money mistakes are often made without even knowing about them! Some of the repeated mistakes people make are not having a monthly budget, not investing regularly, or accumulating huge debts. If you’ve been able to move past your financial mistakes and learn from them, congratulations!
We’ve highlighted some of the most frequent money mistakes that usually lead people to serious economic hardship. Avoiding them could be the difference between poverty and wealth, so make sure you keep reading this article!
1. Frivolous and Excessive Spending
Millions of Americans live beyond their means and run into financial trouble throughout their lives. Making sure you keep your budget under control entails more than just creating an effective strategy from which to kickstart your financial future.
In other words, it’s best to have something left at the end of the month to pay off your debts or add to your savings. If you do this each month, you’ll keep financial burdens at bay.
Overspending is definitely a money mistake, but anyone can correct it. Start by simply reducing non-essential expenses like shopping, dining out, or other kinds of entertaining. If you do cut down impulse purchases, you’ll most likely be able to save more money, which can help you reach your long-term financial goals.
2. Postponing Financial Planning
“I’ll do it next month.” Does this sound familiar to you? The problem with having this mentality is that by the time you finally decide to start budgeting your household, you may have made things more difficult to deal with or lost some financial planning opportunities.
Postponing your financial responsibilities is one of the most common money mistakes that people make. Do you also do this? If the answer is yes, just think it adds to your to-do list, and when it comes to hot-button topics like paying off debt or retirement planning, putting off the process could cost you more in the long run.
3. Failing to Save for Emergencies
Nearly 60% of Americans do not have enough savings to cover an unexpected $1,000 expense like a surprise medical bill or sudden car repair. Millions of people are living without a safety net, which means that they have to rely solely on their incomes if a financial emergency occurs. Doing this money mistake could be disastrous to their finances.
Financial advisors recommend having enough money set aside to meet your family’s needs for three to six months. A good piece of advice would be to save 10% of your net income. If doing this seems unrealistic in light of your monthly expenses, consider starting with a smaller percentage and increasing it by 1% each month until you’ve gotten to the 10% threshold.
4. Buying a New Car
A lot of new cars are bought each year, yet few buyers can actually afford to pay for them in cash. But here’s the thing: being unable to pay for a new car in cash can also imply being unable to afford the car. Basically, the ability to afford the payment isn’t the same as the ability to afford the car.
Think about this before getting a new car that you’re not sure you can afford — it may turn into a money mistake that you’ll regret later.
Borrowing money to get a new car is also a money mistake because you’ll end up paying interest on a depreciating asset, amplifying the difference between the car’s price and its value. Worse yet, many people change their cars every three years or so, losing money each time.
If you really need to buy a new car and/or borrow money for this big purchase, consider getting one that’s fuel-efficient and less expensive to maintain and insure. Cars can cost a fortune, and if you buy one that does more than you actually need, you may be wasting a lot of money that could have been saved.
5. Putting off retirement savings
Many Millennial and Generation Z workers entered the labor market more focused on paying off their student debts than saving for their golden years. Age 65 may seem far away, especially to those in their early twenties, but if you start saving money early, you’ll be able to build a larger nest egg as time goes by.
Unfortunately, many people don’t even realize that they are making this money mistake until they approach their full retirement age.
For instance, let’s say John (25 years old) has an IRA that’s giving him a 6% annual return, and he decides to contribute $2,000 yearly into that account. At 65, he will have a total value of $328,095 from his $80,000 investment. Now, if John postpones retirement savings by five years and starts contributing the same amount per year at age 30, he will end up receiving only $236,242 from a $70,000 investment (35 x $2,000).
Putting off retirement savings for a few years isn’t a tragedy, but ignoring this financial responsibility for decades is definitely a money mistake.
6. Taking Too Much Time to Pay Off Your High-Interest Debt
It’s difficult to save when you’ve been accumulating debt, especially if you are losing money every month due to high-interest rates. If you’re dealing with several considerable debts that all require your attention, it’s difficult to determine what to prioritize first. In these cases, financial advisors recommend paying off the debts that have higher interest rates first — a great strategy that can help you eventually save money.
If you do have the money, consider paying off everything that isn’t tax-deductible. For instance, let’s say you have set aside $5,000 in a savings account yielding only 2% interest. That amount of money would be far better spent on paying off your debts.
Once you’ve accumulated debts, you’re required to pay them off. Obviously, you need money for that, but it’s also a good strategy to avoid any future potential money mistakes.
7. Living Paycheck to Paycheck
In June 2021, the household personal savings rate in the US was 9.5%. Many families may be able to live paycheck to paycheck, but an unforeseen emergency can quickly turn into a financial collapse if you’re not prepared.
Overspending is a money mistake that puts people in a vulnerable and risky position, where they need every cent they earn and one missed payment would be devastating. Nobody wants to be in this kind of situation, especially when an economic recession strikes. However, if this does happen, you’ll be left with very few options.
Many financial advisors suggest keeping at least three months’ worth of living expenses in an account that’s easily accessible. Changes in the economy or loss of employment could wreck your nest egg and catch you in a debt-paying cycle. That’s why, to avoid any potential money mistakes (that could even lead to losing your house), it’s always best to build a three-month buffer.
8. Paying Off Debt With Savings
You may believe that if your retirement account is making 8% and your debt is costing 20%, exchanging retirement for the debt would be a good idea — you’ll only have to pocket the difference. But be careful as this money mistake may cost you a lot.
Besides losing the power of compounding, it is extremely difficult to give back those retirement funds, and you may be charged hefty fees. Borrowing from your retirement accounts can be a reasonable choice only with the right mindset. However, even the most skillful planners struggle with saving money to rebuild these accounts.
When the debt is paid off, the urgency to repay it usually fades. After this, people tend to come back to the same spending pace, which can lead to accumulating other debts. So, if you’ve decided to pay off debt with savings, you must live as if you still have a debt to pay.
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