Money management is a challenging task
Top 7 worst money mistakes to avoid. Source: unsplash.com
Whereas some mistakes in handling your finances are inevitable, there are some kinds of budget mistreatments you’d better avoid. Being commonplace, they might have more serious consequences than you imagine.
1. Absence of a safety net
If you earn enough to provide for your daily expenses without tapping a credit line, you may think you’re perfectly fine. Yet, emergencies happen, and they need to be prepared for. Without savings or investments, you would not have an emergency fund. It would leave you in a dire position in case of economic recession, layoff, serious illness, etc. Furthermore, people who live paycheck to paycheck face financial difficulties when they need to buy or repair major household equipment outside of the scope of their daily needs. A broken fridge or a car, leaking roof, or an outdated laptop – may all become reasons to get into debt. Besides, there are joyful events that require extra money – weddings and celebrations, baby birth, vacations, etc. If you save just a small part of your monthly income regularly, they won’t bring you unnecessary stress either. At the same time, almost 60% of Americans don’t have enough money in their savings account to pay for an unexpected $1,000 expense.
2. Ignoring retirement
When we’re young, it seems retirement is something from a very distant future. However, years go by quicker than you think. Thus, many middle-aged people find themselves panicking about their approaching retirement as they don’t have any savings to rely on. The sooner you start investing in your retirement plan, the better. Compound interest will do its work over years, making your senior years pleasant and easy. The consequences of not saving enough for retirement, on the other hand, are always disappointing. Firstly, you’ll need to continue working, even when it will be hard for you physically. Secondly, you’ll be counting pennies and will have a lower quality of life than before. Finally, you may be forced to sell property or valuables just to afford necessary health care.
3. Settling wrong debts first
For the majority of people today, getting into debt is only a matter of time. Be it a credit card, a mortgage, or a peer-to-peer loan, we all face a need to borrow money, at least once in a lifetime. While there are numerous ways to get extra money fast and easy, paying back properly is not something taught at school. Unfortunately, people who get into a debt pit find it hard to manage all outstanding loans with minimal losses. That aggravates their financial situation even more.
Two common methods of paying off numerous loans are the debt snowball and the debt avalanche. In both cases, you have to make the minimum payments regularly. It would help you avoid unwanted penalties. Thus, the chosen method will help you prioritise extra money you can afford to pay towards the outstanding loan balance.
- In the snowball case, you start eliminating your debts with the smallest ones. Then, you pay off the second smallest debt with the amount that would otherwise go towards the already settled bill. That’s how you eventually get to deal with the biggest amount owed.
- If you choose the debt avalanche method, you need to analyse the interest paid on every loan. This way of handling debts targets borrowings with the highest interest rates first.
4. No financial planning
Going with the flow won’t help you to set your finances right. If you spend everything you earn uncontrolled and make no plans, you may eventually wind up on a slippery debt road. Getting your budget under control isn’t that hard now with so many online tools and apps available. Financial planning divides spending into essential categories and impulse splurging. It will show you the weak spots in your wallet where money goes down the drain. Sticking to a plan for a while will limit your overspending and free extra money for savings. If you analyse your regular expenses, you may also save more by renegotiating certain services, or looking for more affordable options. Moreover, with planning, you set short-term and long-term financial goals. You put aside money in smaller portions, and big purchases or holidays aren’t that hurtful anymore.
5. Not reviewing insurance coverage
When we get any type of insurance for the first time, many people prefer to stick to the basic policies. However, they may not cover enough, especially if your life conditions change. Unexpected expenses may become disastrous for households without major savings. Therefore, it’s wise to review your insurance coverage each year, and determine which additional policies you may or may not need based on your current lifestyle and upcoming changes. Getting a new house or remodeling the old one, buying a car, adopting a pet, or having a baby may motivate you to reevaluate the existing insurance policies. You need to choose the ones that will cover the full value of your growing assets. Newly discovered health conditions, or approaching retirement should also make you thoroughly consider the right type of health insurance cover.
6. Social competition
Trying to keep up with the Joneses is getting harder today, as not only your well-to-do neighbors, but also millions of media influencers set up the living standards you may want to live up to. That’s what forces thousands of young people to buy something they can’t afford. What’s even sadder, they don’t actually need at least half of that stuff. The desire to live the same lifestyle as other (more successful) people, gets you into trouble in many ways.
First, you haven’t walked around in their shoes and know nothing of what they’ve done to achieve certain financial goals. It’s quite silly to compare the financial possibilities of a young graduate having their first part-time job with those of a seasoned business person. Secondly, we substitute the remedy with the occasional plaster sticking. To be able to truly keep up with successful people, we should try to learn about their money-making strategies instead of buying the same brand of shoes or purses. Unfortunately, if you place the accents wrong, you end up with a huge credit card bill instead of the luxury house your neighbor has.
7. Making emotions drive your investment decisions
Investment is one of the lucrative means to multiply your wealth without getting an extra job. However, investing is full of uncertainty as the market fluctuations make your chosen assets constantly change their value. Sticking only to low-risk stock is not an option if you truly want to make money work for you. However, higher risk often goes along with higher volatility. Emotions can override your ratio when you follow every market up and down. With investing apps, almost half (49%) of investors are checking their investments’ performance once a day or more. They get worried by every market movement and may rush with portfolio re-arrangements. Rush emotional decisions rarely lead to good outcomes. Moreover, getting too emotional about investing will make it stressful and deteriorate your overall wellbeing. Therefore, if you can’t think rationally, you’d better choose an investment manager to do it for you. Spending extra money on professional services is much better than losing everything due to your fears and excitement.
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