Life is full of financial ups and downs; sometimes, even if you do everything, you might make some financial mistakes. But it's not only about the mistakes you make by making financially; it is also about the opportunities you might be missing to grow your finances.
The good news is that it is never too late to recover from your mistakes. It is never too late to change. So, let's look at the top 10 most common financial mistakes you should avoid and how to stay clear of them.
Top 10 Most Common Financial Mistakes
Financial Mistake #1. Spending Too Much
Excess spending is one of the most common financial mistakes most people make. It does not seem like a big deal when you spend some money on buying clothes or ordering food every week. But if you keep track and multiply it by 52, that's the amount you could have saved every year. Even if you try saving even half of it and add it to your savings, it still accumulates in your nest egg for a rainy day. Try creating a monthly budget where you calculate all your expenses. Otherwise, you might start overspending. What's more, with access to a credit card, spending more than you can afford is more accessible, so try to stop yourself from swiping your credit cards as much as you can.
Financial Mistake #2. Living on Borrowed Money
Some people make it a habit of borrowing money from friends and family for unavoidable expenses and paying it later, even when they have enough money set aside. While in most cases, the family does not charge interest, some friends and distant relatives might. This borrowing of cash can also lead to negative impacts on personal relationships and cause conflicts. It is best to try and avoid borrowing money from family and friends and going through the official channels of credit when required.
Financial Mistake #3. Purchasing a New Car
If you are planning to buy a car, instead of taking out a loan or borrowing money with interest, save for it. A car is a depreciating asset, so the best option is to buy one within your budget. If you do want to take a car loan to buy one, we suggest you buy a smaller one that consumes less fuel than a large SUV to show off to others. Cars can be highly expensive, and if you purchase one that you do not need, it means you are burning money that you could have saved for paying off a loan or saving for your retirement.
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Financial Mistake #4. Living Paycheck to Paycheck
Most households survive paycheck to paycheck, and if any unforeseen expense arises, then it can become quite problematic as there is nothing to fall back on. Relying on your monthly paycheck is challenging, as when you miss one, then you might be in a difficult position. Ideally, it is best if you have at least six months' worth of your expenses in the bank for emergency situations. This can include loss of employment or the changing economy – in such situations, you can be forced to borrow money and trapped in the vicious cycle of debt repayment.
Financial Mistake #5. Not Investing in Your Future
Saving money monthly can be a great way to help build your nest egg for a rainy day. There can be multiple unforeseen expenses like medical emergencies, home renovations, car repairs, and others where you could use the money. So start building your savings to help manage such unexpected expenses. Start by understanding your risk profile and investing in multiple saving schemes. Build a portfolio with a mixture of debt and equity funds with some traditional techniques in it.
Financial Mistake #6. Not Saving For Your Child
If you have a child or are planning to have one, it is essential to create a college fund while they are young. Education can be quite expensive, and you need to calculate how much your child/children will need when they grow up and look towards higher studies. When planning to save for your child, take into account the inflation amount and start saving enough money to provide them with quality education. Apart from this, try teaching your child the importance of saving money as well.
Financial Mistake #7. Postponing Saving For Your Retirement
When you are young and have a lower income, you might delay saving for your retirement. But it is essential to start saving for your retirement as soon as possible. When you start early, you can save a much more significant amount. Start saving at least 15-20% of your annual income towards your retirement. That way, you do not have to worry about financial troubles during your golden years and can be financially independent when you stop working actively.
Financial Mistake #8. Not Owning Insurance
Insurance is not a luxury anymore; it has now become a necessity. Having insurance means you are protected when it comes to medical problems. So, when you start earning, medical insurance is the first thing you need to invest in. These days medical insurance is readily available at affordable rates, so there is no real reason why you should not get one. Apart from insurance, you also need to have insurance coverage when you have loans such as education, home, or car loans.
Financial Mistake #9. Paying Off Debt With Savings
If you have a mortgage with a 15% interest and your savings plans are just giving you a 7% return, you might think it is better to pay off your debt with your savings first. But it is not that simple. When you take your money out of your savings account, you lose the chance to earn interest from compounding. You might also incur a penalty when you take cash out from your retirement fund or fixed deposit. The best way is to pay off your debts when you have some extra money rather than withdrawing from your FD prematurely or taking money out from your 401(k).
Financial Mistake #10. Ignoring Your Credit Score
Having a good credit score helps save money when it comes to interest rates. With a better credit score, it becomes easier to get better loan amounts and even better interest rates for things such as buying a house or a car, getting personal loans, etc. Keep checking your credit score every six months to a year, and make changes to your spending and saving when any error occurs.
Conclusion
When planning your financial goals, it is essential to take a step back and realize what mistakes you may be making. Keep a check on your expenses to understand how you can reduce your debt. Try to finish paying off debt before incurring a new one, and try saving for major purchases rather than taking loans to pay them off.
Once you identify what financial mistakes you are making in your portfolio and savings, you can start to avoid them in the future and make intelligent financial decisions.
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Vishnu
Founder & Managing Director of Investor Diary
I, Vishnu Deekonda, am dedicated to providing the proper financial education to every individual interested in becoming financially independent through intelligent investments.
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