None of us are born knowing how to handle money flawlessly. Managing personal finances isoften acomplicated process with a serious learning curve, after all. The good news is that we can all learn from our collective mistakes as humans and use that knowledge to keep improving what we’re all doing. In other words, we already know about some things that are not conducive to effective personal finance.
To start, here are a handful of the most common money mistakes people make.
Mistake #1: Not Having Money Goals
Have you ever sat down and clearly outlined your money goals? Without goals, it’s easy to accidentally get into a habit of just keeping your head above water — that is, getting so caught up in the short-term like paying this month’s credit card bill that you forget to take steps toward your longer-term future.
Here are some examples of smart money goals from Investopedia:
– Short term: Make a budget or update your existing one, start an emergency fund and pay down your credit cards.
– Medium-term: Pay off educational loans and outline your life dreams so you can see what you’ll need to save to reach them.
– Long-term: Understand how much you’ll need for retirement and boost your retirement savings.
Mistake #2: Living Above Your Means
It’s all too easy to accidentally live above your means and not even know it, especially if you’re not yet tracking your spending. As Brad Stroh of Freedom Financial Network outlines, everything from your daily coffee habit to your TV streaming services, impulse buys at the grocery store, underused gym membership and many more habits can really add up over time. While $5 or $10 here or there may not seem like a budget buster, non-essential spending may be setting you back more than you’d think.
Tracking your spending is the first step toward seeing where your money is going. Thankfully it’s easier than ever to automate this process using an app. Then you can make adjustments based on the habits you notice, all with the goal of helping you live well within your means.
Mistake #3: Neglecting to Build an Emergency Fund
“We’ll cross that bridge when we get to it,” while perhaps a helpful reminder to not worry too much about the future in certain areas of life, is not a very sound piece of financial advice. Failing to plan for future financial emergencies is setting yourself up to take on debt in the event your savings fall short.
What you can do now is start and build your emergency fund, ideally in a high-yield savings account that will earn you interest. By automating reasonable amounts from each paycheck and making a sizeable deposit whenever you get a windfall, you’ll be working toward having enough funds to cover at least a few months’ worth of living expenses following an unexpected expense.
Mistake #4: Paying the Minimum Due on Credit Cards
Paying the minimum amount due on credit card balances will keep them current, but it won’t put a dent in interest. In fact, you may end up paying hundreds or even thousands of dollars in additional interest over time if you pay down a significant credit card balance this way.
Avoid this trap by freeing up as much money as possible each month and funneling these funds toward your most pressing credit card debt — while always keeping up with the minimum due on every other account, too. Target this one balance, usually whichever has highest interest, until it’s gone. Then set your sights on the next one, and the next.
Avoid making these common money mistakes yourself by taking small, strategic steps toward effectively managing your finances — like tracking your spending, saving for emergencies, paying down debt and setting clear goals.
