We are all well aware that there are numerous financial mistakes that you can make. Chances are that you have performed a few of them, and faced the consequences. Whether it was a risky investment, blowing your paycheck, or forgetting about subscriptions, we’ve all been there. They happen.
According to Bankrate, approximately 74% of Americans feel as if they have a financial regret. If you have feel as if you have made a financial mistake in the past, remember that you are human, and are not alone.
Managing money is an ever-evolving challenge. Personal finance is something that grows with you, and successes and failures will happen along the way. It is important that you learn from these mistakes, and avoid doing them again. It is also important to become aware of financial mistakes of others, so as to prevent them from happening to you.
In this article, we will discuss numerous financial mistakes to avoid, and what to do instead. Here are 7 costly personal finance mistakes to avoid:
- Excessive spending
- Living paycheck-to-paycheck
- Not setting financial goals
- Having no budget/not tracking your income or expenses
- Not having an emergency fund
- Prioritizing the wrong debts first
- Succumbing to lifestyle inflation
1. Excessive spending
Excessive spending is one of the most costly financial mistakes that you can make. This can mean that you spend more than you make or just spend your money carelessly.
That pumpkin spice latte might not seem like a big deal to your wallet, but it can add up. Living by frugal means is a great way to make better use of your income. Even just an extra $50 each week not used towards spending can add up to $2,600 in a year. This can be used towards a financial goal (which we will talk about later), or paying a credit card payment.
What to do instead
When your paycheck hits, you might be hasty to get out there and spend it on whatever sticks out to you. Instead of going out to eat, utilize that extra bit of money to put towards investing or savings. Reevaluate your unnecessary spending habits, and minimize or eliminate them completely. Look for opportunities that will limit your spending. Remember, every dollar counts.
2. Living paycheck-to-paycheck
Relying on a single paycheck can become problematic. If this is the case, then what would happen if next week’s paycheck were to never come in? What would happen if you were to suddenly lose your job or an accident were to occur?
If you are in a position where you are depending on the next paycheck, then it may be time to rethink and restructure your finances. Living paycheck-to-paycheck most likely means that your expenses outweigh your income. It’s time to change that.
What to do instead
If you are in this situation, then it is time to fix it. Cut down your expenses to where you have room to breathe. Maybe you can’t, and are only paying for the essentials. Look into another job, or look to increase your income in some way. You should position yourself to where if something were to happen, you are comfortable and sturdy. You should also be in a situation where you have income leftover, which can be utilized for various things.
3. Not setting financial goals
Without goals, you can be left clueless as to what it is you are trying to accomplish. If you don’t set financial goals for the future, then managing money in the present will be even harder.
Having no goals set in place will likely cause you to be stuck in the present. This can lead to overspending on things that only offer instant gratification, or ignoring investing or savings.
Goals can be either short-term or long-term. Whatever the goal may be, make sure that it is specific, measurable, attainable, relevant, and time-bound (or SMART). Remember that when trying to accomplish your goals that you should strive to be both consistent and disciplined.
What to do instead
Set financial goals for the future. These goals should replicate your vision and desired outcomes. As we mentioned before, aim to create SMART goals so that they are more concise. The earlier that these goals are created, the better. For example, if you start investing earlier as a teenager, then you will reap the benefits of compound interest.
4. Having no budget/not tracking your income or expenses
Having no budget is one of the most harmful financial mistakes to avoid. A budget is one of the most important aspects of any financial situation. It acts as a financial plan that can help you achieve your goals, such as paying off debts.
A budget is also a great way to track your finances. It is imperative that you do so, or you may fall victim to financial complications. Check your bank statement frequently, record how much you spend on a grocery trip, etc. Habits like this allow you to track your money and see what you are doing with your income.
Another mistake is having a budget, but not actually sticking to it. Consistency is key! Make sure you are focused and disciplined with your budget.
What to do instead
Create a budget that complements your lifestyle, and stick to it. Your budget should be methodical and realistic. Ensure that your spending limit includes regular expenses, and is suited for your income. Don’t go too hard on yourself, but also don’t get too comfortable.
5. Not having an emergency fund
Life can, and will happen. Things will come up. Accidents will occur. Maybe a medical emergency comes up, or the car breaks down. Something is bound to happen. Knowing this, it is important to be prepared. That’s where an emergency fund comes in.
An emergency fund is essentially a cash reserve set aside for unplanned expenses or financial emergencies. These are created for financial safety and are a countermeasure to mishaps that may happen.
57% of Americans can’t cover a $1,000 emergency expense. Ensuring that you are not a part of this majority will ensure financial stability and prevent you from falling victim to loans or credit.
What to do instead
It is absolutely crucial to your finances that you create an emergency fund. You never know what is going to happen. This can be created as a separate bank account, investment account, or some other form of cash reserve. Try to utilize an account that returns interest so that your money works for you. A good rule of thumb for an emergency fund is that it can cover 3 to 6 months of expenses.
6. Prioritizing the wrong debts first
Student loans, car payments, etc. Many fall victim to debt, and are obligated to pay them off. If you are burdened by various debts, then make sure that you are prioritizing payments to the right debt first. Improperly addressing debts is one of the financial mistakes that can be easily avoided.
Many sporadically make payments on their various debts, and fail in paying them off. Be meticulous and logical in your plan, and aim to find the best route to a debt-free life.
What to do instead
First identify all of your debt, along with the interest rates. From here you should create a strategy and plan how it is you are going to pay these off. It is recommended that you tackle debt with the highest interest rate first.
There are two common methods of paying off debts. The first is known as the “snowball” method, where you pay off the debts that are the smallest first. The other method is known as the “avalanche” method, where you pay off the debt with the highest interest rate first. There are pros and cons to either method. Just make sure that whatever your strategy is, that it works for you and fits your financial situation.
7. Succumbing to lifestyle inflation
Good job! You just earned a job that earns you $20,000 more. Most people who encounter this situation will take that extra $20,000 and blow it on non-essentials. They think that as their income increases, so should their spending.
This is known as lifestyle inflation. It is basically a situation where someone increases their expenses, usually as a result of increased income. Just because someone else is driving that nice BMW doesn’t mean you have to. It is important to avoid this and live within your means (or even live beneath your means if possible).
What to do instead
So you just got that salary increase. Now what? Don’t go straight to upgrading your car or a nice vacation. Think how you can benefit your financial situation from this increase in income. Sometimes increasing your spending on a certain thing is okay, such as when you need to purchase a larger house for a growing family. However, increased spending should be avoided when it can. Focus more on your needs than your wants.
Use this extra income towards paying off debts. Additionally, you can put it towards investing or savings. Use this extra income to make your financial situation better and more comfortable.
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