What Are the Worst Financial Mistakes You Can Make? There are certain financial mistakes that are very common and yet also avoidable. Making certain financial mistakes can take years to overcome. It’s much better to gain money sense and learn as much as you can to make the right decisions from the start, rather than trying to go back and fix mistakes.
The following are some of the most frequently made and consequential financial mistakes people make.
Not Saving Any Money
There’s this tendency to want to live in the moment, and you always think that you’ll be making money and you don’t really need to save it. If you’re not putting at least something aside after your bills are paid for an emergency fund, it’s a huge mistake.
You might think you don’t have any money to put aside, but if you look hard enough and potentially make some cuts to your monthly budget, you’ll likely find something.
It doesn’t matter how little it is. Just start somewhere.
Twenty dollars a week put into your savings account would mean an additional $1,040 dollars at the end of the year. That’s something meaningful, and over five years, you’d have more than $5,000 saved.
Letting Unused Cash Sit Idle
While you do need to have an easily accessible emergency fund, if you have more than what you need to cover six months’ worth of expenses and you’re just letting it sit there, you’re making a mistake. You need to invest your money, and you can earn many times over what you would otherwise.
If your savings is sitting idle, then inflation is going to erode much of its value.
Don’t carry a large balance in your checking account if you can avoid it.
Even an account that earns a small bit of interest is better than nothing.
As a side note, when you do invest, if you have any losses after you sell a stock, you can actually use that as a loss on your tax return, which is one more benefit of investment.
Buying a New Car
As much as you might want to, the reality is that buying a new car is a financial mistake. A car, unlike property, is a depreciating asset. That means that there’s going to be a big difference between the value of a new car and how much you paid for it.
If you trade your new cars in every few years, you’re losing money each time you do that.
Buy a used car, and go for one that’s simple. It’s a step that can help you financially in big ways.
If you can buy a used car with cash, even better.
Getting a House That’s More Than You Can Afford
If you’re going to buy a new house, it’s an exciting and sometimes emotionally charged situation. You may let your feelings allow you to get carried away, and you can end up buying more house than you can afford or need.
When you buy a bigger or more expensive house, it’s not just the mortgage that’s going to be an issue. You also have to think your taxes, utilities, and maintenance expenses are also going to be higher.
Paying Off Your Debt with Savings
Debt is expensive to deal with, and it can slow you down from moving forward in life. However, when you use your savings to pay debt, you’re losing the power of compounding. Plus, if you take money out of your retirement account to pay off debt, you may have to pay fees.
Focusing More on Cutting Spending Than Raising Income
If you want to build wealth and pay off debt, yes, it’s possible you’re going to have to cut your spending. In fact, most people could benefit from cutting some of the unnecessary things out of their spending.
Don’t let that distract you from something else you should be working toward, though, which is raising your income. You ideally need to do both to get ahead financially.
You’re limited in how much you can cut from your spending. There’s only so much there. You’re not limited in how much you can raise your income, making it more important in the grand idea of wealth building.
Finally, don’t let the desire to live a certain lifestyle take control of your life. Maybe you want the expensive belt, or the brand new car, or the high-end vacation. Sure, luxuries are nice in life, but if you’re not in a place to afford them, but you’re driven by a desire to have a certain lifestyle, you’re never going to be able to build true wealth.