We’ve all done it – committed some major financial faux-pas. Even the most financially literate person missteps at some point! The key is to admit that you made a mistake, and to know how to pivot and repair the damage. A mistake doesn’t have to shatter your financial foundation. So, let’s discuss the top five money mistakes people make, and how you can avoid falling victim to them yourself.
Mistake 1: Not Creating a Budget
I’ve said it before, I’ll say it again, I’ll scream it until I’m blue in the face. You need a budget. Whether you make minimum wage and feel you have no money left over after paying the bills, or you make five hundred dollars an hour and feel you don’t need to think about money – you need a budget. You need a budget!
Would you ever drive cross-country without a map (or without Google Maps)? No – you’d get lost, run out of gas, and probably end up stranded in the middle of nowhere with no cell reception. Not having a budget is the same thing – your money can’t do what you want it to without a map of where it should go. Not having a budget means overspending, ending up in debt, and being unable to survive a period of financial hardship.
Fortunately, building a budget doesn’t have to be complicated or restrictive. You can use my free budget sheet to get started, and build a system from there! And, when done right, you can tweak your budget easily as your needs change – like if you want to increase your dining-out budget one month because of your birthday, you can just decrease your shopping budget. The key is to give every cent a job.
To make sure your budget fits your needs, look back at your spending for last month (or track it for a month) and see how much you spend on what. This can be very enlightening and can make sure your numbers are reasonable!
Mistake 2: Carrying High-Interest Debt
Ok, now you have a budget. Money feels tight? That does NOT mean putting something on a credit card! Too often, people decide “Oh, I can buy this now with my Visa” or “I can get a loan”, positive they’ll pay it off in no time, and they end up in a debt cycle.
The thing is, compound interest can quickly spiral out of control on debt, and often your payments only cover the interest! Then, something else comes up, you miss a payment, and…well, debt is a constant weight on your shoulders.
And of course, having debt because you wanted the newest gaming system can wreck your credit score, making it impossible to take on loans later – to buy a house or a car, for instance!
If you have debt, you need to prioritize paying it off. Whether you use the debt avalanche method or the debt snowball, focus on paying it off as fast as possible, so that you can move forward!
Mistake 3: Not Saving for Emergencies
If you have debt, you need to prioritize paying it off. Whether you use the debt avalanche method or the debt snowball, focus on paying it off as fast as possible, so that you can move forward!
But, if you have an emergency fund, you’ll be prepared for impending hardship! Generally, a fully-funded emergency fund consists of three to six months of your expenses – more if you are a single-income family, are self-employed, have chronic health issues, or work in a particularly niche field. The idea is that if you lose your job tomorrow, you’ll be able to pay your bills while you look for a new job.
Your emergency fund should be kept in a high-yield savings account – you want it accessible in case you need it, but there’s no reason it can’t make you money in the meantime! Don’t touch it except in actual emergencies, and when you do use some of it, make sure you replenish it again as soon as you can.
Even small amounts can add up quickly, so if you can only put $10 or $20 a week into the emergency fund account, do so! You’ll be grateful it’s there the very first time you face an emergency!
Mistake 4: Ignoring Investment Opportunities
So many people don’t invest early and steadily. It may seem like there’s plenty of time, or not enough money, or too much risk. However, investing less money earlier will make you more money than investing more money later.
Investing in mutual funds early means compound interest will exponentially grow your money. You can use that money to buy a house, retire comfortably, or travel the world – whatever goals you have! Investing also protects your money against inflation, and if you lose your job, your investments can protect your financial health.
Some of the best investment options are mutual funds which provide diversification. A great place to start is with your 401K at work – especially if you get an employer match.
Mistake 5: Overspending on Lifestyle Inflation
It’s nearly irresistible – you get a raise at work, or come into a little inheritance, and suddenly you have the opportunity to upgrade your car, build that extension onto your house, or start buying fancier clothes and eating at better places. Lifestyle inflation can be a huge threat to your financial stability.
Avoid this – when you have more money coming in, first increase your savings proportionally! This will help you balance any increased spending. Then really think about what matters to you. Focus any increased spending on the areas that matter the most to you. You can update your budget to reflect your additional savings and spending, and then stick to that budget! Don’t worry about what people around you say you should spend your money on – you don’t need to keep up with the Joneses, you need to ensure the health and happiness of yourself and your family. That’s it!