Many people live paycheck to paycheck or with a cloud of debt hanging over them. Gaining financial stability might appear out of reach for many people. On the contrary, managing one’s finances doesn’t have to be complicated.
A little information can go a long way. Unfortunately, there are common mistakes that trip up many people. Recognizing those mistakes are and taking corrective action can make a huge difference in getting your finances back on track.
Setting Too Many Goals
It’s understandable that you might want to stay on top of several financial goals at once—paying off debt, saving for a house, planning for retirement, etc. However, putting all your energy into multiple goals can overwhelm you and ultimately diminish your motivation.
What you can do is to take stock of where you are financially. Then, decide which goal is your priority. Take that goal and create a more specific goal, such as paying off your highest-interest credit card. Work on making progress toward that outcome. Reaching every goal — no matter how small will feel like an early win. You’ll likely stay motivated to work on other goals.
Receiving a Huge Tax Refund Each Year
If you get a significant income tax refund each year, you’re probably withholding too much money from your paycheck. Until you get that refund, you’re loaning money to the federal government without interest.
Not only is it an inefficient way to add to your savings, but you might need that money for an emergency.
Focusing on Debt Repayment While Sacrificing Savings
The thought of finally paying down student loan debt or a large credit card balance can feel liberating. Even though it might suit you to put a little extra money toward debt repayment, don’t neglect your savings account.
If you have to pay an unexpected medical bill and have no savings to draw from, using a credit card means you’ll take on more debt. While you’re paying down debt, put away enough cash to cover at least one month of living expenses.
Consider setting up a monthly automatic transfer from checking to a savings account.
Borrowing Against the Value of Your Home
It might be tempting to take out a loan against your home’s equity, but you could put your house in jeopardy if you can’t make the payments. However, if you want to refinance a high-interest credit card, using a home equity loan might make sense because it’s tax-deductible. Also, the interest rate is likely to be lower.
Not Saving Enough for Emergencies
Over one-third of Americans do not have an extra $400 to deal with an emergency, such as an unexpected medical expense or job loss.
For many people, putting away money for savings is easier said than done, but it’s essential to do it when you can. Some financial experts suggest putting away at least six weeks of living expenses. Start with a small amount each month, say $25, and then gradually increase that amount.
Neglecting to Save for Retirement
It’s never too early to plan for retirement. Unfortunately, about one-fourth of Americans have no retirement savings. Even if retirement feels light-years away for you, start saving now if you haven’t already.
Does your employer offer a retirement plan like a 401(k)? Take advantage of it. Also, look into personal savings options like individual retirement accounts (IRAs).
Contributing No More than the Minimum to Your Employer-provided Retirement Plan
If you already have a retirement savings plan, good for you! Just make sure you’re maximizing your savings as much as possible. If you’re saving through your employer’s plan, you probably know there’s a minimum contribution level, which is an excellent place to start. However, you don’t want to stay at that minimum level because it probably won’t yield enough to live on during retirement.
Adjust your budget to allow for increasing that contribution, perhaps when you get a pay raise or promotion. Work with your employer’s benefits office or a financial advisor to calculate how much you need to save to retire.
Not Budgeting for Special or One-time Expenses
It can be frustrating to spend so much time budgeting for the month only to realize you didn’t account for irregular expenses like holiday gifts, the annual vacation, or taxes.
To avoid being thrown off-guard with your budgeting, include a line item each month that allocates money for such expenses. Do this even during months you don’t expect them. Instead of waiting for the need to arise, this tactic will allow you to put money away, so you’re ready to handle those costs when they do come up.
Not Allowing for Budget Flexibility
Personal circumstances change, and your budget needs to respond to those changes. Setting a budget without any flexibility can leave you feeling discouraged when financial hiccups happen.
Therefore, suppose you have about $3000 of take-home pay each month. To avoid running out of money, add a “buffer” item to your budget that equals 5-10% of your $3000. Doing this will enable you to take care of unexpected expenses without dipping into savings or using a credit card.
If you end up not spending your buffer, put some of it into savings or toward a credit card balance. Flexibility also means reviewing your budget occasionally, such as every quarter, or when going through a significant life change.
Not Keeping Track of Spending
A budget only works if you monitor your spending. How much do you spend each month eating out? Do you allocate enough for utilities?
Make sure you know where your money goes each month. Otherwise, your perception of your spending could be grossly inaccurate.
If tracking your spending isn’t automatic for you, start doing it weekly and increase the frequency. Perhaps set an alarm or use a smartphone app to remind you. The more you’re on top of your spending, the easier it is to make adjustments when they’re necessary.
Spending More When You Get a Raise
If you’ve recently earned a promotion or bonus, congratulations! Now, keep doing what you’ve been doing. In other words, avoid the temptation to buy a bigger home or purchase something extravagant just because you got a financial windfall.
If you do want to do something with that extra money, consider increasing your retirement contribution, even by a small percentage. If you know ahead of time that you’re getting a bonus, tax refund, or raise, plan what you might save it for so you won’t increase your spending overall.
Letting Emotions Affect Investment Decisions
In a volatile market, it’s understandable to want to react when that market takes a downturn. However, if you’re investing for the long haul, such as for retirement, a knee-jerk reaction like dumping an investment could be a mistake.
The market will always go up and down, and this is just a given if you’re willing to take on at least moderate risk. If you want to make a change to your portfolio, consider your reasons for it. For example, a change in your financial goals might be a sound justification.
Having Unrealistic Expectations
It’s okay to have an ambitious financial goal, such as paying off student loans early. Just make sure you’ll have the funds to make this happen. Sometimes, however, what we estimate on paper might not work out that way in real life. For example, you might decide to slash your entertainment budget in half to pay off your loans early. Will you stick to this plan?
When setting your budget, be completely honest with yourself. Don’t just focus on your regular spending but also on how much money will come each month.
Managing your finances takes work, but it doesn’t have to be hard. A little knowledge and self-awareness will help you stay on top of your money. When setbacks do happen, don’t be hard on yourself. Personal finance management is a lifelong learning process. It’s about progress, not perfection.