Critical Money Mistakes
In this article, we’ll take a look at some of the most widespread mistakes that people make with their money, which frequently result in significant financial hardship. Even if you are already experiencing problems with your finances, avoiding making these mistakes could be the difference between life and death for you.
1. Spending that is both excessive and pointless
Many enormous fortunes have been squandered 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 at the time, but the costs of these seemingly insignificant actions can quickly add up.
Spending just $25 per week on eating out results in a cost of $1,300 per year, which could be applied to an additional payment on a credit card or auto loan, or several additional payments. When you’re going through tough times financially, it’s important to make sure you don’t make this mistake. After all, if you’re only a few dollars away from foreclosure or bankruptcy, then every dollar will matter more than it ever has before.
2. Never-Ending Payments
Ask yourself if you truly require the things for which you must continue to make payments on a monthly basis year after year. Things like cable television, music streaming services, or high-end gym memberships can require you to make consistent payments but leave you with no tangible goods to show for it. If money is tight or you simply want to save more, adopting a more frugal way of life can go a long way towards fattening your savings and protecting you from the effects of financial hardship.
3. Living on Borrowed Money
The use of credit cards as a payment method when purchasing necessities has become increasingly common. In spite of the fact that an ever-increasing number of consumers are willing to pay interest rates in the double digits on items such as gasoline, groceries, and a whole host of other items that will be gone long before the bill is paid in full, it is not sound advice to do so from a financial planning standpoint. The interest rates on credit cards make the cost of the items that are charged a significant amount of money more expensive. When you use credit, there is always the possibility that you will end up spending more money than you bring in.
4. Acquiring a Brand-New Vehicle
Although there are millions of new cars sold annually, only a small percentage of purchasers are able to pay cash for their vehicles. However, if you are unable to pay cash for a new vehicle, this may also indicate that you are unable to afford the vehicle. Having the ability to pay the monthly payment does not necessarily mean that one has the financial means to purchase the automobile.
In addition, when a consumer borrows money to purchase a car, they pay interest on a depreciating asset. This makes the gap between the value of the car and the price paid for it even larger. Even worse, many people trade in their vehicles every two or three years, and each time they do so, they end up losing money.
When it comes to buying a car, a person may not always have a choice but to take out a loan; however, how many customers truly require a large SUV? Purchasing, insuring, and fueling automobiles of this type is an expensive endeavour. It may not be beneficial to purchase an SUV if you do not regularly tow a boat or trailer or if your line of work requires you to have one.
If you are in a position where you need to buy a car and/or borrow money to do so, you should give some thought to purchasing a vehicle that consumes less gas and has lower costs associated with its maintenance and insurance premiums. The cost of automobiles is high, and if you purchase more automobiles than you require, you may be throwing away money that you could have put towards savings or used to reduce your debt.
5. Investing an Excessive Amount of Money Into Your Home
When it comes to purchasing a home, it is not always the case that more space is preferable. If you do not have a large family, purchasing a home with 6,000 square feet of living space will only result in higher property taxes, maintenance costs, and utility bills. Do you really want to make such a big hole in your monthly budget that will last for such a long time?
6. Putting Home Equity to Work as a Savings Account
When you refinance your home and take cash out of it, you are giving up ownership of your property to another party. Refinancing your mortgage could be a good idea in certain circumstances. If you can refinance and pay off higher-interest debt while also lowering your rate, this may be an option for you.
However, another option is to establish a line of credit against the equity in your home. (HELOC). Because of this, you will have the ability to make use of the equity in your home in a manner similar to that of a credit card. Because of this, you might end up paying interest that isn’t necessary just so you can use your home equity line of credit.1
7. Living on Paycheck to Paycheck as a Way of Life
The rate of personal savings for households in the United States was 9.4% as of June 2021.2 It’s possible that many households survive from paycheck to paycheck, which means that an unexpected problem can quickly become a catastrophe if you aren’t prepared for it.
People find themselves in a precarious position as a cumulative result of spending more than they earn, a position in which they require every single dollar they make and where missing even one paycheck would be catastrophic. When an economic downturn occurs, this is exactly the kind of predicament you want to avoid finding yourself in. If something like this takes place, you won’t have many choices.
A good number of financial planners will recommend that you keep the equivalent of three months’ worth of expenses in an account from which you can quickly withdraw money. Your savings could be depleted if you lose your job or the economy experiences shifts, and this could put you in a vicious cycle of incurring more debt to pay off the previous one. It’s possible that having a cushion of three months could mean the difference between keeping and losing your home.
8. Failing to Make Retirement Investments
There is a possibility that you will never be able to retire if you do not put your money to work for you in the financial markets or in other ways that produce income through investments. It is absolutely necessary, in order to ensure a comfortable retirement, to make regular contributions to designated retirement accounts.
Take advantage of retirement accounts that allow you to defer taxes and/or the plan offered by your employer. Gain an understanding of the amount of time your investments will have to grow and the level of risk you are willing to accept. If at all possible, you should seek the assistance of an experienced financial advisor in order to coordinate this with your objectives.
9. Eliminating Debt Through the Use of Savings
It’s possible that you’ve come to the conclusion that if the interest on your debt is 19% and the return on your retirement account is 7%, switching the retirement account for the debt will result in a net gain for you. However, it’s not quite as easy as that.
You will no longer benefit from the power of compounding interest, it will be very difficult to pay back those retirement funds, and you may be subject to significant fees. Borrowing from your retirement account can be a viable option if you have the right frame of mind, but even the most disciplined planners have a hard time putting money aside to rebuild these accounts.
When the debt is paid off, the urgency that was previously associated with having to repay it typically disappears. It will be very tempting to keep spending at the same pace, which means you risk getting back into debt if you do so. If you want to get out of debt using savings, you have to spend your money as if you still owe money—to your savings account. Only then will you be able to pay off your debt?
10. Failing to Formulate a Strategy
The circumstances of the present will determine the trajectory of your financial future. People are willing to devote countless hours to activities such as watching television or scrolling through their social media feeds, but they are unable to commit even two hours per week to managing their personal finances. It is essential that you are aware of your destination. Make it a priority to sit down and plan out your finances at least a little bit.
The Conclusion of the Matter
Start by keeping track of the smaller expenses that can quickly add up, and then move on to monitoring the larger expenses once you’ve gotten the hang of that. This will help you avoid the perils of overspending. You should give it some serious thought before adding any new debts to the list of payments you already have to make, and you should also keep in mind that being able to make a payment is not the same as being able to afford the purchase. Last but not least, you should make it a monthly priority to put some of what you earn into savings, and you should also spend some time developing a solid financial plan.
