Managing your finances is an essential, yet very challenging task in the journey towards a financially secured life. Without the right guidance and knowledge, you might end up blundering.
At some point in life, everyone had a fair share of financial mistakes. Such mishaps can even be difficult to spot as many are doing them. But money mistakes, even the simplest ones, can cause long-term damage that can be a real challenge to recover from.
Despite the financial difficulties that you might already be experiencing, steering away from mistakes in managing your finances can help make the journey a bit easier. Here are some of the common personal finance mistakes people make that you should avoid.
1. Frivolous Spending
It’s true that it is fun to shop and buy new things. But sometimes, this leads to people spending beyond their means and making financial commitments that come back to bite them. Buying things, especially when making major purchases can give that sense of fulfillment.
However, buying it at a cost that will break your bank and make you sacrifice important matters makes it not that worth it. Purchasing a new car when a lightly-used new car will save thousands or purchasing a home with payments you cannot maintain are some examples.
It’s always safe to set a personal budget based on what you have and stick to it. Spend within your means and if you struggle to establish an understanding of that, consider consulting with a financial advisor.
2. Not Investing in Retirement
You can never start too early when it comes to saving for retirement. Some may think that they are too young or “they only live once”, hence saving for retirement funds is least prioritized. This has become a financial mistake done by many. If you wish to strive for a financially stable future or even the freedom to retire earlier, stop working and finally relax, saving up for retirement as early as you can is necessary.
You can never have too much saved up for retirement. The future is unpredictable and you will need all the safety net you get as you grow old. As soon as you start earning, ask yourself what your expectations are for retirement and how you want to live, then start making the steps toward achieving those goals.
There are feasible ways to and easily save for retirement. In the US, if you are employed with a for-profit company, you can consider taking a 401(k) plan. For non-profit company employees, there are options like 401(k), 403(b), and 457 plans.
3. Accruing Too Much Debt
Most people accrue debt at some point between student loans and home mortgages. Loans can be good and healthy for your financial wellness. You can use it to build credit along the way. Getting an installment loan can help during emergencies or can make purchases easier to manage. However, burying yourself in an amount of debt that’s difficult to recover from can be catastrophic.
You would want to reign this in and avoid accruing excessive amounts of debt over time. Consider consolidating your debt to manage it better and bring down interest rates. Many people accrue debt due to large purchases. Consider paying for large payments in installments that are feasible for you, rather than making a large upfront payment you won’t be able to recover from afterward.
4. Living on Borrowed Money
Many things in a person’s financial life get tied into borrowings, such as credit cards and loans. This is normal, but it shouldn’t consume every part of your financial life. There is a very thin line between a healthy or good debt level and a bad and alarming one.
This will be determined by your debt-to-income ratio. Your debt must be lesser than your income, ideally, it should not be more than 43%. That’s the level that can get you a good credit standing, and beyond that is no longer good for your financial stability.
Take control of your borrowing habits and take loans responsibly. Try to have as much of your expenses paid off immediately without having to borrow money for everything.
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5. Not Having an Emergency Fund
Emergencies are inevitable and they happen no matter what you do to try and prevent them. Such sudden exigencies, like calamities and accidents, can be major financial burdens that leave you struggling in the aftermath. It can start a domino effect on your budget, and eventually, leave you broke and even indebted.
No one wants to be paranoid and to always think that emergencies will happen. But hoping for the best and preparing for the worst can help you manage situations and your finances better. Try to save money that can get you through for 3-6 months without income in case of emergency.
Stay on the Right Track
Financial stability and freedom is a journey and it takes vision and commitment to achieve. Mistakes may not easily be avoidable in life, but you can avoid some of the common financial mistakes to keep you on the right track towards your goal. Try to minimize debt, spend responsibly and save consistently to manage your personal finances better.