5 Common Financial Mistakes to Avoid

October 20, 2020

There are many people out there who wonder why they never seem to have any money, although they earn a decent income. Somehow by the end of the month, it’s all gone, and they have to use their credit card to buy groceries. Unfortunately, healthy financial habits don’t come naturally. That’s why advertisements are so good at making us buy things we don’t need and why so many of us are in debt.

The good news is that you can learn. No matter how bad you think you are with money, you can get better. It’s not a talent you need to be born with. It will take some time, patience and commitment. The first step is to avoid these five most common mistakes.

Not Budgeting

You can’t get a handle of your finances if you don’t know where your money is going. This seems pretty obvious, but many people, especially if they’re only responsible for themselves, avoid budgeting because they view it as unpleasant and restrictive. In reality, budgeting doesn’t take away your freedom. It gives you freedom.

What is a budget? It’s just a plan for your money. Instead of spending it randomly and hoping for the best, a budget will help you gain a better understanding of your financial situation and what you can do to improve it.

For example, when you start tracking your expenses, you might notice how many subscriptions you pay for every month because they renew automatically, and you forgot about them. Or you’ll notice how much small expenses you never really thought about add up over the course of a few months.

Without a budget, you can struggle to get by even if you have a six-figure income. With a budget, you can pull yourself out of financial difficulties and build the life you want for yourself.

Living Paycheck to Paycheck

This is another common mistake. You get your paycheck, you pay your bills, and then you keep spending. Whatever money is left at the end of the month is considered your savings. If you run out of money, you just charge everything to your credit card. First of all, credit cards have high interest rates, so this strategy can get you into debt quite quickly. If you already have debt on several credit cards, you’re living dangerously, and we suggest you get a personal loan and set up a payment plan you can manage. Personal loans have lower interest rates, so it will help you save some money. Even if your credit score is less than ideal, you can still find bad credit loans with lower interest rates than credit cards.  Second of all, because credit cards have such high interest rates, you end up paying premium prices for whatever you buy.

Moreover, if you live paycheck to paycheck, it means that if you have some sort of emergency like your car breaks down or you lose your job, you’re completely unprepared, and you’ll get into debt. Most financial planners would tell you to save at least 10 or 20 percent of your income and create an emergency fund that covers all your essential expenses for three to six months.

Paying Full Price for Big Purchases

Nowadays, when we need or want to buy a new phone, laptop or TV, we just use our credit cards. We buy now, pay later. Maybe we’ll spend a bit of time reading reviews, but that’s it. Why not spend a while longer looking for special offers? With a big purchase like that, it can mean saving a couple hundred dollars. It’s even better if you save the money for the purchase over the course of a few months instead of using your credit card. Unless your phone, laptop or TV is broken, you can probably wait a few months.

With a few clicks, you can find hundreds of discounts, coupons, clearances and so on. You really don’t have to pay full-price for anything anymore. We insisted on big purchases because they’re not as frequent, so it’s not much of a hassle to look up discounts a few times per year, but you can do this for everyday items as well. Saving a dollar or two doesn’t seem like much, but it adds up over time.

Not Setting Financial Goals

Vague aspirations like developing healthy financial habits or saving money are not nearly as motivational as concrete goals. If you’re not yet used to creating a budget and sticking to it, we recommend you start with short-term goals – things like big purchases and going on vacation. Since it will only take you a few months to reach your goal and you’re saving for something you really want, it won’t feel so restrictive, plus you only need a few months to get used to this new lifestyle.

After you find your balance and get more comfortable following a budget, you can move on to long-term financial goals like saving for an emergency fund, a down payment on a car, a down payment on a house and retirement. You can review your financial goals and progress every year, and this will help you stay motivated and on track.

Making Financial Decisions under Pressure

You should never let anyone pressure you into making financial decisions. Remember that you earned this money through your work, so of course, you want to take some time to consider your options.

Let’s say you want to buy a car, so you go to a dealership. The dealer will tell you all about this or that car’s great features, how it’s the perfect car for you, and this is an amazing offer. You can’t afford it right now? No problem! They can set you up with a payment plan. It’s only $X,99 per month for the next six years. Their goal is to convince you on the spot, before you have a chance to go home and think about it.

Maybe then you’ll realize that a car is a depreciating asset and over the course of those six years, you’ll be paying much more than it’s worth, without even considering fees and high interest rates. Or you’ll start to ponder on how much gas this car uses and how much the repairs would cost. Since it’s an expensive car, the insurance will be more expensive as well, and you don’t really need a large SUV.

They know this, and they’ll try to pressure you so they can get their commission. This doesn’t apply only to car dealers. It could even be a friend asking you for a loan. Whatever situation it is, feeling pressured to act right away makes it impossible to consider all aspects and make a smart decision.

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