We are approaching the end of the year. This is the time when many people take stock of where they are, and consider where they want to go in the coming new year. One of the most popular areas to set goals is in the area of personal finances.
This can be a tricky field to navigate. When you are starting out, you may make some desperate choices about your finances. The habits you form now will affect you for the rest of your life. It’s important for you to clear up common money misconceptions, so you can avoid making mistakes. Financial mistakes can be hard to clear up and generally may take a while to fix. Understanding the most common financial mistakes will help you to make better financial choices in the future. Avoiding costly money mistakes or credit mistakes can save you money, time and stress. Here are 7 areas that require great care to ensure financial success for you and your family.
Not Having a Plan
When you do not have a financial plan, you will not move forward to reach your financial goals. Your financial plan can help you make sure your spending matches your priorities. Your financial plan will help you decide when you should start investing your money, how much to save for retirement, and other financial goals. Take the time to set up your financial plan today.
Not Having a Budget
When you do not have a budget, you do not have control of your finances. Failing to budget month after month means that you are not taking control of your financial situation. Without a budget you can make decent money and still struggle to get by. It can be difficult to reach your financial goals when you do not have a solid budget in place.
If you want to take control of your money, you need to know where it’s going and plan in advance how to spend it. Bottom line: You need a budget that works for you. This may sound daunting, but it’s easy if you follow the 50/20/30 Rule, which is flexible enough to fit any situation. Basically, the rule says that from your take-home pay, you should allocate:
- 50% to Essential Expenses, which include housing, transportation, utilities and groceries
- 20% to Financial Priorities, which are retirement, savings and debt (in that order)
- 30% to Lifestyle Choices, which are gifts, travel, dining out, shopping and everything else
Then track your spending to make sure that you’re sticking with your budget. You can do this through a myriad number of ways, including pen and paper. But using an automated system will ensure that you don’t miss any expenses, and you’ll see trends in your spending.
Living Paycheck to Paycheck
While it’s great to know where every dollar will go, the reality is that you can’t predict everything. In March 2018, the U.S. household personal savings rate was just 3.1%, according to Federal Reserve data. Many households are living paycheck to paycheck, and an unforeseen problem can easily become a disaster if you are not prepared. The cumulative result of overspending puts people into a precarious position – one in which they need every dime they earn and one missed paycheck would be disastrous. This is not the position you want to find yourself in when an economic recession hits. If this happens, you’ll have very few options.
Many financial planners will tell you to keep three months’ worth of expenses in an account where you can access it quickly. Loss of employment or changes in the economy could drain your savings and place you in a cycle of debt paying for debt. A three-month buffer could be the difference between keeping or losing your house.
Going Without Insurance
Many people choose to go without insurance to save money. Your insurance is your safety net. It is there to protect you from bankruptcy and to make sure that you have the things you need. You need to make sure you have basic insurance coverage, including health insurance to protect yourself from problems in the future.
Buying a New Car
A lot of people take on car payments that they can’t afford, accepting a $400 or $500 payment plan without realizing that they’ll have fewer choices when it comes to other financial goals and wants. On top of that, they forget to factor in the cost of gas and insurance, and their car is suddenly guzzling down more than a quarter of their budget.
If you’re reading this, thinking, “Uh-oh … ,” don’t worry. You can trade your car in for a less expensive model. You can swap a $20,000 vehicle for one that’s $10,000, and voilà!, your payments have been halved. Or get a more fuel-efficient car that doesn’t need special gas. If you lease, check out SwapaLease.com or LeaseTrader.com.
Spending Too Much on Your House
When it comes to buying a house, bigger is not necessarily better. Unless you have a large family, choosing a 6,000-square-foot home will only mean more expensive taxes, maintenance, and utilities. Do you really want to put such a significant, long-term dent in your monthly budget?
Great fortunes are often lost one dollar at a time. It may not seem like a big deal when you pick up that double-mocha cappuccino, stop for a pack of cigarettes, have dinner out or order that pay-per-view movie, but every little item adds up. Just $25 per week spent on dining out costs you $1,300 per year, which could go toward an extra mortgage payment or a number of extra car payments. If you’re enduring financial hardship, avoiding this mistake really matters – after all, if you’re only a few dollars away from foreclosure or bankruptcy, every dollar will count more than ever.
Examining these things can be tough, especially if they reveal painful truths about your financial situation. But the first step in solving a problem is defining the problem. Then you set up solutions. Go ahead and do the tough work of getting a full picture of your financial situation, then make plans to make the necessary improvements, and look forward to 2020 as a year of prosperity.