Here we’ll take a look at some of the most common financial mistakes that often lead people to major economic hardship. Even if you’re already facing financial difficulties, steering clear of these mistakes could be the key to survival.
1. Not Having a Financial Plan
The first and foremost mistake an individual makes is not having a financial plan in place. This will make managing your finances with respect to saving, expenses, and investments a daunting task. Your financial future depends on the steps you take in your present, for that effective financial planning is necessary.
Your financial plan should be all encompassing. Meaning, it should address the envisioned financial goals you wish to address. To begin with, you must engage in a budgeting exercise that will give a sense of your cash flows and enable you to save (and invest) more. Believe in the idea of delayed gratification and avoid splurging on unnecessary purchases. The recent uncertainties have taught many of us how to spend just on our needs and not indulge wants in things we don’t need. Budgeting will also help you maintain discipline with your finances and instill good financial habits such as saving regularly and investing for the future. Consider using a budgeting app that helps you stay on track with your finances and not be tempted to stray from your budget. Sticking to your budget will facilitate saving and invest your hard earned in productive avenues that counter inflation well.
“If you fail to plan, you are planning to fail” – Benjamin Franklin
2. Never-Ending Payments
Ask yourself if you really need items that keep you paying every month, year after year. Things like cable television, music services, or high-end gym memberships can force you to pay unceasingly but leave you owning nothing. When money is tight, or you just want to save more, creating a leaner lifestyle can go a long way to fattening your savings and cushioning yourself from financial hardship.
3. Living on Borrowed Money
Using credit cards to buy essentials has become somewhat commonplace. But even if an ever-increasing number of consumers are willing to pay double-digit interest rates on gasoline, groceries, and a host of other items that are gone long before the bill is paid in full, it’s not wise financial advice to do so. Credit card interest rates make the price of the charged items a great deal more expensive. In some cases, using credit can also mean you’ll spend more than you earn.
4. Not Investing in Retirement
If you do not get your money working for you in the markets or through other income-producing investments, you may never be able to stop working. Making monthly contributions to designated retirement accounts is essential for a comfortable retirement.
5. Paying Off Debt With Savings
You may be thinking that if your debt is costing 19% and your retirement account is making 7%, swapping the retirement for the debt means you will be pocketing the difference. But it’s not that simple.
In addition to losing the power of compounding, it’s very hard to pay back those retirement funds, and you could be hit with hefty fees. With the right mindset, borrowing from your retirement account can be a viable option, but even the most disciplined planners have a tough time placing money aside to rebuild these accounts.
When the debt gets paid off, the urgency to pay it back usually goes away. It will be very tempting to continue spending at the same pace, which means you could go back into debt again. If you are going to pay off debt with savings, you have to live like you still have a debt to pay to your retirement fund.
The Key Takaway
To steer yourself away from the dangers of overspending, start by monitoring the little expenses that add up quickly, then move on to monitoring the big expenses. Think carefully before adding new debts to your list of payments, and keep in mind that being able to make a payment isn’t the same as being able to afford the purchase. Finally, make saving some of what you earn a monthly priority, along with spending time developing a sound financial plan.