Here, we’ll look at some of the most common mistakes people make with their money that can put them in a lot of trouble. Even if you’re already having trouble with money, avoiding these mistakes could help you stay afloat.
The 10 Most Common Financial Mistakes
1. Spending too much and on useless things
Often, people lose a lot of money one dollar at a time. When you buy that double-mocha cappuccino, go out to dinner, or order a pay-per-view movie, it may not seem like a big deal, but it all adds up.
If you eat out once a week for $25, that’s $1,300 a year. You could use that money to make an extra credit card or car payment, or even several extra payments. If you’re having trouble with money, it’s important to avoid this mistake. If you’re just a few dollars away from foreclosure or bankruptcy, every dollar will be more important than ever.
2. Never-Ending Payments
Think about whether you really need things that you have to pay for every month, year after year. Things like cable TV, music services, or high-end gym memberships can make you pay all the time without giving you anything in return. When money is tight or you just want to save more, living on less can help you build up your savings and protect you from financial trouble.
3. Living on money they borrowed
Buying necessities with a credit card has become more and more common. But even though more and more people are willing to pay double-digit interest rates on gas, groceries, and other things that will be gone by the time the bill is paid in full, it’s not a good idea from a financial standpoint. Interest rates on credit cards make the cost of things you charge a lot higher. When you use credit, you might also end up spending more than you earn.
4. Getting a new vehicle
Every year, millions of new cars are bought, but few people can pay cash for them. But not being able to pay cash for a new car can also mean that you can’t afford it. Even if you can pay the payment, that doesn’t mean you can pay for the car.
Also, when a person borrows money to buy a car, they pay interest on an asset that is losing value. This makes the difference between what the car is worth and what the person paid for it even bigger. Worse, many people trade in their cars every two or three years and lose money every time.
People sometimes have to get a loan in order to buy a car, but how many people really need a big SUV? These cars cost a lot to buy, insure, and run. If you don’t need an SUV for your job or to pull a boat or trailer, it might not be a good idea to buy one.
If you need to buy a car and/or borrow money to do so, think about buying one that uses less gas and costs less to insure and maintain. Cars are expensive, and if you buy more than you need, you might waste money that you could have saved or used to pay off debt.
5. Putting too much money into your home
When you’re looking to buy a house, bigger isn’t always better. If you don’t have a big family, choosing a 6,000-square-foot home will only make your taxes, repairs, and utilities more expensive. Do you really want to make a long-term, big dent in your monthly budget?
6. Using the value of your home as a piggy bank
When you refinance and take money out of your home, you are giving up ownership. Sometimes, it might make sense to refinance. If you can lower your rate or refinance to pay off debt with a higher interest rate, do so.
But there is also the option of getting a home equity line of credit (HELOC). This lets you use the value of your home as if it were a credit card. This could mean paying interest on your home equity line of credit even though you don’t need to.
7. Getting by from check to check
In June 2021, 9.4% of U.S. households had saved money on their own.
Many people may live from paycheck to paycheck, and if you aren’t ready, an unexpected problem can quickly turn into a disaster.
Overspending over time puts people in a dangerous situation where they need every dollar they make and one missed paycheck would be terrible. When an economic recession hits, you don’t want to be in this situation. If this happens, you won’t have much to choose from.
Many financial planners will tell you to keep three months’ worth of expenses in an account you can get to quickly. If you lose your job or the economy changes, your savings could run out and you could end up in a cycle of borrowing money to pay off debt. Having a cushion of three months could mean the difference between keeping your house and losing it.
8. Not putting money away for retirement
If you don’t put your money to work for you on the stock market or in other ways, you might never be able to quit working. For a comfortable retirement, it’s important to put money into retirement accounts every month.
Use tax-deferred retirement accounts and/or a plan offered by your employer. Learn how long it will take your investments to grow and how much risk you can handle. If you can, talk to a qualified financial advisor to see if this will help you reach your goals.
9. Using savings to pay off debt
You might think that if your debt is costing you 19% and your retirement account is making you 7%, swapping the retirement account for the debt will give you the difference. But it isn’t that easy.
You lose the power of compounding, it’s hard to get those retirement funds back, and you might have to pay a lot in fees. With the right attitude, borrowing from your retirement account can be a good idea. However, even the most disciplined planners have trouble putting money aside to rebuild these accounts.
Most of the time, the need to pay back a debt goes away once it’s paid off. It will be tempting to keep spending the same amount of money, which could put you back in debt. If you want to pay off debt with savings, you have to live like you still owe money—to your retirement fund.
10. Lack of a plan
Your future finances will depend on what’s happening right now. People spend a lot of time watching TV or scrolling through social media, but they can’t find two hours a week to work on their finances. You must know where you want to go. Spend some time planning how your money will be spent.
In conclusion
To avoid the risks of overspending, start by keeping track of the small expenses that add up quickly, and then move on to the big ones. Think carefully before adding new debts to your list, and remember that just because you can make a payment doesn’t mean you can afford the purchase. Lastly, you should save some of what you earn every month and spend time making a good plan for your money.
