Top 8 Most Common Financial Mistakes
Updated on May 30 2018
The most common financial mistakes are part of everyday life. The problem is that they can add up to create financial hardship for you and your family. Discover the top monetary mistakes people make so you can plan to avoid them in the future to not only help your pocketbook, but also your well-being.
Financial hardship doesn’t typically happen overnight. Great fortunes are often lost one dollar at a time with poor spending habits and decision-making. Here are some of the most common financial mistakes that can often lead people to major economic problems. Even if you’re already facing financial difficulties, being aware of these mistakes can help you plan for a better financial future.
1. Poor Spending Habits
Frivolous spending can leave you broke. Discretionary and non-discretionary or “mandatory” spending can take a toll on your retirement planning. Small purchases, like your morning coffee, pack of cigarettes or Netflix movie add up substantially over time. Think about it: Just $20 a week spent on a meal at a restaurant or a quick trip to Target costs you $1,040 per year, which could go toward an extra mortgage payment or retirement investments. The reality is that most people spend more than $20 a week on luxury purchases. If you’re enduring financial hardship, it’s important to budget your money and limit extra spending. Foreclosure or bankruptcy usually happen because of excessive or frivolous spending.
2. Too Many Payments
Monthly payments add up — literally. Ask yourself if you really need items that keep you paying every month, year after year. From cable television to apps to magazine subscriptions, too many payments can put a dent in your savings while leaving you much in return. Consider whether the expense is worth the entertainment. Unused gym memberships are a common culprit that can add up, as well. When money is tight, or you just want to save more, creating a leaner lifestyle can help cushion your savings.
3. Living on Borrowed Money
Remember the days when everyone used cash and balanced their check books daily? Credit cards have become a habit that has been accepted as normal, have aided in inflation, and have also left many in debt. The problem is you don’t realize how much you’re spending if you constantly use credit. Keep in mind that an ever-increasing number of consumers are willing to pay double-digit interest rates on gasoline, groceries and a myriad of other purchases that are gone long before the bill is paid in full. Credit card interest rates make the price of the charged items substantially more expensive.
4. Big Ticket Purchases
Big-ticket purchases have the biggest financial consequences as they drain your savings. Millions of new cars and boats are sold each year, but few buyers can afford to pay for them in cash. Many people also remodel their homes and take luxury vacations and put all the expenses on their credit cards, or take out a loan at a bank or financial institution to fund the splurge. Cars and boats are depreciating assets, which amplifies the difference between the value of the purchase and the price paid. Home improvement can improve the value of the house, but it needs to be within means. Vacations should be budgeted throughout the year as a monthly expense so you can pay cash and don’t end up paying exessive interest and fees.
5. Treating Your Home Equity As a Bank, Rather Than An Investment
Refinancing can be a bad habit. When you refinance and take out cash, you are giving away that amount of money in ownership to the bank. The cost to refinance also costs you thousands of dollars in interest and fees. If you want to pay off your principal on your home, you’ll want to build equity, not make payments in perpetuity. Bottom line: You don’t want to pay more for your home than it’s worth.
6. Living Paycheck to Paycheck
Living paycheck to paycheck is unfortunately a common scenario in America. Ideally, when you reach senior status you should no longer be living paycheck to paycheck, but people who have not saved strategically are still in this situation. The main issue with barely scraping by financially is that when you face unforseen emergencies your financial situation can become potentially disasterous.
7. Not Investing
If you do not get your money working for you in the markets or through other income-producing investments, you cannot stop working - ever. The monthy, incremental contributions are what help when it comes to building a nest egg as compound interest works over time. Setting a strategic investment portfolio and plan for your unique situation is key to building assets for a successful retirement. Making monthly contributions to designated retirement accounts is essential for a comfortable retirement. Take advantage of tax-deferred retirement accounts and/or your employer-sponsored plan. Understand the time your investments will have to grow and how much risk you can tolerate. A qualified financial advisor can help you make educated investments based on your investment time horizon and financial situation.
8. Using Savings to Pay Debt
If you have a credit card or loan that costs you 15% interest and a retirement account that is making you 7%, you might think swapping your retirement for debt is the smartest move. This is not the case. Compound interest pays over time, and it’s very hard to pay back those retirement funds, not to mention hefty fees involved with withdrawing funds early. Borrowing money from a retirement account may be a viable option, but generally people don’t rebuild their investment after they borrow. Think about it: When the debt gets paid off, the urgency to pay back the account goes away.
Hold Yourself Financially Accountable
Overspending is an epidemic of the 21st century. It is important to have an informed financial plan that can help set you up for finanial success. Start by monitoring the little expenses that add up quickly, then move on to monitoring the big expenses. Hold yourself accountable to only purchasing items you can afford, rather than splurging your savings. If you make saving a monthly priority and get the help of an expert financial professional, you are more likely to enjoy a secure retirement.