7 Mistakes to Avoid When Managing Your Personal Finances
Managing your personal finances can be extremely daunting — and no wonder. You have to consider numerous aspects of your financial life, and it can be easy to overlook something. Even with the best intentions, making money mistakes can easily hinder your success. This article will list common personal finance mistakes people make and what you can do to avoid them.
Overusing Credit Cards
Credit cards are a powerful tool to help boost your credit history, but they can also be a financial trap. The higher your credit limit, the easier it is to get buried in credit card debt. To avoid overspending, try making your purchases on a debit card, so you only spend what you have in your bank account.
That’s not to say you should never use a credit card. After all, the biggest factor in your credit score is payment history, so making charges and paying them promptly is beneficial. Just try to pay off balances before the due date to avoid piling up debt. If your credit card offers cash-back opportunities, take advantage of them to save some extra cash.
“Winging” Your Budget
It’s easy to be tempted with guilty-pleasure purchases when payday arrives. A solid budget ensures you have enough money to take care of your needs so you can occasionally splurge on your wants.
It can be tricky to manage a steady budget, especially if your paycheck varies weekly. A good rule of thumb to follow is the 50/30/20 rule. Aim to spend 50% of your monthly income on needs, 30% on wants, and 20% on savings, debt repayments, and investments.
Living Paycheck to Paycheck
Living paycheck to paycheck isn’t an ideal situation for anyone. Depending on your financial and living situation, saving a part of your paycheck can be difficult. Yet setting aside money from each paycheck can help you build growing savings, even if it isn’t much.
You may find saving opportunities by selling unused items and eating at home more often, for example. Having money saved enables you to prepare for the unexpected, reducing financial stress and additional debt. Using the 50/30/20 budgeting tool described above will help you avoid spending your whole paycheck.
Neglecting to Create an Emergency Fund
In life, it’s essential to expect the unexpected. Ceilings leak, cars break down, bones get broken. Encountering an emergency without cash set aside to handle it can have negative financial consequences. You might have to resort to a payday loan or make early withdrawals from investment accounts, leading to costly penalties.
To avoid this downward financial spiral, start building an emergency fund before disaster strikes. Even saving a small amount, such as $20 a week, can result in just over $1,000 in a year. The earlier you start saving, the better!
Not Investing in Retirement Accounts
Depending on your age, retirement can feel like many light years away. You may focus more on the short-term benefits of your money than the long-term ones. It’s easy to do, even when you know the long term is vital to your future.
It may seem safe to keep your money in a savings account, but you could be losing out in the process. The funds you invest in a retirement savings account can earn more; over time, those earnings can create earnings of their own. If you have a 401(k) plan and get a matching contribution from your employer, try to match the entire amount.
Paying for Abandoned Services and Memberships
Are you still paying for that gym membership when you haven’t worked out in months? Like many Americans, you probably are paying for multiple services you aren’t even aware of.
Take time each month to go through your bank statement and highlight recurring changes. While you may love the convenience of automatic payments, it’s easy to become oblivious to monthly charges taken out of your account. Keep track of your current subscriptions to avoid paying for ones you are no longer using. Think carefully about the services you do utilize and decide whether those are worth their expense as well.
Paying Off the Wrong Debt First
When you have multiple loans, deciding which to pay off first can be overwhelming. Quick wins are appealing, so you may be tempted to pay off the smallest loan first. However, a key component is examining the interest rate attached to the loan.
When developing your debt repayment plan, write down all your loan balances along with their corresponding interest rates. Pay off loans with high interest rates first, then move down to your lower-rate debt. The more you pay in interest each month, the harder it can be to dig out of a financial hole.
Learn From Your Previous Mistakes
Chances are, you may be guilty of making one or more of the mistakes above in your money management. It’s OK to experience bumps in the road as you pave your way toward financial success. The key is to identify and eliminate these barriers so they don’t prevent you from moving forward. No matter what stage in life you’re in, avoiding these common personal finance mistakes will help you reach your financial goals.
Also Read About: 6 Unique Ways to Invest Your Retirement Savings