Other than ensuring that you have a budget, using the tools that you can to help you stick to your budget, and saving and investing, there are many mistakes people make with money that you’ll want to avoid. Let’s look at a few and learn how to avoid them or overcome them.
Living Paycheck to Paycheck
The sad fact is that most people in the world do live paycheck to paycheck. That means that most people cannot cover the expenses required of them without resorting to credit if they lose their job or an unexpected expense comes up. If you are in such situation now, it’s imperative that you start managing your money to avoid this.
Using Credit for Everyday Things
Unless you’re super-good at paying the entire balance each month and are using the card to gain rewards that add quality to your life, stop using your credit cards for everyday things. If you use a card to buy dinner out (or worse, groceries) because you’re short of funds due to another expense, you are in trouble and need to get your budget fixed asap.
Ignoring Study Loans
So many millennials are having issues with their study loans. Thankfully, there are programs that you can investigate that will help you, at least for the short term. If your income is low enough that you qualify for one of the income-based payment plan options, go ahead and choose that.
These income-based plans allow you to pay a reduced amount if your income qualifies. It’s important to understand that in most cases, your payment will not cover the interest, so try to pay that when you get your notifications to avoid your balance increasing while your income is on the low end. Many people on the income-based plan end up eventually earning enough to pay the entire payment instead of qualifying to end payments after 25 years. This means they end up paying back a substantial amount, even up to double their initial balance due to compounding interest.
Even with all the issues, don’t ignore notices about your study loans. Typically, you can work out a plan with them based on your situation if only you call and talk to them. Everyone, regardless of income, is currently able to put their loans on temporary forbearance while they gain job experience. There is almost always a way to work it out with them. The one thing you cannot do, at this point in time, is file bankruptcy on your study loans.
Using Credit during Crises
If you’re using credit during a crisis and not your emergency savings, you have a serious issue. It’s imperative that you do what you can to build your emergency fund. If you still owe on your credit cards, pay minimum payments until you can save at least a grand for emergencies.
Once you have the minimum of a grand in savings, work on paying off one credit card at a time. Once they’re done, use the amount you were paying on them to add to your savings until you build three to six months of emergency savings. Then start investing elsewhere.
Remember, your emergency fund is for things that are unexpected, necessary and urgent.
Treating Retirement Savings as an Emergency
Once you have paid off your consumer debt and maximized your emergency savings account with a three to six months emergency fund, it’s time to maximize your retirement account contributions. Even though you may think you should not contribute to retirement when you’re young, you should.
The sooner you start, the better, due to compounding interest. The truth is, if you started saving just about $450 a month you could have a million dollars in investments (if you earn 6%) in only 20 years. 20 years is going to come fast even if you’re in your 20s now. Don’t think of it as being 20 years from now; think of it as being in the blink of an eye because it’s going to happen so much faster than you think.
Putting All Your Eggs in One Basket
It’s essential to diversify your investments so that you can mitigate the ups and downs of the market. The easiest way to accomplish this without having to get a master’s degree in finance is to find a fund that is named by the date you plan to retire. For example, it may be called the 2045 Fund.
This simply means that the fund is designed and diversified based on the idea that the people in this fund will retire sometime in the 2040s. The investments are made to be concentrated highly in stocks when you’re young and to move out of those types of investments closer to retirement. It takes out the guesswork when you allow a fund manager to deal with the ratios.
When you are trying to figure out the best financial fund or investment firm to work with, focus on the fees. Don’t let someone tell you that the costs don’t matter. They do, and they can be very high and eat away at your investment.
Not Considering What Happens If You’re Sick or Gone
It’s imperative, especially if you have family counting on you, to ensure that you have adequate life, disability, health, and renters / homeowners insurance. While most people don’t want to think about being sick or dying, it does happen. The average life expectancy in the US is almost 79 years, but many things play a role in that average, from access to healthcare to clean air.
Getting Too Serious about What’s Hot
During your investing life, you’re going to be tempted by a lot of hot deals. However, it’s best not to get too carried away by what’s hot right now. That doesn’t mean you cannot try it out. For example, if you’re interested in investing in cryptocurrency, just don’t spend more than you’re willing to lose. Consider any investments in anything trending and hot to be entertainment.
Not Building Credit History
Many young people don’t realize how important it is to build a credit history. Yes, sometimes it seems a little questionable that the way you build credit history is to use credit. But, if you do it responsibly, it’ll save you money on your home and anything you need to finance. Focus on your debt to income ratio, opening the right accounts, closing accounts, and how that affects your credit report.
Not Learning about Finance
The truth is, formal education on personal finance is almost non-existent. You’ll have to seek out financial literature if you want to learn. But, it’s probably one of the most important things you can learn to make your life better.
Not Talking about Money and Your Income with Friends
For some reason, our society has made it seem like bad manners to discuss how much you make with your friends. The problem is that it leads to considerable inequalities in terms of pay. Do talk about your salary and how much things cost with friends and family, so that you know the truth of what’s happening out there.
Buying Property without a 20 Percent Down Payment
Before you purchase a home, save the 20 percent down payment. That’s going to help keep your head clear about what you can really afford and save you money on private mortgage insurance – which by the way is something you pay for to help out the loan company as it doesn’t help you at all.
Buying New Cars
When you want a new automobile, it’s tempting to buy a new one. However, it’s a waste of money because all cars lose thousands of dollars the moment you drive them off the lot. It takes about four to six years for a vehicle’s value drop to stop. If you focus on buying used but well maintained, you’ll save lots of money over the years.
Buying Most New Things
In fact, buying most things new is a waste of money. The more items you can find gently used, the more money you’re going to save. A well-made sweater that you buy at the thrift store is going to feel just as wonderful, if not more so, than one you paid ten times more for new.
Avoiding Professional Help
The other mistake to avoid making is not seeking out the help of professionals when it comes to your money. Hiring a CFP, CPA, EA, or someone who can genuinely help you with financial planning, including tax planning, will probably literally change your life.
If you are interested in learning how to use your money effectively, it’s within your power to do so by just educating yourself about the realities of personal money management and how savings, credit, and investing really works.