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.
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.
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.
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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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..