When it comes to you and your money, however, there’s a little more urgency to get it right the first time and eliminate missteps. Money mistakes can jeopardize not only your financial stability today, but how well you can achieve financial success in the future.
Here are seven common money mistakes you don’t want to be making, and how to solve them:
1. Failing to Create a Budget
According to a 2013 Gallup Poll, two-thirds of Americans don’t have a budget. Not having a budget can lead to overspending, lack of planning, and even debt if you’re not careful. Even a simple budget can help allocate funds and give a clearer financial picture.
How to Solve This Money Mistake: Start by reviewing your income and calculating how much money comes in each month. Then, review fixed expenses (or those expenses that don’t change from month-to-month, like rent). Next, look at variable expenses. This may include groceries, utilities, and transportation. The last level of expenses to examine: discretionary. This means entertainment, dining out, and so on.
Finally, look at the totals for how much you bring in each month and how much you spend. The key is to spend less than you earn. Create a budget based on the amount you bring in each month, then allocate those funds to a specific category based on your expenses.
If you’re spending more than you make, look at where you can cut back in your budget. (Protip: Start with eliminating discretionary expenses, then see where you can save on variable expenses.)
2. Skipping the Emergency Fund
There’s no a question of if an emergency will happen — the question is when. In life, things happen unexpectedly that cost a lot of money. Consider a major illness, unemployment, a car accident, a toilet breaking, an ER visit, or even something more benign like a mix up in your paycheck. As things occur unexpectedly, it’s important to have a cash reserve ready for such emergencies.
How to Solve This Money Mistake: Open a high-yield savings account for your emergency fund. Ideally, you’ll want to save up 3-6 months worth of expenses. But this is a big chunk of money, so if that seems overwhelming aim to get $1,000 in your fund — then continue saving from there.
The point of the emergency fund is to prevent you from overspending in your current budget when the unexpected (inevitably) happens and going into debt to cover the cost. It’s also to give you peace of mind, knowing that you have a cash reserve to handle life’s emergencies.
3. Leaving Free Money on the Table
One of the biggest advantages to working as an employee in a company: the benefits. A major benefit is a 401(k) plan. These plans often come with an employer match. That means when you contribute to your retirement savings, your employer will match your contribution up to a certain percentage.
If you’re not contributing enough to at least secure the match, that’s free money you’re leaving on the table! You could be missing out on thousands of dollars in free money by not taking advantage of this easy opportunity.
How to Solve This Money Mistake: Talk to the HR person in your office and sign up for your employer-sponsored retirement account. Start contributing today and set up automatic payments. If possible, max out your retirement account to get the full benefits.
If that’s not possible, start small. Contribute at least enough to secure the match (usually around 3%-6%) and work to up that contribution every year or with every pay raise.
4. Refusing to Invest (from Fear or Ignorance)
Due to the recession, many Millennials (and people from other age groups) are fearful of the stock market. Gen Y in particular prefers to hoard their cash in regular checking or savings accounts down at the local bank.
By not investing, you’re missing out on a lucrative opportunity to grow your net worth. All things come with a level of risk — yes, even that regular account. That’s thanks to inflation, which will erode the value of your savings over time. The best way to safeguard against inflation and reach your biggest financial goals is to invest wisely.
How to Solve This Money Mistake: Start educating yourself about investing. Then consider seeking out a pro to help you get on the right track with no-load, low-fee investments as part of a passive strategy that allows you to maximize your earnings.
The key is to get started, even on a small scale, in order to take advantage of the biggest factor in your favor: time. Compound interest is what really allows your investments to grow in value, so it’s critical that young professionals get started with investing now.
5. Making Minimum Payments on Debt
Paying the minimum on your debt is essentially just throwing away money, yet it is a mistake many people still make. For those in credit card debt, paying only the minimum can end up costing you thousands of dollars and years of your life.
How to Solve This Money Mistake: Look at what your minimum is. Then look at your budget. Where can you cut down and add more to your debt? Getting out of debt is a guaranteed return on your investment, especially when you have high interest rates which add more money to your balance, making it harder to get out of debt.
6. Buying Unnecessary Items
As we get older, it’s easy to fall into a lifestyle trap and think that we “deserve nice things.” However, many people spend mindlessly on things they don’t need and things that don’t offer them value.
People purchase unnecessary items because they think it will bring happiness or simply because items were on sale. It’s easy to buy things we don’t really need, which can cause havoc on the budget and result in a lot of clutter.
How to Solve This Money Mistake: Think of it this way — would you still be buying this item if it weren’t on sale? If not, you probably don’t need it. Do you really need items to be a certain name brand? Ask yourself if you really need the item and give yourself 72 hours (or more) to think before making any big purchases.
7. Going Without Insurance
Not having the right kind of insurance can cost you a lot of money. Having health insurance, homeowners or renters insurance, and car insurance should be a given. However, many people don’t consider the bigger picture or look at their long-term needs and forego these things altogether.
How to Solve This Money Mistake: Sign up for health insurance, car insurance, and insurance for your place of residence. Look into what other types of insurance would work best for you and your family, in order to protect them should anything happen in the future. Disability insurance and life insurance can be immensely helpful during a family emergency.
Remember, mistakes happen and nobody is perfect. However, it’s easier to set yourself up for success when you have a plan in place.
Have you made any of these common money mistakes? What would you add to the list?