Managing your finances and taking ownership of your money is a skill that not everyone possesses. We can't always predict what happens in life and everyone comes across an event that seeks attention from your wallet. Often, a lack of proper budgeting, awareness of needs, and negligence in budgeting can cause financial headaches no one wants.
The first step in taking ownership of your budget is to understand the biggest mistakes people tend to make and avoid these. Below, we've outlined
1. Unnecessary and Excessive Spending
This sounds basic but the biggest mistake people make when managing their finances is excessive and unnecessary spending. People often think they have more money to spend than they really do, which can lead to overspending on things that are not necessary or beneficial. What do people typically overspend on? Birthdays and holidays are common examples of overspending. Reasons for this type of overspending is lack of budget awareness and impulse buying. This type of behavior can quickly deplete a person’s savings and leave them in debt.
2. Not Having an Emergency Fund
Another common mistake people make is not setting aside money for unexpected expenses. Life happens and having an emergency fund can be a lifeline during times of financial hardship, such as job loss or medical issues. We've all experienced having to take our car to the shop or being out of work temporarily. Setting aside even a small amount each month can help protect against the financial burden of unexpected expenses.
3. Only Making Minimum Payments on Credit Card Debt
Your highest interest rate debt will almost certainly be your credit card debt. Making only the minimum payments on credit card debt can be a costly mistake. Credit cards on average carry a 24.25% interest rate so if you're carrying debt in this category you'll want to hurry up and pay it down. Minimum credit card payments will make you feel like you're in a never-ending cycle of debt since so much of your payments to towards interest. It is important to make more than the minimum payment when possible in order to reduce the total amount owed and avoid future financial strain.
4. Maintaining Unused Services & Memberships
Staying subscribed to services and memberships that are no longer needed can be a costly mistake and we all do it. Many people forget about these types of expenses and continue to pay for them each month. Even the smallest monthly charges add up when you pay their service fees over the course of a year. A great place to search for your unused memberships is to consistently check your credit card statements.
5. Not Saving for Retirement
Not saving enough for retirement is a mistake that can have serious consequences. It is important to start planning for retirement early, as the more time there is, the greater chances of achieving financial security in the future. Putting aside a small amount each month can help ensure that there is sufficient money available when the time comes to retire.
6. Buying a New Car
Buying a new car instead of a used car is often an unnecessary expense that can deplete financial resources quickly. New cars typically depreciate significantly in value just by driving them off a lot. Buying a used car, even one with only a few thousand miles can save anywhere from 15-30% off the original price of a new car.
7. Paying off the wrong debt first
Another mistake people make when managing their finances is paying off the wrong debt first. It’s important to prioritize high-interest debts, as these will be more expensive in the long run. Paying off lower-interest debts first can also mean missing out on opportunities for savings. Some people for instance don't actually pay attention to the difference in interest rates between student loans, car loans, mortgages, and credit cards. They'll in turn make evenly distributed payments on all their different areas of debt when in reality they should be prioritizing paying off debts with the highest interest rates like credit cards. Student loans typically have lower interest rates and should be a lower priority.
8. Eating Out
Eating out can be a costly habit. We all get lazy and want to sometimes go out or call an Uber Eats delivery service but this is not financially the most sound way to nourish your hunger. Not only are restaurant meals typically more expensive than home-cooked ones, but they can also have additional costs like having to tip the waiter/waitress and also paying taxes you don't always have to pay shopping for groceries. It is important to consider the cost-benefit of eating out versus cooking at home in order to make the most of your money.
9. Neglecting Your Credit Score
Ignoring your credit score is another common mistake people make when managing their finances. Having a bad credit score can keep you from getting a loan or other financial services to help build or leverage your wealth. Additionally, bad credit can lead to higher interest rates when you do qualify for loans. If you have bad credit, you'll want to take steps to improve it if needed. We recommend regularly checking your credit and monitoring your score.
10. Running Up Credit Card Debt
Finally, running up credit card debt is a mistake many people make when managing their finances. It's easy to do since using a credit card (borrowed money) is so seamless and effortless. Credit cards can be helpful for making purchases or building credit, but it is important to pay off balances in full each month in order to avoid accumulating high-interest charges. As mentioned earlier, paying high-interest rates on credit cards is a common mistake people do when managing their budget.
What are some steps to managing your finances?
Create a budget! A budget is the first step in managing your finances as it helps to give you an overall look at your spending habits, income, and expenses. It will also help you to identify areas where you need to make changes or adjustments. A good starting point to figuring out your budget is by taking your income and deciding how much you want to put towards paying off debts and adding to savings. Once you have this down, you'll want to disperse your spending based on prioritized needs like rent, food, clothes, etc.
Track expenses! Tracking your spending can help you stay on top of where your money is going so that you can manage your finances more efficiently. The easiest way to track expenses is to look at your credit card and bank statements where money is being debited. You'll most certainly see areas where you can cut expenses!