8 Money Mistakes To Avoid At All Costs

Over the course of your life, you will handle a lot of money. Whether you are shopping for groceries, investing in the stock market, or buying your first home, you’ll have plenty of opportunities to make smart financial decisions in your lifetime. There are, however, just as many chances for financial mistakes. Here are eight common money mistakes you may be making and how avoiding them can help you save money.

Mistake #1: Not following a budget

One of the most common financial mistakes people make is not sticking to a budget – or not having one at all. If you don’t follow a budget, you might assume that a budget will restrict your spending on the things you enjoy. Yet, the opposite is actually true; budgets are adaptable to your lifestyle and priorities. For example, if you like rock climbing, you may allocate funds to your essentials– rent, gas, food, and savings– but also reserve a set amount for climbing fees or gear. By setting aside money for your favorite hobby, you are making sure that your other expenses don’t eat into your rock-climbing fund. 

Establishing a budget allows you to view an accurate snapshot of your personal finances, rather than trying to remember all the figures off the top of your head. Additionally, budgets can reveal your spending habits and assist you in reaching your financial goals. Essentially, a budget tells your money where to go, instead of staring at an empty bank account wondering where it went. A helpful starting point for beginners is to use a template or follow the 50/30/20 Budgeting Rule, dedicating 50% of your income to needs, 30% to wants, and 20% to savings.

Mistake #2: Ignoring or being irresponsible with credit

From the outside, credit can seem complicated, with various credit card terminologies and best credit practices to understand. But rather than take the time to learn how credit works, many ignore it completely. Others aren’t aware of the consequences of misusing credit and end up charging more than they can afford to their card, resulting in more fees and debt. However, lacking credit history or having bad credit can negatively impact your financial well-being. Both poor or nonexistent credit can make it challenging to qualify for loans with favorable interest rates, leading to higher costs on many types of loans.

Conversely, learning about and practicing good credit habits can help you immensely down the road. For example, a strong credit score can help you get approved for loans with favorable terms. It can also influence your ability to rent an apartment, as landlords often check credit scores to assess the reliability of potential tenants. To build credit responsibility, you should use credit cards wisely, make timely payments, and keep your credit utilization low. You should monitor your credit history regularly to ensure accuracy and address any discrepancies. In addition, you should request a free credit report from one of the three major credit bureaus annually. 

Mistake #3: Spending more than you earn

When you start earning your first paycheck, receive a raise, or get a credit card, it's tempting to overspend. Dining out, going to events, or indulging in shopping sprees can add up quickly. Before you know it, you’re faced with a credit card bill at the end of the month that you aren’t able to pay in full. With more access to money than you’ve ever had before, it can potentially lead to lifestyle inflation. To avoid falling into a cycle of debt, always pay more than the minimum payment due and limit your credit card expenses to what you can repay in full monthly.

No matter your income, you should always try to spend less than you make. A couple of ways to curb your impulsive purchases is to treat your credit card like a debit card and to use a waiting period of 24-48 hours before you buy a new item. Additionally, make your savings a priority to avoid lifestyle creep and credit card debt. In the wise words of Warren Buffet, “Do not save what is left after spending; instead, spend what is left after saving.”

Mistake #4: Not having an emergency fund

Imagine a scenario where your financial life is going smoothly. You’re saving a portion of each paycheck, increasing your financial literacy, and using your credit card responsibly. Then, out of the blue, you lose your job or need to repair your car. Suddenly, the savings you worked months to accumulate are used up in an instant. Not having an emergency fund could cost you hundreds of dollars and sacrifice your progress towards your financial goals. 

For situations like these, having a dedicated emergency fund is important. An emergency fund acts as a financial safety net during difficult times. It’s recommended to keep about 3-6 months’ worth of expenses for unforeseen circumstances. Yet, even saving up for one month is a good start. When you don’t have separate emergency savings, you risk jeopardizing your other financial goals every time an accident occurs. Keep your emergency fund in an account that’s easily accessible during emergencies. Consider a high-yield savings account as it usually has more favorable interest rates than a regular savings account.

Mistake #5: Buying a new car

Each year, new vehicles hit the market with their updated styles, models, and colors. Many people cannot afford to purchase a new car outright, so they opt for a monthly payment to be able to afford the vehicle. However, squeezing the monthly car payment into your budget does not equal being able to afford the vehicle. In addition to the cost of the car, there is also registration, maintenance, insurance, and more. Plus, a car is a depreciating asset, which means they drop in value as they age. 

Opting for a used vehicle can often provide better value compared to a new one. Pre-owned cars typically come with a lower price tag, resulting in borrowing less money and paying less interest over the loan term. Of course, buying a used vehicle requires careful research. Prospective buyers should check the vehicle's history report, have it inspected by a trusted mechanic, and consider these other questions to ask when buying a car. Additionally, you may want to wait to purchase a car until you have a good credit score and history. Although having credit isn’t always required when buying a car, it can potentially save you a lot of money by helping you qualify for a greater loan amount and a lower interest rate.

Mistake #6: Neglecting your high-interest debts

Loans are used for many things: houses, cars, college education, etc. While taking on debt is not always a bad decision, failing to repay what you owe can lead to issues. High-interest debt, such as credit card balances or private student loans, should be paid off first. Then, you can opt for a debt repayment strategy that suits you. Consider the snowball method (starting with the smallest debt and progressing to the largest) or the avalanche method (clearing the largest debts before moving on to smaller ones).

When money is tight, it can be hard to decide if you should save money or pay off your debt. You should always pay off your debt when you have debts with a high interest rate, multiple accounts with large amounts of debt, or already have an adequate amount of money in savings. Whether you owe $6,000 or $60,000, facing the challenge of paying off debts can feel overwhelming. Use these best strategies to pay off student loans and conquer any remaining high-interest debts.

Mistake #7: Putting off your retirement fund

When you’re in school, your career likely hasn’t started yet, which makes retirement feel distant. Yet, saving for retirement early is important because you’ll be able to harness the power of compound interest and gradually build wealth over time. Your retirement savings are especially critical because they can help you live the life you want once you exit the workforce.

Many people don’t start saving for retirement at a young age because they feel that contributions won’t make a difference. Yet, even a small amount of savings earlier in your career can produce big results over time. Consider saving 15% of your income each year in a retirement account like an IRA or 401(k) retirement plan—this includes any match or contribution you get from your employer. If reaching 15% seems challenging initially, don't worry. You can gradually increase your savings each year until you reach the target. Most people can find some extra money to save if they pay closer attention to their spending.

Mistake #8: Not having financial goals

While it can be easy to get caught up in the day to day, it’s important to have specific objectives for your money. Having clear financial goals – both short- and long-term – can set you up for a secure financial future. Short-term financial goals, like saving for a vacation or graduating from college debt-free, can give purpose and direction to your money in the immediate future. Whereas long-term financial goals, like improving your credit score or paying for your child’s education, will take many years to reach because of their significance and commitment. 

Ultimately, you want your goals to be both attainable and a little bit challenging. Goals that are too easy lack significance once you accomplish them. On the other hand, overly ambitious ones can feel unattainable and dampen your motivation. While financial planning and goal-setting may feel daunting in the beginning, it will help you immensely in the long run. Just don’t forget to regularly review and adjust your financial goals as your needs and life evolve. 

If you realize that you’ve been making one or more of these mistakes, don’t worry. Now that you’re aware of your financial tendencies, you can take steps to build better money habits. By following this advice, you can help prevent potential financial losses down the road. You should continue to educate yourself further on all things personal finance and increase your financial literacy. With more financial knowledge and experience under your belt, you’ll be better prepared to handle difficult money situations in the future– and we’re confident you’ll make the best decisions for you.