Financial mistakes are easy to make.
Sometimes you are just so busy that you don’t take the time to think long and hard about money. Finance can be complicated, so it’s easier to just avoid thinking about it. While this isn’t good, it won’t necessarily be disastrous.
On the other hand, there are some financial mistakes that are both common and very damaging. These common mistakes can disrupt your life and set your plans back by a factor of years.
This simple mistake is one that can lead to numerous problems.
A simple lack of a budget can lead to debt in the worst cases. But in the least severe cases, having no budget means saving less money for your future.
Budgeting can be a difficult habit to build at first, but making one is necessary to manage finances. With small steps, building a budget over time leads to greater savings.
One good method is the 50/30/20 plan or another similar budget. These simple budget methods are split as Needs/Wants/Savings.
Becoming overburdened with debt is an increasingly common experience.
In many cases, it’s not a lack of responsibility, but a byproduct of the costs of living. Student debts when combined with credit cards and other personal debts direct money away from savings. It’s no surprise that high levels of debt with high interest rates can lead to financial difficulties.
Wherever possible, debt should be avoided. However, it’s also important to differentiate bad debt from useful debt.
If you have decent or better credit, a mortgage is a good example of a debt that serves a purpose while not costing too much in interest. On the other hand, letting credit card debt get out of control can be incredibly damaging.
Budgets can account for the amount of money you are willing to spend on a given expense.
However, with or without a budget, taking the time to compare options is always prudent.
Many people forgo taking the time to compare options. Perhaps the best example of this is with cars. A car can lose about 40% of its value the moment it leaves the lot.
If you can get a used car with a good record and not too much mileage, you can save thousands of dollars through such a simple decision. Many dealerships offer 2- to 3-year-old cars with certificates, low mileage, and often an overhauled vehicle with a fresh warranty.
In many cases, laziness is the cause of spending too much when there are cheaper options that provide roughly the same quality. Depreciating assets like cars are key areas where comparison shopping is critical.
Not investing means not experiencing the power of compounding interest. Simply saving is a good idea, but only to a point. Once you have enough money to cover a major emergency, it makes sense to start investing.
Sitting on cash is a historically bad idea when you have other options. When looking at historic returns, cash is an asset with extremely slow appreciation. In most cases, it will make more sense to invest in stable, low-risk assets with much stronger long-term returns. Diverse portfolios of bonds and especially of large-cap stocks tend to do better over extended periods, even though they can fluctuate less predictably in the short term.
Lastly, a lack of life insurance is an easy financial mistake to make, but one that can cause hardship for your family.
This is perhaps the most understandable and forgivable financial mistake. Most people do not want to think about their mortality. But there are a few reasons why your mortality is worth spending just a small amount of time acting on:
Life insurance is important for the peace of mind it provides. You can relax and stop thinking about your mortality knowing that your loved ones will be taken care of.
This is a controversial topic that is debated passionately in financial and political contexts.
Personal decisions and broader economic circumstances beyond individual control can both apply at different times to different people. But focusing on attributing blame on individuals’ decisions, poor governmental policy, disasters, or any other external factors won’t help the average person.
Individual shortcomings, policy failures, and disasters are factors that are understood well enough.
One personal factor that may lead to bad financial decisions is “financial fatigue”. In one publication in which the Australian government covers finance-induced stress, the causes, impacts, and remedies are investigated.
This overlooked cause of personal financial struggles refers to the day-to-day stress many people suffer from due to financial issues. Once you’re too indebted or too preoccupied with finance, it becomes easier to make bad decisions.
This may be in part due to cynicism if you come to believe there is no chance of regaining control over your finances.
Overall, all an individual can do is try to make sense of their financial circumstances and make the changes that are under their control. Finance is hard, but focusing on small victories can be more effective than thinking about the big picture when you’re struggling to psychologically confront financial challenges.
Awareness is the first step to avoiding these common money management mistakes. Just by reading this article, we hope we have made it less likely that you suffer from one of these bad financial circumstances.
The next step following awareness is preparation. Financial planning can help you avoid overspending, bad debt, and suboptimal long-term growth due to these factors or the lack of long-term investments.
All that’s left is for you to get started in the areas you may not have had the time to closely consider so far. It’s never a bad time to make changes, implement a budget, and work on improving your financial future. But it’s always better to get started early.
Editor's note: This article was originally published Jan 19, 2022 and has been updated to improve reader experience.
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