Throughout the financial improvement series, I’ve shown you how to save tons of money with big wins, how to automate your finances, and overall better your financial situation. But I know some of you won’t try some or any of the tips I’ve shared. Maybe it’s skepticism. Maybe you think you know better. Maybe you’re just lazy.
So today I thought I’d go over some of the biggest financial pitfalls you can have. Whether through lack of action or ignorance these items will cost you dearly.
Image via Wikiemedia Commons
Avoid These 5 Critical Money Problems
Here are five critical mistakes that will set you back significantly.
Spending More Than You Earn
The worst mistake you can make with money is to spend more than you earn — this is a surefire way to get into debt. The root cause of almost every single money problem you can have is to spend more than you have. Performing this mistake leads to debt, interest charges (which then further deplete your available cash), and the inability to save for anything. It’s flat out dumb.
Buying a House You Can’t Afford
Looking to put yourself at risk of foreclosure and paying too much in interest? Buy a house you can’t afford to buy. (By the way, this is one of the core problems of the housing bust of just a few years ago.)
Don’t rely on your home going up in value to pay off your problems. Don’t assume you’ll be able to refinance to a lower rate in the future (your home value dropping might kill your ability to refinance). Don’t assume you’ll be able to sell it in the future.
Automating Your Bills… and Ignoring Them
If you’ve been paying attention this one might make you scratch your head.
“Wait… I thought you said I was supposed to automate the payment of my bills?”
Yes, you are.
But not to the point of pure ignorance. Ignorance is not bliss. Inevitably a charge or two hits your credit card that you don’t notice. Or your service provider adds in an extra charge for a few months that you end up paying.
Automate your bills… but still read them. It’s important.
Rely on Credit for Emergencies
Some of you don’t think you need an emergency fund because you have a magical credit card that will take care of all of your problems.
I find that solution… interesting.
So you’re saying it is a better idea to keep nothing in the bank and pay anywhere from 10% to 20% (or higher) in interest when you use your credit card for emergencies.
You do know you can be paid interest for keeping money saved in a bank, right? Why would you want to pay interest instead?
Save Nothing for Retirement
Imagine it now… sitting in a tiny apartment, eating ramen noodles, and hoping you can stretch your Social Security dollars a little bit further this month. You never travel, you never relax, and you’re thinking about getting a part-time job as a greeter at a local store.
That’s the life of the retiree with no retirement savings. Completely dependent upon the government for income with little true retirement freedom.
16 More Money Problems to Avoid
Additionally, here are some more common money mistakes:
- Assuming something is always a good deal because it is on sale — Getting 50% off on something you don’t need simply means you are spending money unnecessarily. Always think about how often you’ll be using the item you’re about to purchase.
- Paying retail – There are too many good resources on the web now for anyone to be paying full retail price. Before you buy anything, be sure to do your comparison shopping online and find a discount coupon or a special promotion. At the minimum, make sure you take advantage of cash back rewards when you shop.
- Buying new when used would do — Another question to ask is whether or not you need to buy new. There are plenty places where you find good used items. This is especially true with car purchase, where buying used is often a better option.
- Paying late fees
- Relying on your job as the only source of income – This is something that we preach religiously on Moolanomy…build and diversify your income.
- Passing up tax breaks – There are many tax credits and deductions that you can potentially claim. Don’t be complacent and make sure you know what they are so that you can take advantage of them.
- Not asking for help when you need it – Do-it-yourself is great (to some extent), but we all need help occasionally. There are plenty of free advice online, but there are also times when you should pay for help. Don’t be afraid to do this because what you paid the expert could cost far less than the mistake that could result from a botched DIY attempt.
- Paying only the minimums – The best way to use a credit card is to pay it off each month. If you only pay the minimum, you could be paying far more than the original purchase price. Here is a credit card payment calculator that shows you how much interest you’ll pay by paying only the minimum payment.
- Taking on too much, or too little, debt – Debt is not always necessarily bad (especially now that the borrowing rate is so low). While you should avoid consumer debt, taking on debt to buy a house (or better yet, an investment property), or to start (or expand) your business is not necessarily a bad thing.
- Not paying attention to your credit – Whether or not you plan to borrow money, your credit is important. Learn how to track and improve your credit.
Saving for Retirement and Investing
- Assuming you can save up later – When it comes to saving for retirement, time is you friend. The earlier you start saving for retirement the better.
- Investing too conservatively – Another problem related to saving for retirement is not investing aggressively enough. We are not talking about speculative investment here, this could be something as simple as your fixed-income investment vs. stock investments allocation. If you con’t know anything about investing, at least put your money into a target retirement fund.
- Trying to beat the market – Market timing is an exercise in futility. It is better to have a long-term investment plan and stick to it.
- Counting on Social Security – I don’t know if Social Security will be around when I am ready to retire. If that is your plan for retirement, think again.
- Overpaying for home insurance – We covered this earlier in the series, insurance is where you can save a lot of money very quickly.
- Putting off buying life or health insurance – Both of these are meant to protect you against catastrophic event. The younger and healthier you are, the cheaper it is to buy into these plans. Don’t put it off and put your finances and family at risk.
Your To Do List
If you want to succeed financially, do NOT do these things:
- Spend more than you earn
- Buy too much house
- Ignore your bills
- Rely on credit cards
- Save nothing for the future
If that doesn’t sound like the best of ideas… go back and read through this series, implement what you find, and enjoy a stronger financial future.
Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He’s building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, and many others.