At one time or another everyone makes a mistake- even when it comes to your finances. However, if you keep making the same missteps over and over again it will lead to bigger problems. Learning from these common money mistakes can help position you for a solid financial future.
- Spending more than you earn. A large segment of people in the United States live above their means; that can mean struggling financially throughout your life. Getting your budget under control isn’t only about creating a solid plan from which to launch your financial future. Having enough money left at the end of the month to add to savings or pay off your debts can lift a huge psychological weight.
Correcting overspending is as simple as cutting back on nonessential expenses such as dining out, shopping or other entertainment. If you can learn to trim down mouthy purchases, you can likely free up some needed cash at the end of the month to put toward long-term financial goals. However, if you’re struggling and have already cut out all the extra spending, it may be time to look into more far-reaching solutions. For example, you might be able to renegotiate certain services such as cable and internet, or reach out to your lenders about altering the terms of your monthly debt payments.
- Putting off financial planning until tomorrow. “I’ll get to it later” usually never happens. Address your financial planning within the next two weeks. If not, you may miss some financial planning opportunities or make things more difficult for yourself.
Try setting aside time once a week or even once a month to check in on your finances and accomplish important goals.
- Failing to save for emergencies. This is a wake-up call – 60 percent of Americans don’t have enough money in their savings account to pay for an unexpected $1,000 expense. Millions of people are without a safety net, and even one accident could be devastating to their finances.
The recommended amount so you have enough cash set aside to cover all of your family’s expenses for three to six months. A good rule of thumb is to save 10 percent of your net income. If that amount is impossible due to your monthly expenses, try starting with 5 percent and increase that amount by 1 percent each month until you’ve reached the 10 percent threshold.
- Postponing retirement saving until later in life. Many Millennial and Gen Z workers entered the job market more concerned with paying off their student loans than saving for retirement. The retirement age of 65 -70 can seem like a long way off to someone in their early 20s, however, money saved early will grow into a much larger nest egg as the years pass.
For example, if you have an IRA with a 6 percent annual return, and you start contributing $2,000 per year into that account at age 25, you’ll have a total value of $328,095 at age 65 from your $80,000 investment (40 x $2.000). If you wait just five years and start your $2,000 annual contribution at age 30, you’ll end up with only $236,242 from an investment of $70,000 (35 x $2,000). If you have the income available, it’s never too early to start saving.
- Taking a long time to pay off your high-interest debt. It’s hard to save when you’re in considerable debt — especially if you’re losing money every month to high-interest rates. If you have multiple debts that all need your attention, it’s difficult to know where to prioritize. But paying off debts with high-interest rates is often a great strategy that can save you money in the long run.
Begin by paying off your debt with the highest interest rate, which will often be a credit card account. If you have the cash on hand, pay off everything that isn’t tax-deductible. For example, say you have $5,000 stashed away that’s earning only 1 percent interest. That money would be put to far better use to pay off your credit card debts.
- Always buying new cars without considering used options. Did you know that the minute you drive a new car off the lot, its value drops by as much as 25 percent? If you need a new car, consider a used car. Buying used means the depreciation has already come out of the previous owner’s pocket – not yours. The loss of value in a car is far less from years three to six than from years one to three, which means you’ll get more of your money back when the time comes to sell the car.
- Not buying enough insurance coverage. Having the right insurance — including medical, automobile, homeowners, long-term care, life and disability — is key to good financial planning. While it can be difficult to figure out the kinds of insurance and the amount of coverage you may need, not having the right balance of insurance can be disastrous if you’re hit with an unexpected expense.
Experts say to review your insurance coverage each year and determine which policies you may or may not need based on any major life events you’ve experienced. For example, if you’ve purchased a newer, more expensive car, it’s time to reevaluate your auto insurance. If you’ve recently gotten married or added a baby to your household, it may be time to take a look at your health insurance. If you’ve completed a major, value-adding home remodel, it’s probably a good idea to increase your homeowner’s insurance.
- Not monitoring your credit scores and credit reports. Credit scores can affect you in many ways – from borrowing money, to buying a home and even renting an apartment, it is very important to see a credit score similar to what a potential lender may see. You can easily check your credit profile with each of the three nationwide credit bureaus, and then work with your lenders to correct any problems or errors that you discover.
- Lacking an investment strategy, or not sticking to one. If you invest in stocks or mutual funds as part of your savings plan, it’s important to have a strategy for that money. A common misstep is spending too much time and effort trying to time the market, hunting for the “big payoff” or chasing the investment of the month (or week or day). Instead, you need to decide on a strategy and stick to your plan.
- Not having a will. Suppose the worst were to happen and you die tomorrow. Would your loved ones be provided for? If you pass away without a will, a court will determine who gets what based your state’s laws.
However, when you prepare a will, you’re creating a legal document that clearly defines what you want to happen to your money and other assets after you’re gone. While no one likes to think about their own death, having a will in place not only makes your wishes known but also can reduce the stress of your surviving loved ones who are already facing a difficult time. An even better option, if you have some assets is a Trust. Trusts are more expensive and more complicated, but do a better job of transferring wealth when you do finally leave this earth.
There is a good chance you’ve made at least one of these mistakes throughout the process of managing your finances — and that’s okay. The key is to identify and understand financial missteps so that you can do your best to prevent them moving forward.
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