We mostly struggle with regret. In personal finance, we make several decisions about earning, saving and investing. Assuming 30 years of working and 20 years of retired life, we make money decisions for 50 years or more. What is the chance that we get it right always? We are all prone to making mistakes and making them too often for comfort.
Here are 10 of the most important financial mistakes you need to stop :
1. Spending more than you can afford:
Excessive spending is one of the biggest financial mistakes that you can make. It doesn’t seem like a big deal if you are spending a few extra bucks every week on ordering food or buying clothes you don’t need; but, multiply this amount by 52, and that’s the amount that you are wasting every year! If you can save even half of this and add it to your savings, you can create a nest egg for yourself for a rainy day. It is must, to have a monthly budget; otherwise, you will end up overspending. What’s more, the easily available credit cards have made it easier to spend more than we can afford; so refrain from swiping your card as much as you can.
2. Paying off debt with your savings
You may think that you have a mortgage at 15% interest and your saving plan is giving a return of just 7%, so it makes sense to pay off your debt with your savings. However, it’s not that simple. If you take out money from your savings account, you will lose interest earned by compounding as well as incur a penalty for taking out money from your FD or retirement fund. It is ideal to pay off the debt as and when you have some extra cash, rather than withdrawing your FD prematurely or taking out money from your retirement fund.
3. Paying full price for everything
In today’s day and age, it’s almost a sin to be paying the full price that is mentioned on the packaging. A simple search can get you deals and offers on restaurants, hotels, flight tickets, groceries, clothes, and even online food orders! Make sure you compare the prices from different websites before taking a final call, and your pocket will thank you.
4. Postponing saving for retirement
When you are young and have lesser income, you may delay starting a retirement fund. However, it is imperative to save for your retirement and start as early as possible. The earlier you start; the bigger the amount you can save. Start by saving at least 15-20% of your annual income for your retirement fund. This will help you live a life of comfort in your golden years, and be financially independent even after you stop actively working.
5. Buying a New Car
Millions of new cars are sold each year, although few buyers can afford to pay for them in cash. However, the inability to pay cash for a new car can also mean an inability to afford the car. After all, being able to afford the payment is not the same as being able to afford the car.
Furthermore, by borrowing money to buy a car, the consumer pays interest on a depreciating asset, which amplifies the difference between the value of the car and the price paid for it. Worse yet, many people trade in their cars every two or three years and lose money on every trade.
Sometimes a person has no choice but to take out a loan to buy a car, but how many consumers really need a large SUV? Such vehicles are expensive to buy, insure, and fuel. Unless you tow a boat or trailer or need an SUV to earn a living, it can be disadvantageous to purchase one.
If you need to buy a car and/or borrow money to do so, consider buying one that uses less gas and costs less to insure and maintain. Cars are expensive, and if you’re buying more of a car than you need, you might be burning through money that could have been saved or used to pay off debt.
6. Living Paycheck to Paycheck
In June 2021, the U.S. household personal savings rate was 9.4%. Many households may live paycheck to paycheck, and an unforeseen problem can easily become a disaster if you are not prepared.
The cumulative result of overspending puts people into a precarious position—one in which they need every dime they earn and one missed paycheck would be disastrous. This is not the position you want to find yourself in when an economic recession hits. If this happens, you’ll have very few options.
Many financial planners will tell you to keep three months’ worth of expenses in an account where you can access it quickly. Loss of employment or changes in the economy could drain your savings and place you in a cycle of debt paying for debt. A three-month buffer could be the difference between keeping or losing your house.
7. Lack of proper analysis due to pressure to invest in a short period:
In the months leading up to the end of the year, you may already be running out of time to make tax-saving investments, and you may not be able to analyze all your options. Investing at the beginning of the year allows you to put aside small amounts rather than a large sum in one go; your money will have more time to grow.
It is therefore wise to plan your finances based on both short and long-term goals. Make prudent financial decisions by improving your financial understanding, reviewing existing financial arrangements, and aligning your future plans accordingly. As a result of such financial discipline practices, it is possible to build a healthy financial portfolio.
8.Opting for too many credit cards:
One of the most common financial traps, especially for individuals in the early stages of their adult life, is accumulating 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. Many people don’t realize that the minimum payment generally only covers interest. While many Americans carry debt from student loans or car loans, stacking credit card debt on top of other debt causes much financial stress.
Responsible use of credit cards can provide many benefits, but you’ll want to avoid getting in over your head. However, if you’re already carrying big credit card balances, it’s not too late to recover! Consider using a personal loan or a credit card with a low balance transfer interest rate to knock down those balances. Then find a card with a solid rewards program and a reasonable interest rate to use for everyday purchases while paying it off every month to improve your credit score.
9. Not Following the 50:30:20 Rule
One common financial mistake is failing to build a financial plan or a budget.
Your financial plan is your road map to accomplish your financial goals. It’s about establishing SMART (specific, measurable, achievable, relevant, time-bound) goals and an investment and savings strategy to get you there. Meeting with a financial planner is often recommended for a strong start.
Your budget is how you allocate your income every month. A strong budget helps ensure you’re taking care of your needs and living within your means, as well as allocating funds to your wants, debt repayment and investments in your future.
One good rule of thumb to use when establishing a budget is the 50/30/20 rule:
- 50% for needs (housing, car, healthcare, etc.)
- 30% for wants (entertainment, etc.)
- 20% to savings, debt repayment and investments
Depending on your available income, financial goals, and stage of your career, flexibility is important. If you can comfortably allocate more than 20% of your income to savings and investment, you’ll be better off over the long term.
10. Ignoring your credit score
A good credit score can help you save a lot of money in interest rates. The better your credit score is, the easier it is to get higher loan amounts, and even a better rate of interest, for things like buying a car, house, personal loan, etc. You should check your credit score every six months or so, and make amends by spending wisely if any errors are found in your report.
The Bottom Line
To steer yourself away from the dangers of overspending, start by monitoring the little expenses that add up quickly, then move on to monitoring the big expenses. Think carefully before adding new debts to your list of payments, and keep in mind that being able to make a payment isn’t the same as being able to afford the purchase. Finally, make saving some of what you earn a monthly priority, along with spending time developing a sound financial plan.
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