How to Avoid Financial Mistakes
People learn a lot of things in school. How to write and calculate the circumference of a circle, that the mitochondria is the powerhouse of the cell. However, school lessons don't tell you much about managing finances.
There are a lot of common financial pitfalls that the education system just won’t prepare you for. From mishandling budgets to missing payments, there are a lot of ways to mess up your finances, and not all of them are obvious.
Not Automating Money Sent to Savings
While you can take whatever money you have leftover at the end of the month and toss that into a savings account, what happens when you have nothing left over? It ‘s better to send a certain amount of money every month directly into savings before you do anything to spend any part of your paycheck.
The benefit of this approach is that it prioritizes saving and gives you a set amount of money to work with each month. By automating savings, you save money more reliably and save yourself some needless stress.
Not Diversifying Investments (Especially Retirement Funds)
Investments are good to have, but it might not be the right time to put all of your eggs in one basket. You usually want many different revenue streams so that if one falls through, you have others to lean on. You don't want to have more than 20 percent of your funds in one investment. The ideal is about 10 percent.
Moreover, by diversifying your investments, you also make it more likely that you’ll be able to take advantage of any sudden booms in the profitability of certain stocks or other investments. It pays to diversify.
Not Communicating About Finances With Your Partner
When you're single, you only have to worry about your own bills and payments, but if you enter a serious relationship, you may start to share the responsibilities of household finances. It’s important that you stay on the same page where finances are concerned.
Otherwise, someone may spend more than they should, or bills could go unnoticed and accrue extra charges. It ‘s also important to discuss savings goals so that you can live the life you desire. Financial communication is essential to work as a team and avoid mistakes.
Forgetting to Maintain a Good Credit Score
A good credit score is essential for financial success. It can make or break plans to take out loans or mortgages, which in turn can set up all kinds of obstacles in life. Additionally, interest rates and monthly payments are often affected by credit score.
How do you keep a good credit score? Make all payments on time. Bills sometimes come with a minimum rate, but you should pay the bill entirely in order to keep a good credit score. Also, you should make sure you have access to credit in the first place — a person without credit cards won’t have the best credit.
Making Big Purchases With Debt and Without Research
While purchasing a house or car can be overwhelming, that doesn’t mean either is something that should be rushed, especially if you took a loan out to make the purchase. It’s important to research expensive investments beforehand and make sure they’re actually worth whatever debt you might be taking on.
When making a big purchase, take your time and do it right. Explore all options and write out a full plan if you are planning on borrowing money or using a payment plan. Make sure it’s the best product you can buy and something you can actually afford.
Too Many Subscriptions
We are living in an unprecedented age of convenience when it comes to consumer purchases. While it’s amazing that you can instantly watch your favorite movies, try new beauty product samples and get groceries delivered to your door, make sure you aren't going overboard on the subscription services.
When fitting subscriptions into your budget, make sure to account for any and all subscription services, and factor in service fees if applicable. Also, make sure to only subscribe to services that you use enough to be worthwhile. Cancel the ones you don't use.
Having an Unrealistic Budget
While it’s almost impossible to predict exactly what you will spend every month, you can make an educated guess. That means making a budget that covers the maximum you will pay for everything every month, not the minimum.
For example, if you know you can spend only thirty dollars a week on groceries, don't put thirty dollars as your budget. Just to be safe, use roughly the maximum that you may have to spend on groceries. That way, you are always covered when expenses are higher than expected.
Not Understanding/Utilizing Employee Benefits
Different jobs offer different benefits, and it’s sometimes hard to understand the full terms. Complicated or deceptive wording can make it difficult to know what exactly is being offered. However, the effort put into investigating the terms of employee benefits can be well worth it.
Understanding what is available to you as an employee is crucial to saving money. You may have investment plans or prepaid health benefits already available to you that you should take full advantage of. Knowing your options can help you save a ton of money.
Not Having an Emergency Fund
You never know when you might need some extra cash, so it’s a good idea to have an emergency fund. You can have one large fund or several smaller ones for individual potential crises, such as car or home repairs.
It’s also important to have such a fund in case you lose your job. It’s best to have three to six months’ worth of living expenses set aside in an emergency fund to cover the time while you look for a new job.
One thing you really don't want to mess up is your taxes. Errors on taxes can lead to real problems, and if you really mess up, it can land you with criminal charges and even jail time.
Even just paying taxes late can be detrimental to your finances. Late taxes can result in penalties and interest fees every month. Ask a licensed professional to see what options you have if you absolutely cannot pay your taxes on time. They can help you make the best decision for your financial situation.
Not Having Long-Term Disability Insurance
Insurance can be annoying, because theoretically, you may never need to use the benefits from it. However, no one can tell the future, and if you don't have insurance, it can mess up your finances for life.
Having long-term disability insurance can prevent a financial catastrophe in the event that the main breadwinner of the family becomes disabled. With this insurance, the person can still receive about 60 percent of their income even though they can no longer work. It may be a "just in case" purchase, but it is an extremely important one.
Late Bill Payments
Late bills are the fastest way to rack up fees and end up in debt. It may seem harmless at first when they charge you three dollars on one bill, but it adds up fast. The best way to avoid this is to set up auto payments whenever possible so you never miss a payment.
As long as you keep enough money in the bank, every payment should be paid on time. That way, you don't even have to think about paying a bunch of different bills at different times every month. That said, electronic services sometimes fail, so it’s best to manually make sure they went through.
Not Having a Will Or Life Insurance If You Have Children Who Are Minors
Death is a sad thing to think about, but it’s important to do so for the well-being of your children and loved ones. In the event that you pass away and don’t have a formal will, the funds you set aside for children or other people in your care might not go to their intended recipients.
In addition to a will, it’s also essential to have life insurance so that your children will have some financial stability. The payment from such insurance can also offset funeral costs and other expenses.
Spending Too Much on Non-Essentials
Don't spend money on things you don't need. It's pretty simple, at least in theory. While never indulging in any sort of luxury simply isn’t realistic — everyone has a bad day once in a while where they a peppermint mocha to cheer themselves up — regularly eating out and engaging in other expensive habits can empty your bank account quickly. On average, you can save up to $60 a week just by making coffee at home.
Whenever possible, take the cheaper route. Make food at home and walk to nearby locations instead of taking the car and paying for parking. Small decisions can make a big difference in the long term.
Taking on a Car Payment You Can't Afford
As tempting as it is, a fancy new car is not worth the financial consequences. It may feel great to own a Mercedes or a BMW, but it’s not going to feel great if you can't afford the monthly payments and go bankrupt as a result.
That goes for any major expense. It’s also why saving up money first and paying in cash is often preferable to setting up a payment plan. Even if the plan doesn’t have interest (and it probably does), you’ll have a better idea of what you can afford if save first and pay for things all at once.
Not Having a Plan to Get Out of Debt
So you're in a tough situation. Maybe you made some mistakes in the past, or maybe you just had to take out student loans to get through college. But what is the plan to get rid of your debt?
You need a specific, actionable plan to tackle something as complex and long term as major debt. If you don’t have specific steps in mind for how to get out of it, you could very well end up even further in red. If you don’t already have a budget, it might be time to make one.
Not Understanding the Terms of a Co-Signed Loan or Lease
Sometimes, you may have to co-sign an agreement with someone where you take on financial liability if the other party fails to make regular payments. This can be a useful tool, especially for parents with kids in college, because it allows a less financially mature person to qualify for loans they might not otherwise be able to access.
However, things can go south with such agreements easily, so it’s important to understand what exactly you’re financially responsible for. If you’re on the line if your kid fails to make a payment after college and they’re not financially responsible, you could be the one who ends up having to pay for their mistakes.
Dependence on Credit Cards
It’s not a good idea to rely on credit cards to pay for things without the cash to back it up. They may work temporarily, but left unattended, unpaid credit card bills can skyrocket and lead to serious debt.
Credit cards should only be used to build and maintain good credit scores. They are not a free pass to buy whatever you want. While the happiness of a purchase fades quickly, the debt sticks around. Then you might be forced to sell the same things that you bought with the credit card in the first place and still owe money.
Not Understanding Credit Score and What It Means
While credit scores are not necessarily intuitive — they can fall both if you have too much and too little debt — it’s nevertheless important to understand for your financial future.
What credit score companies care about is not whether you have debt, but whether you manage debt well. They want to know if you can be trusted to pay off debt you accrue, not that you can avoid debt altogether. Because of that, things like having a high total credit maximum available to you across cards and paying off debt reliably make a big difference in your credit score.
There is no better feeling than finding something that you want to buy and seeing that it’s on sale. It’s a good habit to shop the sale rack before buying something full price.
Why spend extra money to get the same product? Bragging rights? The real winner of that argument is the person who got the same product and saved money. While overindulging sales can be a problem, with moderation, taking the time to bargain hunt can pay off — literally.
Living Paycheck to Paycheck
If you spend everything you earn, even if you pay off all of your bills completely on time, you won't be prepared for the unexpected. Maybe your car will break down, or maybe you'll have unexpected medical bills.
Living paycheck to paycheck should always be avoided if at all possible. While low wages can sometimes force people to save less than they’d like, even squirreling away a modest amount is better than nothing. Identifying ways to cut down on expenses should always be a priority.
Buying a Home You Can't Afford
Buying a home that’s too expensive can have serious consequences down the line. While living in your dream house is obviously great, as soon as you get behind on payments, the dream becomes a nightmare, and the bank may ultimately take the house back anyway.
Higher monthly payments mean that even if you can avoid going into debt, you’ll need to lower your standard of living to make up the difference. It’s best to live below your means, both in terms of a house and in everything else.
Not Doing the Math Before Taking Out Student Loans
At first glance, student loans seem like a great idea. Yes, you’re borrowing a lot of money, but it's to attend a great school which will, in turn, get you a great job, right? Well, that's not always the case. Sometimes you can't get the job you want, or the job you can get can’t pay the debt you’ll accrue to get it.
When taking out any loan, you need to calculate exactly how much you will owe and at what rate you’ll be able to pay it back. You should look at not just the best case scenario, but also the worst.
Having multiple investments is a great way to prepare for the future. Even if one investment disappoints, others are likely to exceed expectations, meaning you’ll be growing your money one way or another.
Not investing at all is a rookie mistake. Whether it’s stocks, bonds, a 401(k) or something else, investing your money consistently pays better dividends than the paltry interest you get by keeping it in a savings account. While you should certainly keep some money in reserve, investing much of your savings in reliable places is generally the best way to prepare for the future.
When making any long-lasting purchase, especially an expensive one, it’s best to think about what will be practical and useful in the future, not just now. While trends come and go, utility is forever.
This applies to everything from home renovation and cars to technology and furniture. Chasing popular trends may make you seem hip for a while, but trends change, and for all you know, your fancy new car or kitchen design could look very tacky in a decade. It’s cheaper to make quality and functionality your goals in any new purchase.
Not Saving for Retirement
Unfortunately, there will come a day when you either can no longer work or, if you’re lucky, you no longer have to. If you save properly now, you can have an enjoyable retirement with a solid quality of life, and you’re well-off enough, you might even be able to raise it. You can go on vacation and even contribute to your children and grandchildren's college funds.
In order to have all of those things, however, you need to put together a retirement plan so you can save what you need for that future. Unless you happen to be a billionaire, you need to start saving money now to have enough to live on later.
Paying Off Smaller Debts First
When paying off debt, it’s often wise to pay off the bigger debts first. Because of the way interest works, a large amount of debt with a small interest rate can sometimes end up costing much more than a small amount of debt with a higher interest rate.
Of course, the only certain way to know which loans should be paid off first is to do the math. Identify the amount and interest rate of each loan and see for yourself what will cost you more if you pay it off later. It’s a headache now for sure, but it means less time spent in debt later.
Skipping Student Loan Payments
Student loans are some of the most expensive loans out there, and they just get worse with time if not paid off. Punitive fees hurt your credit score and your wallet, and all while the entire thing accrues more and more interest.
Handling student loans properly ensures that you don't fall into a Mount Everest-sized pile of debt. Because of this, it’s essential to shop around and come up with a concrete plan for repayment before committing to a loan.
Having Too Many Credit Cards
While having more credit cards raises your credit ceiling and indirectly your credit score, that’s only if you can keep track of them all and avoid the temptation to ring them all up with new purchases. If you’re not careful, having too many credit cards can make your finances go out of control.
It’s best to only use one or two credit cards regularly. While others can be used occasionally before quickly being paid off if they offer some advantage and don’t have a monthly fee, they should otherwise be stowed away somewhere safe. If you can’t keep track of all the credit cards you need to pay off, you have a problem.
Closing Accounts Once the Balance Is Paid Off
Once you pay off the balance on a card, it can be tempting to get rid of the account. However, that’s not always the best thing to do, especially if it has no monthly fee. Your credit score is based on long-term payoffs and total credit ceiling. If you keep the card, then your score will improve because your history of responsibly using credit will be longer and better..
Because certain cards offer benefits like cash back or flight miles, tactically using credit cards can even earn you money over time. The trick is to never borrow more than you can immediately pay off and keep track of all the accounts you have open.