Managing your personal finances is no easy feat – oftentimes it comes down to careful planning, experience, and constant learning to get to a point where you’re feeling comfortable and confident with the direction of your financial future.
It should go without saying that a lot of the learning and experience is a direct result of continual trial and error.
It’s inevitable that as you learn new personal finance strategies, investment philosophies, and money principles that not everything will go your way, and that mistakes will be made. Plenty of mistakes.
While some financial mistakes are nothing more than very minor or insignificant setbacks, others can be extremely significant and even detrimental to your financial well-being.
Needless to say, it’s extremely important to make very wise financial decisions and to avoid making grave financial mistakes that might end up jeopardizing your financial security.
In this article, we’ll focus more attention on some of those larger financial mistakes by highlighting them in more detail. The five financial mistakes that you need to avoid at all costs (seriously, no matter what) are:
Financial mistake #1: Not having a plan for your finances
Financial mistake #2: Not getting an early start to your retirement fund
Financial mistake #3: Not having savings set aside for an emergency
Financial mistake #4: Only making minimum payments on your credit cards
Financial mistake #5: Not having a proper budget and savings plan
Financial mistake #6: Not having the proper insurance to protect your assets
Now, let’s take a look at each one of these financial mistakes together in more detail so that you can better prepare and know how you can avoid them.
Financial mistake #1: Not having a plan for your finances
Having a financial plan is arguably one of the best moves you can make when it comes to your money. So it should come as no surprise, especially considering that Savology is a free financial planning platform, that the first financial mistake you need to avoid is not having a financial plan, or even thinking that you don’t need one, to help you navigate your finances.
When you’re just getting started on your personal finance journey, it can be tough to see the long-term value you might get right away from any of the activities you’re doing. The best way to think about your financial plan would be asking yourself these questions:
Would you navigate to a new destination without the aid of map directions or a GPS? Probably not.
Would you try to construct a new home or building without having a blueprint? Again, probably not.
So then why do most of us try to navigate our most important financial decisions without having a proper plan in place? I wish I could say that we don’t or that most Americans actually do have a financial plan, but that’s just not the case.
And if you don’t believe me, the numbers speak for themselves:
- 72% of households do not have a written financial plan
- 69% of Americans have less than $1,000 in total savings to their name
- 34% of Americans have nothing tucked away at all
A large part of it has to do with common misconceptions and a lack of knowledge about how to get started with a financial plan. Having a financial plan not only benefits your financial future, but other important areas of your life.
Luckily, you have options. You can get started by using a traditional financial advisor which can prove to be very effective for those who can afford it. Alternatively, you can get started by building a free financial plan in just 5 minutes with Savology, saving you time, money, and coming with the same quality recommendations to help you map out your next moves.
Financial mistake #2: Not getting an early start to your retirement fund
This is a financial mistake that we see all too often. There is a common misconception that there is an ‘optimal’ time frame as to when you should begin planning your retirement and investing for it.
The truth is, there’s no time like the present.
And this is true for a variety of different reasons:
1. Time to retirement, thanks to compound interest, arguably has the biggest impact on your retirement outcome. The sooner you are able to start investing and taking advantage of compound interest, the more time your money has to earn you even more money. Putting this off means that you’ll either need to significantly increase your savings rate or worse, sacrifice your lifestyle throughout your retirement years.
2. The sooner you start, the earlier you will begin adopting additional healthy financial habits that will complement your financial plan.
Getting a start now versus starting 10 years later can easily add up to a difference of tens of thousands, if not hundreds of thousands of dollars.
The most important thing here is to get started. Don’t worry about having a significant amount of money to invest on a monthly basis, but rather just getting started and slowly working your way up from there.
Your retirement plan and future-self will thank you for doing so.
Financial mistake #3: Not having savings set aside for an emergency
Not having an emergency fund is a big one.
If you recall earlier I mentioned a few important, and alarming financial statistics. Two of those stats are directly related to this financial mistake of not having any savings in the case of an emergency.
1) 69% of Americans have less than $1,000 in total savings
2) 34% of Americans do not have any savings at all
Now ask yourself, what would happen to these same individuals if their car broke down and it needed repairing? Or if they were laid off and were unable to get any sort of workers’ compensation for a few months? What about if there was a health emergency and their current health plan couldn’t front the bill or even if their deductible was extremely high?
The reason why I’m asking those questions is that it’s a LOT more common than you might think.
Typically in those situations, Americans resort to putting these types of expenses on their credit cards or taking on loans to fund them. And that is a serious problem that leads to carrying more debt, increasing their monthly payment (with interest that compounds), and having a large expense that they couldn’t properly afford in the first place. There are going to be unexpected events in everyone’s lives, it could be unemployment and bankruptcy or car repairs, so it’s important to be prepared for these situations to be more than beneficial long-term.
To say the least, these types of emergency expenses can end up pushing people into poverty and even causing some to go bankrupt.
Just like any type of insurance, most people have the mindset of “It won’t happen to me, so I won’t really need this”. And if that’s how you’re currently approaching your emergency fund (or lack thereof one), then you need to make changes today.
Most financial experts will recommend saving anywhere from 3-6 months of take-home pay as a sufficient emergency fund. The general rule of thumb or philosophy around this is making sure that you have enough (emergency) savings to get you through 3-6 months of your current lifestyle, with the current expenses, assuming that you had zero income for those months.
Luckily for you, your Savology financial plan makes saving for emergencies a top priority whether or not you currently have one. Your plan will even calculate the exact amount you should have in your emergency fund, based on your current living expenses, to make sure that you have sufficient savings that will get you through a 3-6 period if no income were to be made.
Financial mistake #4: Only making minimum payments on your credit cards
Credit cards can be very helpful, and even strategic if you plan things out and are diligent with your money habits. However, most of the time they end up being dangerous.
I mean, the thought of being able to purchase now and pay later seems too good to be true, right? That’s because it is, especially if you’re not making your payments on time, but even more so if you’re only making the minimum payments.
The same way that compound interest can work in your favor on your investments, can be true about working against you on your debts. Given that the average interest rate on a credit card is around 19.24% means that if you’re only resorting to making the minimum payments each month, it will end up costing you thousands of dollars in interest.
This is the exact reason why consumer debts start spiraling out of control and why people eventually ignore their credit. If you’re reading this wondering what steps you can take to minimize or debt or ensure that you’re not resorting to your credit card, just know that there are a few things that will better prepare you to avoid making this exact financial mistake.
Here are 5 things to help you avoid piling up credit card debt and only making the minimum payments:
1) Use your credit cards ONLY when you need to (cash/debit first, then credit)
2) Review your credit card statements and transactions at least once a month to understand your spending habits
3) If you currently have credit card debt that you’re carrying, look for ways to consolidate this to lower interest rates
4) Reduce your credit card limits. Having lower ceilings when it comes to anything with your money is like creating a psychological barrier that will force you to stop before reaching it or going over.
5) Say NO to multiple credit cards. Way too many people get sucked into taking on multiple cards because they are offered them. But how many people actually need multiple cards? Not many.
If you find yourself in serious debt due to credit card debts and filing for bankruptcy is your future, you may want to consider a Chapter 13 repayment plan to understand the best options for your future. You may also be asking yourself the question, “Do I qualify for Chapter 7”, which is helpful when considering bankruptcy. Understanding your options and the tools available to you is fundamental to your financial success.
Financial mistake #5. Not having a proper budget and savings plan
Last but certainly not least, one of the biggest financial mistakes you need to avoid in order to achieve financial success is not having a proper budget to control and manage your spending.
Budgeting is one of those financial practices that will start showing you results almost immediately. The moment you start budgeting and analyzing how you’ve been managing your money, you will start to understand a LOT about your spending habits. Chances are you’ll even be surprised about how you’ve been spending your money and how you can trim a lot of unnecessary expenses almost right away. By doing so, you’ll be able to ensure that you are living with your means and not overspending in areas that can end up causing you to take on additional debt and being detrimental to your retirement plan.
Beyond that, budgeting can be a very powerful practice that keeps you focused on your values and needs, rather than wants and impulse purchases. It helps you stay disciplined, form better financial habits, and compliments your financial plan by making sure that you’re allocating your money towards areas that your plan recommends.
If you’re unsure about how to get started with creating a budget, I would highly recommend checking out our ultimate guide to budgeting to help answer all of your questions and keep you moving forward in the right direction.
Financial mistake #6: Not having the proper insurance to protect your assets
Insurance can often feel like the black sheep of your financial plan.
It’s confusing. It’s intimidating. And it’s hard to see the return you get, which makes valuing it and making it a priority difficult for most.
However, regardless of the above, insurance isn’t just a nice-to-have component of your financial plan. It’s one of the most critical pieces to put in place.
Insurance is there for one really good reason: to protect your financial assets – this includes protecting your family’s financial picture as well.
What would happen to your financial status if you weren’t able to work due to a disability? This is where disability insurance comes into play. It’s there to protect your income and your ability to earn money, which is arguably your biggest asset, should you become temporarily or even permanently disabled.
What would happen to the financial standing of your spouse and your other dependents if you suddenly passed away? This is where term life insurance comes into play. It’s there to protect your family’s financial standing and make sure they are taken care of.
While it might be difficult to see the immediate value of insurance, it’s necessary. Not having the proper protection in place, in the form of insurance, can be detrimental to your plan. In the worst-case scenarios, you could end up losing your entire retirement savings.
Moving forward towards financial success
In all honesty, there are dozens, if not hundreds of other financial mistakes that can be made which haven’t been included in this article. However, these six financial mistakes above are some of the more common ones that can potentially be very detrimental to your future. It’s important that we learn from our financial mistakes and continue to work on improving our financial wellness.
By navigating your finances with careful planning and practice, you will be able to avoid the financial mistakes mentioned above (along with avoiding toxic money advice) to make sure that you are well on your way to financial success.
