When we become adults and start being a part of the financial world doesn’t mean we are prepared for it. In fact, most people make at least one of these classic personal finance mistakes. If you want to know if you’re making one of them and learn good money management skills, please keep reading.
1. Living paycheck to paycheck
Earning money by having a steady 9 to 5 job is great. There are many benefits that come with having a steady paycheck coming into your bank account every month. But, it’s no good to just make money without saving money. When you’re practically counting down the days until your next paycheck so you can pay your debts and make ends meet, it is one of the most common financial mistakes people make. A common money management strategy is to “pay” yourself first to save money from your paycheck. Create a savings account so you can squirrel away at least 3 months for an emergency fund so nothing disastrous happens if by some reason you miss a paycheck or lose your job.
2. Having no spending limit
You don’t have to set a strict budget where you can’t surpass it or you absolutely have to reach it, but we do think it’s important that you know how much is too much when it comes to spending. After you allocate your paycheck to save money and pay your debts, determine how much money is left that you can spend comfortably. You can have a separate budget for each different activity: money for going out, money for shopping, money for vacations, etc.
3. Making major purchases in debt instead of saving ahead
Major purchases are the ones you need to plan out the most. Buying impulsively and without any previous savings is a big mistake. If you want to buy, let’s say, a car, it’s important that you do your research, check the fees and interest rates AND start saving as much as you can so you can give a sizeable down payment, leaving a small amount of money on credit. Keep in mind that big purchases equal big debt, so if you have the ability to save up for a few months to have enough money out of pocket instead of making it a debt, do so.
4. Having no emergency funds
Unexpected situations happen all the time and they don’t always occur when it’s most convenient for us. If there’s an accident, an illness, an unexpected job loss, you’re going to need to have money on hand to afford to pay your expenses. If you haven’t saved money, you’ll most likely end up with huge debts for months or years. Always set aside an emergency fund that serves you for at least a few months until you can find stable footing. Add small amounts of money each month and ONLY cash out when there’s a true emergency.
5. Not paying insurance (or not paying enough)
There are all sorts of insurance available: health, life, car, house, and even renter’s insurance. All of these are designed to cover you in case of an unexpected situation. While some people don’t see the need for insurance, they could really be a lifesaver for when bad, expensive things happen. It’s important that you invest in insurance and that you do your research so that you know what types of coverages you need for your own personal situation.
6. Not investing your money
Young people hear the word “investment” and immediate think of the ups and downs of playing the stock market. Don’t forget that without investments, it’ll be almost impossible to retire when you’re older. A big mistake people make is to never invest anywhere so that, in the future, they will have enough money to live off. Even if you’re not very experienced, make sure to do some investing in low risk funds and diversify your investments so you’ll have multiple sources of income. This way, you’ll reduce your risk and have and multiple opportunities to see your money grow.
7. Having a consumer attitude
We live in a world where the media and society highlight the importance and satisfaction that consumerism brings. That you should have an attitude that “expensive things are just better”. You should know better to avoid blowing your budget. Surround yourself with people who know the value of money and never fall in the trap of buying something when you’re not comfortable with the price. Remember there’s always low-cost options for all sorts of products and services that have the same or better quality.
8. Frivolous spending on little luxuries
What is frivolous spending? It basically means all that little purchases you make purely for pleasure and when you add up all the little amounts that you spend, you could end up with a shockingly high amount. So, the next time you’re tempted to buy a Starbucks coffee, haute clothing, or eating out, think about how much money it could represent on the long run. Making your own coffee, wearing store brand clothes, and making your own dinner doesn’t sound so bad but an easy way to save money, right?
9. Living off of borrowed money
This is probably one of the most dangerous personal financial mistakes you can make. If you don’t earn enough money to pay off your credit cards each month and you still use credit cards to buy EVERYTHING, even essential products that have a very short lifespan (i.e. groceries), that is when you’re making your lifestyle more and more expensive. This is because interest rates on credit cards are among the highest in the financial world and you’re paying high interest for every little thing you purchase. This is a money deficit cycle where you’ll end up with never-ending debt.
10. Buying a bigger house than you need
Sure, everyone wants to have a big house with a huge yard so they’ll live more comfortably and look like they’re rich. But with big houses come big payments. So keep in mind that, not only will you pay more money for your home but you’ll also have to pay higher property taxes and more for maintenance and utilities. Unless you have a big family and you need all the space, keep your feet on the ground and purchase the house you need, not the one you want.
Money management and being financially responsible doesn’t have to be that hard. It only takes some organization, a bit of planning, and a lot of self-control so you can start being free from debt and become financially stable for the rest of your life.