Money, money, money. Few things in life generate as much interest, yet demand more responsibility. Money is taken into consideration with almost every life decision we make (which is one reason why personal finance courses should be required in every school)! And while money itself will not bring happiness, mismanaging it can surely ruin a person’s chances for success, and cause a lot of UNhappiness.
The principles of wise financial management aren’t that tough to master. Truly, you don’t need to have a degree in finance, be a math whiz, or consult a professional financial consultant in order to make smart choices. You simply need to know the basics and abide by certain key principles. It pays to avoid these eight common financial mistakes (and understand their consequences if you don’t):
- Failure to set goals and plan for major purchases and retirement. It’s crucial that you plan for large purchases (homes, cars, big toys) by accumulating savings, while also making sure you’ll have sufficient resources for retirement. These types of purchases should never be made on impulse or funded by withdrawals from your 401K.
- Spending more than you earn and failing to budget and monitor expenses. These days, it’s impossible to get away from ads (they’re on Instagram, Facebook, Billboards, YouTube videos, commercials, etc.). We are constantly bombarded with the idea that we need this or that. It’s important to resist the urge to spend, unless each purchase is within the budget you’ve set. If you don’t have a budget, set one…now! Overspending is the most common source of financial difficulty and stress.
- Incurring too much debt, including excessive credit card usage. If you have to put it on a credit card, you probably can’t afford it. That is, unless you pay off all of your credit card balances at month end.
- Investing too little and starting too late. In order to build a sufficient nest egg for retirement, you’ll need to save and invest 15-20% of your income. And, the sooner you begin, the greater your assets will accumulate. Start a monthly investment program as soon as you’ve developed an emergency fund worth six months of expenses. This should be a priority in the first year you begin your career.
- Incurring significant fixed expenses that can’t be reduced in difficult economic times (e.g., spending too much on housing and cars). Your mortgage or rent payment should not exceed 25 percent of your monthly income. And please, avoid those crazy high car payments!
- Ill-timed investment decisions (“buy high, sell low” habits and market timing). Too many investors make decisions on emotion. They take too much risk when the markets are high and panic sell when markets are in decline. Studies show the average investor loses around 2% a year due to poorly timed decisions! Regular investments in a well-diversified program serves investors better.
- Impulse buying and lack of value consciousness when shopping. Have a strong grasp on the actual value of the stuff you’re buying. Are those jeans really worth $175 in the long run? How could buying less expensive jeans and putting that money toward something else impact your financial situation in the long run?
- Lack of discipline and personal responsibility. This is one of the most important tips. Making sure you have positive cash flow and that you’re set-up well for the future takes some serious discipline and self-control! If you need some help with accountability, consider downloading spending tracker, like those available on mint.com. It’s eye opening how our spending on little things adds up.
Because finances aren’t taught enough (if at all) in secondary school or college/university, parents are advised to assume a leadership role. These are CRUCIAL life skills that will set your young people up for success in the real world (and help them avoid potential crises).
Periodically check how you’re doing in these areas, too. If we can all successfully avoid these traps, we’ll be in excellent financial shape! It does wonders for our stress levels, too!