5 Common Financial Management Mistakes and How to Avoid Them
Pop quiz, hotshot: if you had an unexpected $1,000 expense, would you be able to cover it?
If the answer is no, join the club. More than half of all U.S. adults are in your shoes, and most of them don’t have a financial management plan. Add in the economic impact of the pandemic, and you get a grim picture.
Want to get your finances in order? Start by avoiding these five common financial management mistakes.
1. Excessive Spending
Contrary to what movies tell us, blowing through a lot of money doesn’t happen too often. What’s far more likely is that you’ll spend yourself out of your fortune one dollar at a time, buying things you don’t need.
Let’s say you spend $25 a week on dining out. Seems reasonable—until you add it up and realize this costs you $1,300 a year. Try to cut down on these expenses by creating a budget and monitoring personal finances.
2. Living Paycheck to Paycheck
If you’re living paycheck to paycheck, even one missed paycheck could spell disaster. That’s a precarious position to find yourself in, especially during a recession. The solution: know how to manage finances.
According to experts, you need to keep a three-month buffer. That means having three months’ worth of expenses in an account you can access quickly. That can be the difference between keeping your house and losing it.
3. Buying a New Car
If you’re buying a new car, make sure you can afford it. As soon as you drive a new car off the lot, its value drops significantly. And if you’re borrowing money to buy a car, you’re paying interest on a depreciating asset.
If you’re set on getting a vehicle, buying used will result in big-time savings. Also, consider buying a car that costs less to insure and spends less gas.
4. Not Investing in Retirement
Are you making monthly contributions to your retirement accounts? If not, you may never be able to stop working. Take advantage of tax-deferred accounts and learn how long it will take for your investments to grow.
Diversifying your sources of income is fine, but know your risk tolerance. If you invest too aggressively, you may find yourself in a deep hole. Here’s more info on how to align your risk tolerance to your financial needs.
5. Using Savings to Pay Off Debt
Let’s say your debt costs 22% and your retirement account is making 6%. Is it tempting to swap the retirement for the debt and pocket the difference? Yes, but paying back those retirement funds will be much harder.
Also, paying off debt is often a signal to keep spending at the same pace. Soon enough, you may find yourself in debt again. If you use savings to pay off debt, you need the discipline to rebuild those accounts as well.
Avoid These Financial Management Mistakes
At the end of the day, your financial future depends on what’s going on right now. One way to change it for the better is to set aside a few hours each week and use them to develop a sound financial plan.
On the lookout for even more financial management mistakes that you need to avoid? Keep reading our Finance section!