5 common financial mistakes to avoid
This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. Terms apply to the offers listed on this page. For an explanation of our Advertising Policy, visit this page.
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.
For more TPG news delivered each morning to your inbox, sign up for our daily newsletter.
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.
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.
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.
- 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
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.
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.
Photo by Justin Paget/Getty Images.
Welcome to The Points Guy!
Earn 90,000 bonus miles and 10,000 Medallion® Qualification Miles (MQMs) after you spend $3,000 in purchases on your new card in the first three months of card membership. Offer ends 11/10/2021.
With Status Boost™, earn 10,000 Medallion Qualification Miles (MQMs) after you spend $25,000 in purchases on your Card in a calendar year, up to two times per year getting you closer to Medallion Status. Earn 3X Miles on Delta purchases and purchases made directly with hotels, 2X Miles at restaurants and at U.S. supermarkets and earn 1X Mile on all other eligible purchases. Terms Apply.
- Limited Time Offer: Earn 90,000 Bonus Miles and 10,000 Medallion® Qualification Miles (MQMs) after you spend $3,000 in purchases on your new Card in your first 3 months. Offer expires 11/10/2021.
- Earn up to 20,000 Medallion® Qualification Miles (MQMs) with Status Boost® per year. After you spend $25,000 in purchases on your Card in a calendar year, you can earn 10,000 MQMs two times per year, getting you closer to Medallion® Status. MQMs are used to determine Medallion® Status and are different than miles you earn toward flights.
- Earn 3X Miles on Delta purchases and purchases made directly with hotels.
- Earn 2X Miles at restaurants worldwide, including takeout and delivery and at U.S. supermarkets.
- Earn 1X Miles on all other eligible purchases.
- Receive a Domestic Main Cabin round-trip companion certificate each year upon renewal of your Card. *Payment of the government imposed taxes and fees of no more than $75 for roundtrip domestic flights (for itineraries with up to four flight segments) is required. Baggage charges and other restrictions apply. See terms and conditions for details.
- Enjoy your first checked bag free on Delta flights.
- Fee Credit for Global Entry or TSA Pre✓®.
- Enjoy an exclusive rate of $39 per person per visit to enter the Delta Sky Club® for you and up to two guests when traveling on a Delta flight.
- No Foreign Transaction Fees.
- $250 Annual Fee.
- Terms Apply.
- See Rates & Fees