How to Avoid These Pitfalls to Reach Your Financial GoalsYou don’t need to be an expert in finance to develop excellent money-saving habits. Basic financial planning is a skill that anyone can master, even if you’ve made money mistakes in the past. In reality, we’ve all had our missteps when it comes to our finances. Being aware of the most common money errors people make will help you not only avoid them for yourself, but also provide a greater sense of stability as you make more informed spending decisions. Here are the five most common money mistakes and how to fix them
1. You’re Living on Borrowed MoneyAvoid thinking of your credit card as “free money.” That’s a fast way to build up a large amount of credit card debt. Studies have shown that people often spend more when they’re using a credit card. Many of us use our credit cards for leisure or excess activities, such as shopping or dining (which can add up quickly!). Still, if you find yourself relying on credit for significant, essential expenses as well, it’s time to re-examine your spending urgently. Using a credit card smartly means paying off the full balance each month. If you’re only making the minimum payments, you’re not making any progress toward reducing your debt. And remember, credit card balances are charged high interest rates, so having a balance carry over month to month is very costly. How to fix this:
- Treat your credit card like a debit card. Only purchase something with it if you know you have the money in your bank account to pay it off.
- Work toward paying off your full credit card balance each month on time. If this means reducing spending somewhere else, it may be worth it to reduce your debt.
- Negotiate a lower interest rate with your bank. Many banks will offer lower interest rates on credit card balances if you ask, and if you have a history of making on-time payments.
2. You Don’t Have a BudgetDo you know where all of your money goes each month? If not, take control of your financial situation and make a budget. Without a budget, you’re not making informed spending choices. A budget helps you account for every amount you earn, every bill you pay, and any goods or services you buy. A budget also helps you define your financial goals and priorities, and redirect spending to those focus areas. For example, you may realize that by dining out less, you’re able to devote more money to your retirement fund, and that this is more important to you. How to fix this:
- Follow the advice in our How to Build a Budget in Five Steps article to create your own budget.
- Review your budget at least once every month and update it as your needs or wants change.
- Use technology to help! Apps like Mint or You Need a Budget track and automate your spending, so you don’t have to put as much effort into doing it all yourself.
3. Your Emergency Fund is EmptyUnfortunate things happen in life: medical issues, job losses, and other unexpected events. It’s crucial to be ready for periods where your expenses may be unusually high, or your income may be inconsistent. That’s where an emergency fund can help. An emergency fund is your safety net; it’s money that you’ve set aside to keep you going during rough patches. Without it, you may have to resort to undesirable short-term solutions, such as increasing your credit card debt or borrowing money. How to fix this:
- Imagine your emergency fund is a bill. Contribute to it each month before spending money on any non-essentials.
- Work up to an emergency fund that would cover your expenses for about six months. This is the length of time many experts recommend as most helpful.
- Make your emergency fund difficult to access. For example, you could open it at a bank you don’t normally use. This will ideally discourage you from pulling money from it for non-emergency expenses.
4. You’re Spending A Lot on Things You Don’t NeedGenerally, there’s nothing wrong with buying something you want that you don’t really need. Many of us spend money on a new wardrobe, video games, or fancy dinners as they make us feel good, or they’re enjoyable. But when this type of spending becomes excessive and stops you from achieving your financial goals, that’s when it may become a problem. Luckily, creating a budget will help you curb excessive spending. There are also several small checks you can do to ensure you’re not throwing away money on non-essentials. How to fix this:
- Review all of your subscription services (including streaming services, cable, phone bills, gym memberships, and others). Are there some you no longer use that you could cancel? Have you surpassed a free trial period without realizing it? Are there cheaper alternatives to the subscriptions you have? Many adults spend a surprisingly large portion on unused subscription services.
- Stop rationalizing small luxuries. A little indulgence is splurging on a fancy coffee, which isn’t a negative thing on occasion. But when you start buying fancy coffee regularly, then that small luxury starts to add up. Other small luxuries may include cocktails, desserts, car ride services, and more, and should be limited as much as possible.
- Buy used. There are plenty of excellent quality used books, cars, clothes, electronics, and other goods that work just as well as their new counterparts. Plus, it’s better for the environment!
5. You Haven’t Planned for Your FutureMany adults are guilty of only focusing on the present when it comes to financial planning. Retirement seems so far away, and it’s hard to invest money you need now in a distant future. But if you don’t start saving for retirement today, you’re setting yourself up for uncertainty. The earlier you start saving, the better. That’s because the money you save can earn more money through interest, and over time that adds up. Even saving a small amount makes a difference. How to fix this:
- Do your research. Set aside a couple of hours to look into different retirement funds you can invest in. You’ll want to look for funds that are stable and low-risk.
- Make saving for retirement a top priority in your budget and start setting aside money for it today, if you aren’t already.
- Evaluate what you spend on things you don’t need (see #4) and redirect that money toward retirement savings.