5 common financial mistakes to avoid

Jan 31, 2021

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We all make mistakes, but some are more expensive than others. The choices you make today with your money have a direct impact on your future. If you prolong financial mistakes, you’ll keep digging yourself into a deeper and deeper hole. The problem is we often don’t realize we’re building bad habits or neglecting vital personal finance activities. So, let’s walk through five common financial mistakes to avoid.

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Overspending

There is a reason we’re called consumers: We’re spenders by nature. It’s impractical to assume you can live in today’s society without spending a dime, but the key is to control your spending habits and stay within your financial lane.

Living beyond your means initiates a domino effect. If you overspend, you can’t save money. If you can’t save money, you can’t build a safety net, pay off debt or invest in your future.

Budgeting is the most straightforward way to monitor expenses and identify unnecessary purchases. Categorize your purchases as “wants” and “needs.” This will make it easier to identify areas of excess that you can curtail. Test different budgeting techniques and apps to figure out what works for you.

Related: Which budgeting technique is right for you?

Not saving

Not saving goes hand in hand with overspending — with an added caveat. It’s one thing to control your spending and ensure more money flows into your pockets rather than out. It’s another step altogether to allocate your earnings to ensure you’re adequately planning for future needs and goals, like an emergency fund, a house or retirement.

Again, a budget can help you regularly set money aside. Consider a zero-budget template, which factors in saving, and automated transfers to a savings account.

Living without a safety net

According to one survey, only 41% of Americans can afford to cover a sudden $1,000 expense. Can you?

Accidents happen every day. Layoffs can happen at any point — about 15% of the U.S. workforce gets laid off every year (and that is based on pre-pandemic data). While you can’t predict the future, you can at least be financially prepared. That is where an emergency fund comes into play.

As the name implies, emergency funds are financial safety nets that protect you from life’s unexpected costs. The general recommendation is to house three to six months’ worth of expenses in a high-yield savings account. In turn, you can easily access your money and earn a little passive income at the same time.

Keep in mind, emergency funds are for emergencies — not life’s typical expenditures like groceries and travel.

Related: What is an emergency fund and why does it matter?

Creating poor investing habits

You might think the worst investing habit is not investing at all, but that is not the case. If you avoid investing, you will miss out on long-term growth; however, the worst mistake is recklessly investing your hard-earned savings. Investing alone is not enough — you need a deliberate plan.

A plan:

  • Keeps you from gambling your money away
  • Protects you from emotional responses to volatile market swings
  • Ensures you know the right time to reallocate or sell your investments

You can devise your own investment strategy or hire the services of a financial advisor.

Related: The best apps for money management

Neglecting debt

To attain financial stability, you need to protect against emergency expenses and invest in your future — but it’s just as important to pay off your obligations. It’s normal to have debt; the average American has $90,460 in debt. Loans are often a necessary evil that can help you buy assets like cars, houses and educations. But debt can have you climbing a perpetual hill if you let interest endlessly accrue and build on top of itself.

Use a forward-looking budget to set aside future income for debt payments. If you have multiple debts, you can employ the snowball or avalanche methods to reduce your total balance. Under the snowball method, you would prioritize paying off your smallest debt first and work your way up the debt ladder. Using the avalanche method, you would apply your savings to your largest, most expensive debt first and work your way down.

Related: From debt to over 20 credit cards: The story of my personal finance journey

Bottom line

There is no such thing as “perfect” personal finance. Everyone is bound to make a monetary mistake at some point, whether you overspend on clothes or forget to transfer savings to your investment account. Hindsight is always 20/20.

While the financial mistakes we make today have long-term repercussions, the reverse is also true — by implementing good habits, you can put yourself in a much more stable position later on.

Related: TPG beginner’s guide: Everything you need to know about points, miles, airlines and credit cards

Photo by Justin Paget/Getty Images.

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