When it comes to handling your personal finance, a lot of things can go wrong. You could make some costly mistakes, especially if you are adamant about the right principles for financial improvement. I used to be oblivious to so many common financial mistakes until the impact of these wrong decisions started taking a toll on my finances. I had to be self-aware and adjust quickly before things gets out of hand.
I know you may have made some mistakes with money in the past. That’s why I’m here to help. In this post, I will be walking you through the most typical financial mistakes to avoid to prevent money problems. So, you might want to relax as we delve into this piece of information step-by-step.
What Is A Financial Mistake?
A financial mistake is anything you do that puts your personal finance at risk. When you begin to make decisions and take actions that are detrimental to your finances, you are making financial mistakes.
What Are The Common Mistakes In Finance?
Failing to budget your salary, spending more than you earn, and using too many credit cards are some of the most common financial mistakes that millions of Americans struggle with.
According to a report published by the Consumer Federation of America in 2012, 67% of Americans with an annual income of $30,000 – $100,000 confirmed that they had made several bad decisions, which led to an average loss of $23,000 for each of these individuals.
Dangers Of Making Financial Mistakes
The impact of making bad financial mistakes can be very detrimental. Sometimes it takes several years for you to recover completely from a single wrong decision you made concerning your money. Here are 3 major reasons why financial mistakes are really bad for you:
1. Making Financial Mistakes Leads To A Debt Trap
One of the most common results of personal finance mistakes is debt. I remember meeting a friend a few years ago who had $105,000 in credit card debt. This was a debt trap since my friend didn’t even earn up to $50,000 per year. She spent recklessly without reminding herself of the consequences of her actions. The good thing is she eventually had to stop using credit cards and start paying off what she owed bit by bit.
When accepting a mortgage, applying for a personal loan, or using credit cards, you have to be careful. Don’t let your emotions decide for you. Instead, be logical. Critically assess your financial situation and employ the best option available.
2. Making Financial Mistakes Takes Away Your Peace Of Mind
If you really care about your peace of mind, then you must be willing to learn about the common financial mistakes to avoid. When your financial situation is porous, your mind will constantly dwell on the obvious problems. This is what takes away your peace.
Imagine not being able to pay your rent, living paycheck to paycheck, and having your kids in public school. You might not be able to sleep at night. To prevent things like these from happening, you must avoid making financial mistakes.
3. Making Financial Mistakes Affects Your Mental Health
Your mental health or emotional well-being can be distorted when you remain unhappy for a long time. There’s no denying that facing a series of financial challenges as a result of your mistakes will make you very unhappy. You will constantly blame yourself for the poor decisions you made. This could make you mentally unstable.
It’s relatively true that money doesn’t guarantee happiness. However, having your finances in order will prevent a lot of problems, thereby reducing the chances of you being unhappy.
14 Most Common Financial Mistakes To Avoid At All Costs
Making a mistake may not be an issue sometimes. Making the same mistakes repeatedly is the real issue here. This happens most times because you don’t even recognize that you’re making mistakes. Hence, you must be duly informed. Here are the main financial mistakes to avoid:
1. Spending More Than You Earn
It’s no surprise that millions of Americans live above their means, which is why they struggle financially for the rest of their lives. Your spending habit needs to be scrutinized if you don’t want to put your financial life in jeopardy. Do you make big purchases without planning for them? Do you make impulse purchases? If you do, you must realize that’s an issue.
Money should never be spent randomly. There should be a reasonable plan for how you spend your monthly income. After paying for all your fixed monthly expenses, you are supposed to carefully manage the remaining amount of money. Don’t go over budget. Minimize your expenses and live below your means.
2. Failing To Save For Emergencies
This is one of the worst financial mistakes that can cripple your finances. Emergency expenses are inevitable. You can’t certainly determine when they would come, but be rest assured that they could pop out any time. This is why you must be prepared by building an emergency fund.
An emergency fund is a certain amount of money kept in a separate savings account in case of emergencies such as job loss, a pandemic, or illness (if you don’t have medical insurance). Instead of trying to get a loan or using up your credit cards, you can run to your emergency fund. Ideally, if you have enough savings to cover 3-6 months of expenses, then you have an emergency fund.
3. Living Without A Budget
Living without a budget is one of the top financial mistakes affecting millions of Americans. Most people are too lazy to build a budget or they simply believe it’s unnecessary. However, budgeting is highly important in your personal finance. It’s the best way to create a plan for how you want to spend your money throughout the month.
There are so many things you have to spend your salary on. You could also have some money goals you want to reach. The easiest way to organize your monthly expenses and other financial commitments into a plan is by creating a working budget.
Take a pen and paper or open a spreadsheet on your PC and categorically list out all your fixed and variable expenses. Include your saving goals as well. Then find out if the total cost of your expenses is above your monthly take-home pay. This is how you start with a budget. But if you need a more comprehensive and explanatory guide, check out this post where I outline the 5 steps to budgeting your money.
4. Failing To Plan For Retirement
Not having a retirement plan is one of the financial mistakes to avoid in your 30s. The reason for this is that you are expected to start planning for retirement as soon as you turn 30. If you have an average income, it would take at least 3 decades to create a secure financial life by the time you retire. Now, do the math. You can’t start planning for retirement when you’re 40 or 50. The best time to do this is in your 30s.
You should have at least a 401(k) where you make monthly contributions toward your future. If your cash flow increase, you can create safe investments that would serve as passive income streams by the time you become a senior citizen.
5. Postponing Your High-Interest Debt Payments
If you want to be able to reach your savings goals, this is one of the financial mistakes to avoid. Saving money is very difficult when you have an outstanding debt to pay off. You have to stop losing money every month to high-interest rates by paying off your multiple debts as early as possible. The longer you leave your debts unpaid, the more money you would have to pay eventually.
As much as it won’t be easy, you need to make a deliberate effort to clear the debt with the highest interest, and then the next one until you finish paying off what you owe. This strategy is known as the debt avalanche method. You can learn more about it by checking out this post.
6. Buying New Cars Without Planning
Millions of cars are purchased every year. But interestingly, only a few buyers can afford to pay for their cars in cash. Most people would rather resort to car loans. But by borrowing money to purchase a car, you are going to pay interest on a depreciating property. Even if you decide to trade the car eventually, you will definitely lose money. This is clearly one of the common financial mistakes you need to avoid.
Don’t be in a hurry to buy a new car. Sometimes, your old car just needs a little upgrade and polishing to make it road-worthy. If you are going to buy a car, do it when it’s comfortable. Make it a financial goal and plan toward it.
7. Not Having Good Insurance Coverage
Failing to secure good insurance coverage is one of the biggest financial mistakes to avoid right now.
Your health, home, long-term care, and life need to be insured. Although it can be difficult to find the ideal type of insurance and the coverage you need, having no insurance is very unsafe. If you are hit with a big emergency expense, you could be completely helpless. I would advise that you review your insurance coverage annually. This will help you determine which policies you may or may not need.
For example, if you recently purchased a new and more expensive car, it’s important to re-evaluate your auto insurance. If you recently got married or gave birth to a child, you might want to take a second look at your health insurance. To prevent some form of financial disaster in the future, you need to have solid insurance coverage.
8. Not Paying Attention To Your Credit Scores
If you think monitoring your credit score is unimportant, then you’re making one of the biggest financial mistakes. Credit score can affect your financial life significantly. Whether you are borrowing money or buying/renting a new home, you need to present an impressive credit score to your lender.
People with bad credit scores find it very difficult to be eligible for loans. It’s important you avoid doing anything that would affect your credit score. Pay your debt on time. Don’t borrow more than what you can pay. If you are paying off student loans, take it seriously. These things add up eventually to determine what your credit score would look like.
9. Not Investing
Failing to seize investment opportunities is one of the top financial mistakes to avoid in your 20s. When I turned 22, I ventured into the stock market with less than $300. Of course, I was inspired by names like Warren Buffet who had dominated the stock market. But more importantly, I was concerned about my finances. I simply wanted to build assets from a very young age and be financially independent before I turned 30.
Even if you are no longer in your 20s, it’s not too late to start investing. Look for the right channels where your money can grow with minimal risks. You don’t have to buy stocks like I did, especially if you don’t know much about the market. There are so many investment options today. From real estate to forex, you can make your money work for you.
10. Living Without Savings Goals
This is one of the financial mistakes to avoid. Savings goals are important because they motivate you to take your savings habit seriously. If you don’t create and chase after any savings goals, chances are you are not going to save a penny. Instead of spending all your money at once, save some toward a goal.
You can decide to build an emergency fund. It would become an important financial goal that compels you to save money weekly or monthly. Over time, saving money would become a habit. You won’t struggle to take out a certain amount of money from your paycheck and keep it in a savings account.
11. Living On Borrowed Money
Living on borrowed money means you are making most of your purchases with credit cards. It’s one of the financial mistakes to avoid.
Credit card interest rates can be a great deal when you excessively use credit. Technically, you would be spending more than you earn since you have to pay off the principal balance as well as the interest on the debt.
If you are currently in a situation like this, I advise that you drastically reduce your living expenses. Cut down on costs as much as you can until you have enough room to pay off your credit card debt and rely only on your salary.
Besides, if you would like to learn some of the practical tips for reducing your living cost, you can go through this post that talks about 10 frugal habits to help you save a ton of money.
12. Spending Too Much On Your House
On average, housing cost in the US takes up to 30% of your income. That’s a lot of money regardless of how much you earn every year. Going out of your way to spend more than 30% of your income on an apartment is one of the common mistakes in financial planning.
The truth is that for someone earning around $5,000 per month, your rent shouldn’t be more than $1,500. I would even recommend a much cheaper apartment since there are other major expenses to cover for the month.
On the other hand, if you have taken a mortgage, make sure it’s not beyond your means. Some folks spend decades trying to pay off their mortgage and they still can’t complete their payments. This is because they are financially overstretched by spending too much money on a house.
13. Living Paycheck To Paycheck
As of June 2021, the US household savings rate stood at 9.4%. This result clearly shows that millions of American families are living paycheck to paycheck. In this case, overspending is one of the financial mistakes to avoid.
When you are quick to exhaust all your monthly income before the next paycheck arrives, you will be financially stranded. This means you will be desperate for your next salary, this is how living paycheck to paycheck starts.
Moreover, your spending habit may not be the main issue. Your salary may actually be too small to cover all your expenses and savings goals. Hence, you have to find a higher-paying job or pursue a side hustle that guarantees extra income.
14. Paying Off Debt With Savings
Using your savings to pay off debt may seem like a smart idea, but it remains one of the personal finance mistakes to avoid.
Your savings are not supposed to be spent on debt. Ideally, you should either invest your savings or spend it on something relevant such as college education, health, or some major household problems. You aren’t supposed to tamper with your emergency fund until you have an actual emergency to handle. Your retirement account is also a no-go area.
If you are currently struggling with debt, I suggest you check out this post where I examined 10 helpful strategies for paying off debt faster.
Final Words On Financial Mistakes To Avoid
To steer yourself away from financial challenges, you need to be self-aware and intentional about what you do with your money. How do you spend? How do you save? How do you invest? These are key factors you must consider carefully. Don’t be quick to incur debts or indulge in impulse buying. At the beginning of each month, create a budget that organizes your expenses and prevents excessive spending.
Besides, having explained the common financial mistakes to avoid, I believe you are on the right track to make better decisions concerning your personal finance.
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