Let’s face it: many of the biggest lessons we learn in life will come from making mistakes. This is true whether we are talking about relationships, our careers, and of course, money.
Sometimes, those mistakes are small and caught early, allowing us the opportunity to try a better approach. Other times, though, these mistakes can go on for years, setting off a chain of events that will affect you and your family for years to come.
Odds are that you will still make financial mistakes, no matter how diligent you stay or how much you learn. However, by learning some of the most common money mistakes and ways to avoid them, you may be able to save yourself some heartache (and greenbacks) along the way.
Not Having a Safety Net
One of the biggest financial hurdles you may encounter is living from one paycheck to the next. This practice is all-too-common, but that doesn’t mean it won’t set you up for failure.
By managing your finances with little (or no) wiggle room, you eliminate any safety net you might be able to build. If an emergency expense were to arise, you may not be able to cover it without going into debt.
Additionally, a paycheck-to-paycheck lifestyle doesn’t offer many options for the future. If you’re already struggling with regular monthly expenses, it may be impossible to save for a home, buy a new car, or pay for your child’s education down the line.
Build an emergency fund. Save 3-6 months’ worth of expenses. And find some breathing room between your income and spending.
Ignoring Your Budget -- or Simply Not Creating One
A past study by U.S. Bank found that only 41% of American households use a budget. Of course, this means that the majority of them do not.
Your household budget doesn’t need to be complex or aggressive. It can also change over time as your lifestyle, income, expenses, and needs shift. The most important thing is that you have a budget in place.
The second most important thing? Well, you must follow said budget.
A budget does no good if you’re constantly breaking your own rules, though. Save first, cut out wasteful expenses, downsize (your home, car, etc.) if needed, and maintain established spending limits. By doing so, you’ll avoid unnecessary debt, work toward your future goals, and build a secure safety net for your family.
Making Minimum Payments
Credit cards aren’t inherently evil. If you manage your accounts improperly, though, it might begin to feel like they are.
One of the worst things you can do with credit card accounts is to only pay the minimum due each month. Thanks to compound interest, this will turn your everyday purchases into astronomical expenses, and dig you into a hole of debt that you may struggle to overcome.
Ideally, you should be paying your credit card balances in full each and every month. If this isn’t possible, you should either stop using credit cards for a while and buy with cash, or transfer your balance to a card with a 0% interest offer.
Paying High Interest Rates
Much of your debt could be refinanced at a lower rate, saving you hundreds or thousands of dollars along the way. This is true of things like your auto loan, home mortgage, and even student loans.
By refinancing, you can take control of both monthly payments and the interest charged.
Waiting to Save for the Future
For decades, you may feel “too young” to be saving for retirement. Or perhaps money is too tight to think about allocating funds toward savings each month.
By not thinking about the future early on, though, you set a poor precedent. More importantly, you will miss out on the growth of your savings (via compound interest) -- which could mean a difference of tens or hundreds of thousands come retirement.
You may not be able to save as much as you’d like today, but make it a point to still save for retirement from day one.
There is no shortage of money mistakes that you could encounter in your financial journey. By making yourself aware of the most common ones, however, you may be able to head them off from the get-go… and spare yourself a headache in the process.