Common Financial Mistakes and How to Avoid Them
On the path to financial wellness, just about everybody takes a wrong step at some point, or discovers something they could have done better. These missteps take many familiar forms and may not always be apparent – or even intentional.
What's most important is learning from mistakes and understanding how to avoid them. Doing this will help you make the most of your finances, such as putting more money toward savings or paying down debt.
Learning Financial Lessons
Let’s look at some common financial mistakes that consumers make and how you can avoid them.
Spending on indulgences
You grab a drive-thru coffee for your commute; you pick up sandwiches on the way home; you catch a late-night movie every couple of weeks. These are small indulgences, but it’s important to keep track of them so you know the part they play in your overall money habits. Spending just $25 a week on dining out adds up to $1,300 a year.
How to avoid: Everyone deserves things that bring them joy. You don’t have to cut out these treats, but you should come up with a monthly sum in advance, include it in your budget and then stick to it. Familiarize yourself with a 50/30/20 budget plan to help organize your finances and clarify your expenses.
Making never-ending payments
The total cost of subscriptions like gym memberships, music streaming services and meal kits can add up quickly and take a sizable chunk out of your monthly budget.
How to avoid: Evaluate your subscription services and be honest with yourself to make sure that you are only paying for the ones you want and use. Cancel the ones you don’t. Review the list regularly, as your habits and wants may change over time.
Living on borrowed money
Credit cards are a necessity in many ways and can be good for handling unpleasant surprise expenses that you can’t cover with savings. That said, it can be easy to overspend using credit and stretch yourself beyond your earnings.
How to avoid: Closely track your expenses against your budget. If you’re spending more than your budget allows, make sure you have a good reason (an emergency car repair, for example). When you can, put credit cards to work for you by evaluating the perks, such as cash back or late payment forgiveness.
Buying a new car
Keep in mind that when you borrow money to buy a car, you are paying interest on a depreciating asset, and people who trade in a vehicle every few years wind up losing money on their trade.
How to avoid: If you need to purchase a car, assess your true needs and shop appropriately. Don’t forget to take into consideration associated auto expenses, such as gas, maintenance and potential repair costs due to normal wear and tear.
Leaving money on the table
Are you investing the maximum amount in your 401(k) plan? Employer contributions are effectively part of your salary that you might be missing out on. If your employer matches any portion of your contribution to your 401(k), then consider maximizing the amount you contribute. That way, you’ll get the full benefit offered by your employer.
How to avoid: Start with what you can contribute now, increasing as soon as you can to the maximum that your employer will match, as applicable.
Postponing retirement savings
While paying off debt tends to be a high priority for people – as it should be – it’s best to start saving for retirement as soon as possible. Retirement funds will grow at a much faster rate the sooner you start.
How to avoid: Start with a fund like an Individual Retirement Account (IRA) or a Roth IRA, and talk to a financial advisor to create a plan based on your situation and needs.
Putting These Tips to Work
Hopefully, these strategies have given you a place to start when it comes to saving money, paying down debt and investing in your future. And you don’t need to tackle them all at once: It’s fine to start by addressing smaller expenses. In fact, when you track the savings, it can be highly motivating as you set your sights on saving more and practicing better money management.
These may be common financial mistakes, but everyone’s situation is different. Work with a banker or financial advisor to create a plan that’s right for you. And happy travels down that financial wellness path!