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If you're tired of never having extra cash in your bank account, you may be familiar with a few common money mistakes. You can learn how to solve your problem and reach a better financial situation. Read on to learn what mistakes you might be making and how to fix the problem.
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16 Top Money Mistakes
A lot of people make money mistakes, and it can be easy to get stuck in the cycle of financial struggles. However, if you know what you're doing is wrong, you can work to change it.
Here are some of the top money mistakes and how you can resolve the issues.
One of the most significant issues is not having a monthly budget. Without a budget, excessive spending and not knowing where your money's going can occur.
Not having a budget can make saving money or working toward other financial goals more challenging, not to mention potentially incurring credit card debt.
Of course, the solution to no budget is to make a budget. You can start with your regular expenses, such as housing and utilities.
Then, you can determine how much you want to spend on other things, like eating out. Make sure you set aside money for savings and other financial goals. That way, you can improve your financial life overall and let your budget help you.
Another issue you might have is that your money goals are vague. For example, you might want to "save more" or "pay off debt."
Those are great things to do, but they're not very clear. When your goals are unclear, it can be much harder to track your progress with personal finance. It might also be harder to start working on your goals when you first set them.
The best fix for unclear money goals is to set SMART goals. These are specific, measurable, attainable, relevant, and time-bound goals.
Instead of aiming to save more, set a goal to save 10% of each paycheck. Or, instead of setting a goal to pay off debt, include when you want to become debt-free.
Getting more specific can help you stay on track or realize when you're off track. You'll be able to know what to do to reach your goals.
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No Budget Boundaries
You might not have any budget boundaries even if you have a budget. These are financial limits you set for yourself.
Maybe you have an overall budget for the month but don't have different categories. So you could go overboard on your food budget but not have money for clothes or gas.
Setting budget boundaries can help you and your family stay on track financially.
Don't be afraid to make as specific of a budget as you need. Set up categories, and stick to the limits you set for each.
For example, if you can spend $100 eating out and hit that, stop until the next month. Avoid taking money from other categories. If you do that, it can get more tempting each month.
Under-Utilizing Retirement Account
Another one of the biggest money mistakes is not taking full advantage of your retirement accounts. You could miss out on tax savings if you have a tax-free retirement account, such as a 401(k).
If you work for a traditional employer, you could also miss out on employer contributions. Not saving now can cost you a lot in missed compound interest with any account.
If you have an individual retirement account (IRA), max out your annual contributions. You should also ask your employer for their matching 401(k) plan and meet that to get free money.
Even if you can't afford to max out your accounts, save as much as you can. The more you save early in your adult life, the more you'll make in interest over time. Then, you can retire with more money in the bank.
Not Saving Outside of Retirement
Saving for retirement is essential, but it's not the only thing you should save for. A big financial mistake is only saving for the long term.
You should also save for short-term or medium-term purchases, such as a car or house. It helps to have a general emergency fund as well as a safety net. You never know what might happen to you, your vehicle, or a relative or what financial challenges lie ahead.
Set aside money for retirement but also emergencies and other savings goals. You can set a different amount for each goal to help you stay on track.
Make sure you can afford to live without that money. If you haven't already, open a savings account for your emergency fund and other savings goals.
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A haphazard portfolio is one you set up without a clear goal or objective. It may seem like that's okay to just invest without a plan.
However, it can cause money problems since you won't know when to invest more and when to cash out. You should devise a plan for the money you invest to make the best investments for you.
Before you invest, figure out why you want to invest. Maybe you have a financial goal you want to reach, or you want to save faster than with a savings account.
Or perhaps you want to diversify your investments. Whatever it is, knowing your objective can help you choose where to put your money. And if you don't want to invest alone, look into financial advisors for advice.
Not Understanding Compensation
Depending on your job, you may have the option to earn stock in the company. However, if you don't understand how this works, you could miss out on significant earnings over time.
You might be able to get restricted stock units (RSUs) or incentive stock options (ISOs). A company gives you RSUs through a vesting plan. However, ISOs are stocks you can buy later for a discounted rate.
Ask your employer about the various compensation options you qualify for. You can meet with your manager or someone from the human resources department.
Get some information on how you can earn money outside of your salary. Then, you can research those options on your own to learn more. Doing this is great at your current job, but be sure to do it before moving to another company.
Carrying Too Much Debt
Some debt is okay to have. Not all debt is horrible, such as a mortgage. However, you don't want to end up borrowing money to the extent that you have more debt than you can handle.
Having too much debt can make it hard to do a lot of things. For example, you might struggle to rent an apartment or buy a home or car.
Debt can also pile up on your credit report if you don't work to pay it off.
If you have a lot of debt, you should work to pay some of it off. You can start by paying off the smallest loan you have.
Another option is to pay off high-interest debt first. No method is perfect for everyone, so compare your options.
You can use a calculator to estimate how much you'll save with a specific payoff method.
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Paying Off Debt With Savings
No matter how you decide to get rid of debt, try not to use money in your savings account. This is money you've set aside for emergencies or other goals.
If you don't have money to pay off debt, start by trying to make the minimum payments. This will take longer, but it's a start and better than draining your savings balance.
You can pay off debt with the income you have outside of your savings budget. However, you might need to take on a side hustle for a while.
Then, you can earn extra money to put toward your debt. Depending on how much debt you have, this might not be feasible.
Another option is to sell your clothes to help pay off the debt. If you have a house or car debt, you can sell that item to pay off the loan.
Picking the Wrong Debt to Pay off First
When you start to pay off debt, it can be easy to pick the wrong type of debt. Doing that could set you back in your repayment journey.
Think about the loans you have, and look at the loan amounts and interest rates. Start with either the smallest loan or the one with the highest interest.
Paying the small loan can help you feel like you're making progress. On the other hand, getting rid of the highest interest rate might help you save money over the long term.
No Credit Monitoring or Account Alerts
Another one of the biggest and most common money mistakes you can make is not monitoring your credit or other accounts. If you don't, you could miss fraudulent transactions and other issues.
Create an account with one of the three credit bureaus. Get into the habit of checking your credit once a month to look for financial problems and resolve them as they pop up.
You can also set up account alerts on your credit cards and bank accounts. Ask your bank if you can get notifications about large or unusual transactions.
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No Legacy Planning
As much as you might not want to think about it, you'll die one day. Without a plan, you can stress out your loved ones after you pass.
Think about how you want to distribute your assets after your death. Then, work with a lawyer or use a template to draft your will and update it whenever something changes.
No Insurance Policies
You can buy various types of insurance, and you need specific coverage. Without insurance, you could deal with more debt or other money issues.
Consider what types of insurance you might need, such as:
- Homeowners' insurance
- Renters' insurance
- Health insurance
- Life insurance
- Car insurance
- Business insurance
Research insurance providers for the plans that you need. Make sure you get enough coverage and can afford the monthly premiums.
Undeveloped Emergency Fund
An emergency fund can help you if you get in a bad accident, need to replace your car, or need to take time off work- for addressing unexpected expenses. Without enough in your savings, you might need to pay for those things with a credit card or loan.
Aim to save between three and six months' worth of your living expenses. Then, if possible, you can save even more to have more of a cushion.
That way, you'll have money to cover bills if you lose your job or something else happens.
Over-Using Home Equity
You can use home equity to pay for improvements or other expenses. But you don't want to use too much equity, especially early on.
Taking out equity will decrease the equity you have on your home. You should always have at least some equity as equity.
Review how much equity you have in your home. Try not to exceed that equity at any one time.
If you need to use more equity, pay off any existing home equity loans or lines of credit so that you can stay in good financial shape.
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One financial issue that doesn't get a lot of attention is lifestyle creep. Lifestyle creep refers to spending more money as you make more. Even if you eventually make six figures, lifestyle creep could cause you to live paycheck to paycheck.
If you haven't already, start living below your means. Reducing your spending can help you save money to pay off debt or build your emergency fund.
When you get a raise at your job, add that to your savings or investments. It can be tempting to pay more for things, but you'll be able to save and have a better financial future.
Biggest Money Mistakes: The Bottom Line
Many people are prone to making money mistakes, both small and big mistakes. Unfortunately, some people can't avoid it, especially if they don't make a ton of money in the first place. Knowing about some of the most common financial mistakes and how to work to avoid them can help you reach your financial goals more easily.