We all make mistakes, right?
It’s often said that the good thing about making mistakes is the lessons you learn from them. But what if you don’t know what you’re doing is a mistake? How can you learn from something you never realized was a mistake?
Sometimes, we realize the mistake in time to change and rectify the situation before too much harm is done. But what if we don’t realize the mistake until it’s too late to do anything about it?
When it comes to money matters, many people make fundamental mistakes. The sad part of this is that most of these people have no idea they are making mistakes that could have a huge impact on their lives.
So, I’m telling you about the 6 most common financial mistakes people make, why they are bad and what you can do instead. After you’ve read this article, you will be able to identify 6 things that could be affecting your financial security and you’ll have the knowledge to turn things around.
Ready?
Financial Mistake #1: Spending.
Financial security is more about spending than it is about saving – sounds crazy, doesn’t it? The fact is, unless you can control your spending, you won’t have any money to save or invest, so you won’t have the comfort of financial security. Spending less than you earn is non-negotiable.
To be in control of your spending, you must know the difference between wants and needs. Keeping a tight control over spending on ‘wants’ leaves you enough money for ‘needs’ and savings.
Sensible spending tips include – avoid impulse buying; never shop when you are bored, you’ll over-spend and impulse buy for sure; know how much you have to spend on different areas and don’t spend money you don’t have.
Financial Mistake #2: Not having a budget.
I know, it seems too hard and boring, but a good budget is the best tool you have for creating financial security. If you try to mange your money without a budget, you will be doomed to a life of debt, never having enough money and retiring without sufficient funds to live a decent life.
Financial Mistake #3: Thinking you have all the time in the world to save for your retirement.
Many people do successfully begin retirement saving in their 40s and 50s but you will find it so much easier if you start early on in your working life. Make a decision to take out a small amount from every pay packet you ever get. Start small, have it automatically transferred to a savings account and watch that compounding effect boost your dollars. As you advance through your career, increase the amount you save by committing to a percentage of your salary; financial experts recommend a minimum of 10% saved throughout your working life. If you’re a late starter, you’ll need to save 20% to 30% to put away enough to fund your retirement. Take advantage of all the retirement accounts at your disposal.
Financial Mistake #4: Buying more house than you need.
When we start out, we think we should have the same standard of things our parents are currently enjoying. But if you talk to them, very few started out where they are today. When you buy your first home, it doesn’t have to be in an expensive neighborhood, unless you can afford it. You don’t need a huge 5 bedroom, 4 bathroom house either when you just start out, especially if there are no children yet. Start small; buy a house you can afford the mortgage on; when you earn more and can afford to repay a bigger mortgage, up-size. This same principle also applies to cars, furniture, appliances etc.
Financial Mistake #5: Your attitude to money.
Money is not the goal in life; money is simply a tool to help you live the life you want. Having a ‘poor’ mentality is counter-productive; focusing on what you don’t have is never going to help you get what you do want out of life. Comparing your financial situation to others will just make you miserable. Focus on small positive steps that you can take to improve your financial situation. Be firm with yourself about changing bad habits that are preventing from achieving financial security. Having a complacent attitude to finances is fatal.
Financial Mistake #6: Not having an emergency fund or contingency plan.
Even the best laid plans can come unstuck. What if you were injured and couldn’t work for 6 months – how long would your money last? Things happen that we don’t plan on and if there’s no emergency fund or safety net, things can get pretty nasty very quickly. Saving a regular amount for an emergency fund is a vital step in creating financial security. Like your retirement savings, this should be automatically transferred to a specific account and left alone until you have…..an emergency! Make sure you are fully covered by the most appropriate insurances to help in an emergency.
So, how did you go? Are you guilty of any of these common financial mistakes?
That’s OK; learn from your mistakes and take steps to correct the situation now that you know how. Enjoy your new, improved financial security!
So, what kinds of mistakes have you made and learned from?
I would add “buying more car than you need” to that list. Lots of people with $40K incomes and $40K cars out there, which is just plain beyond their budget.
Good point. A lot of people don’t think of cars as an optional expense. They just think they need to spend that much when in reality there are cheaper options. We buy used cars from relatives and it has worked out great.
Very informative article. I would add that people should try to buy things for their functionality rather than to impress people. As an advisor I see people drowning in debt because they live in very expensive homes, have theatre size flat screen tvs, own overly expensive cars, and inadequate retirement savings. “W” is right.
True. I have seen a lot of that too. In fact I have to admit I have fallen prey to the pressure of trying to fit in and have what others have. I have since realized though that it doesn’t matter and if people judge you on your possessions than they aren’t worth it. Society sure has put a high priority on image the last few years though. The future generation of adults are going to have their work cut out for them. Kids these days have no wants because they get everything they want.
I find the budget part to be the one that gets me the most. It’s so easy to swipe a card for something and not know if we’ve gone over our budget each month. But I suppose that just requires proper planning and good choices 🙂
Luckily, I’m moving in the right direction on 3, 4, 5, and 6 and just need to spend more time focusing on the budget so month by month we are getting a surplus.
You have to start somewhere. I am glad you are making progress on 3-6. For budgeting when using plastic, try a program like Quicken where you can download your transactions and sort them into categories. You can line these up with your budget to see when you are going over. I suggest looking at Quicken or your records once a week.
“have it automatically transferred to a savings account and watch that compounding effect boost your dollars”
with negative real interest rates? =P
Automatic transfer is great. You don’t even see the money so you never miss it. We are big fans of this approach.
Ally pays 1.8 % on my savings account , no strings attached.
Their site says 0.95% on savings. How are you getting 2x that?
Great list. Would add, avoid Credit where you can – credit cards and store credit all sounds great at the time, but you never get something for nothing and will have to pay these at some point. If you do have credit cards, look to pay these off completely then keep them clear and use them for emergency only.
It’s true. Plastic makes it really easy to swipe without thinking. You are much more aware of the amount you are spending when you are dealing with bills. Credit cards have their place but only when you can promise to pay them off in full every month.
I would also add to spending – spending more then you have. I see so many people making $50k and spending like they make $100k. I think you need to save or have a budget before you start making all those big purchases like houses and cars as it limits the amount you can save. #5 is a big problem for many.
I agree. Lifestyle inflation and the desire to compete are a bad combination. When I was younger I used to put more emphasis on this and I fell into that trap of spending more so I could fit in. Now I could care less what others think and control my spending. I am much happier and better off. Material things don’t make you happy long term anyways.
I think #4 is the biggest culprit of them all. People generally take on TOO much debt for TOO much house. I’ve lived in bombed out buildings and been absolutely content.
It’s true. I have worked with numerous people who have mortgages that they really can’t afford. When interest rates rise in Canada, they are going to be in a for rude surprise.
Thanks to share these 6 most common financial mistakes done by people along with suggestion. Some people follow “Earn money, spend money and enjoy life” rules. However, it is always not good. You should have a straight forward financial plan to lead a debt free life for long time.
Plans are very important. In fact, every aspect of our life should have a plan if you ask me.