We all make mistakes in our lives. Some can be repaired, some can be avoided, and some leave deep scars. Financial decisions are a huge part of our lives and have the potential to wreak havoc if not handled properly. One can easily make a wrong financial decision if not careful. Impulsive spending on expensive things that we don’t need, not having a proper plan and S.M.A.R.T goals, prioritizing instant gratification over debt repayment are only a few of the numerous money mistakes that we make in our lives from time to time. As a consequence, we are burdened with debts and have poor financial health. These contribute to a reduced state of physical, mental and emotional wellness. We lose our work-life balance, mental peace, our retirement gets postponed and the list goes on. Fortunately, money mistakes can be avoided if only we have a knowledge about them and have a disciplined approach towards our finances. So, let us know some of the money mistakes that one usually makes in his life:
- Not having a disciplined approach towards managing finances : The primary reason for financial problems in life is the lack of self-discipline, the inability to delay gratification in the short term. Many spend everything they earn and more at times, supplemented by loans and credit card debt. This leads to a bad financial state.
- Not having a properly-laid out financial plan with well-defined goals : Nothing is achieved without having a proper plan and setting goals. In the absence of a roadmap, we tend to make poor financial decisions and knowingly or unknowingly incur losses.
- Not having a budget : Without a budget, we cannot track our expenses. Budgeting gives us a visual representation of our spending habits and helps us to curb our unnecessary expenses.
- Giving in to Retail Therapy : Buying unnecessary stuff to temporarily fix our emotional outbreak is dangerous. We should never let our emotions dominate our finances.
- Living paycheck-to-paycheck : Living as if there’s no tomorrow is good but not when it comes to finances. No one can predict what’s going to happen the next second, so why not have a foundation of savings on which you and/or your family can fall back on in times of crisis.
- Living above your means : This is one of most significant factors behind one being broke. We spend way more than we can afford to, more than we need to. As a consequence, we fall into debt and spend precious years of our lives to repay it.
- No life and medical insurance : As the saying goes “Health is Wealth”. There is always a chance that you may fall ill with a life-threatening illness leading to premature death. Not having insurance can leave your family having to pay outstanding debts that you have accumulated over your lifetime which will further eat into their income.
- Not having Emergency Savings : Crises won’t knock before coming. We have to be prepared. A leaky roof or burst pipe can flood a room. Failure in handling unexpected expenses can leave you in debt. During emergencies, you’ll likely end up borrowing money, neglecting your existing payment obligations. You might also be buying everything on a high-interest credit card which will get you in debt.
- Saving what is left after spending : Waiting till you have bought everything you needed and wanted will leave you with very little or no savings at all. Instead, save and invest first, then spend on your needs.
- Not Differentiating Needs from Wants : Not knowing where to draw the line while spending leads to unnecessary expenditures which in turn, leave less in hand to be saved and invested, prolonging the target date for achieving your financial goals.
- Keeping up with the Joneses : Buying a new car just because your neighbor has bought one doesn’t simply make sense. Nicer things never imply financial well-being. Avoid the rat-race, else it’ll only add to your debts.
- Ignoring inflation : Inflation reduces the purchasing power of money over time. Hence, it is important to account for it when you draw up your financial plan. In fact, inflation is the single most important factor to be considered in your retirement plan. Incorporating inflation while calculating returns will also give you a realistic view of the value of your investments.
- Not investing : Saving is important, but investing is equally crucial, especially when inflation eats away your purchasing power over time. The only way to outperform inflation is to invest in equities, bonds, and other investment avenues.
- Investing in trends : Investing in trends is dangerous. Lack of proper research will cause losses in terms of money as well as confidence in the market. Everyone has different financial status, different goals. Know yours and invest accordingly.
- Using Credit Rather than Cash : Overdependence on credit cards will aggravate your debts, especially if it’s a high-interest credit card. Paying in cash will help you track your expenses. As the saying goes “Out of sight, out of mind”. Seeing how much you’re paying will make you think whether the stuff you’re buying is necessary or can be put off.
- Only Making the Minimum Credit Card Payments : Choosing to make the minimum monthly payment, you may be paying off your debts well into your thirties, along with other expenses that need paying. It is difficult to save with debt, and even more so if there is interest too, so try to focus on paying off your credit card debt as soon as possible. Don’t allow debt to pile up.
- Failing to pay bills on time : Failure to pay your bills often results in unnecessary expenses in the form of fines.
- Underestimating the cost of future medical expenses and overlooking your income: With age, health problems and healthcare costs rise, increasing the expenses. Keep this in mind and plan accordingly.
- Not adjusting finances after big changes in life : Revisiting and re-adjusting your financial plan is very important so that you can incorporate the effects of any kind of change in your life. If you don’t do this, your plan won’t be in tune with your change in expenses and income, which might lead to you not achieving your goals.
- Ignoring financial statements : Financial statements provide insights into your current financial situation and help in judging how likely you’re to achieve your goals. Thus, ignoring them will only lead to poor planning and execution resulting in a bad financial state.
- Depending on only one income flow : Given the uncertain state of socio-economic affairs worldwide, it’s unwise to be dependent on a single source of income. Loss of job will adversely impact your financial and emotional well-being. Having alternative sources of income can at least help lessen the blow of a job loss or other unexpected expense.
- Not saving and not knowing how much to save for retirement : If you fail to plan properly, be sure to be in for a sorry retirement. Retiring with little or no savings raises your risk of struggling and living in poverty. You might have to struggle to make ends meet as your healthcare expenses will increase.
- Letting Someone Else Handle the Finances : Seeking advice is good but having a hands-off approach to your finances is not. After all, it’s your financial goals on the line. Ask questions and evaluate the person providing advice. Is his advice in line with your goals? Have an understanding of finance basics.
- Upgrading your housing without proper planning : Housing is the most significant expense that most consumers have each month. Lack of proper planning will leave you having a house payment way more than you can afford.
- Unnecessary Spending for the reward points : Reward points encourage you to spend more than is necessary. Economists call this phenomenon “purchase acceleration”.
- Avoiding the “Money Talk” With Your Spouse : Money being one of the most common causes of tension between couples, it’s important for both of you to be on the same page, especially when your partner’s financial decisions affect your life and vice versa.
- Ignoring the importance of financial literacy : You simply cannot afford to remain ignorant about finances. It has become an integral life skill. Compromising on achieving basic financial literacy is a sure-shot way to a sad state of financial well-being.
Managing money effectively is a key success skill. Money mistakes happen throughout life, but the sooner you understand them and take preventive measures, the better off you’ll be. Each of the 27 mistakes has a cost that you’ll be paying at some point in your life if you choose to remain oblivious to them. It only requires a conscious effort from your side to become financially secure.
Learn from your mistakes, but avoid making them whenever you can.