Times are difficult with the global economic recession. The Fed Reserve hiked interest rates by 75 basis points- a level unheard of for quite some time. People from all economic classes are going through financial hardships. It is crucial to make corrections in our spending patterns and build secure income channels for a better tomorrow. While the latter may incur additional expenses, avoiding financial mistakes in our daily habits will not. Rather, it will help increase our savings.
Top 10 Financial Mistakes to Avoid
Nobody goes out there trying to lose money or spend it on willy-nilly things. But, we always end up making these financial mistakes.
1. Breaking Bank By Spending
There is an enormous difference between spending and frivolous spending. Your Starbucks coffee every day or twice a year vacation might sound like nothing. But, most treasures are lost one dime at a time. These might look little, but cumulatively, it is a big chunk of money. The solution here is not to be a miser but to avoid spending money on useless or ‘status-advertising’ things.
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2. Useless Membership Plans
Are you using that gym membership? Instead of buying a yearly membership, you should have started with a monthly package. Do you need to pay a subscription for those music apps? You have carelessly left out several elements to bleed your bank balance dry.
The best way to avoid this financial mistake is by choosing a leaner lifestyle. Go through your finances and cut off things you just added due to peer pressure or for the sake of owning it.
3. Spend And Then Earn For It
Among all the financial mistakes, the most common white elephant is the credit card. Credit cards might sound user-friendly, but the bills and the interests accumulating with them are not. Do not let your credit card bills pile up. Owning a credit card is not a mistake; it is all about how you use it.
4. Buying Depreciating Items (Cars)
People talk about taking up debts to buy a house or build up businesses. However, it is not wise to do the same for a car. The difference is that a vehicle is a depreciating asset. The moment you take the car under your name, it loses a part of its value. If you re-sell your vehicle even after a day of buying it, it will be a loss for you.
Affording Payment Vs. Affording The Purchase
The thought that monthly payments are affordable and thus buying a car is a wise choice is one of the many financial mistakes young people make. Being able to afford the monthly payment does not mean that you are currently in the economic situation to own that car.
How about borrowing money to buy a depreciating asset? As mentioned before, the car’s value will decrease daily, but the debt you are in would remain the same or even increase based on the lender. The same concept goes for trading your vehicle too. Every time you switch your car, you lose money.
Choose Your Car Properly
Do you need that SUV for driving downtown for your work? You need not buy an expensive car if you do not require its additional features. Moreover, expensive cars come with expensive maintenance costs and insurance premiums. Choose economic vehicles that are easier to maintain.
5. Financial Mistakes In Buying Houses
Buying a house is a good move towards better wealth management. You have property now, and you will be saving money on rent; over time, the asset’s value will increase. However, buying a large house by taking an enormous debt is a colossal blunder, making a huge impact on your monthly budget. Moreover, a large house also leads to a more significant tax burden, utility bills, and maintenance.
6. Home Equity Financial Mistakes
The typical financial tip to get out of debt is refinancing your house. However, it is not an overall lousy tip. In cases where you are paying off very high-interest debt, it is better to refinance and clear out that bleeder. A healthy alternative is HELOC (home equity line of credit). This option helps you use your home equity like your credit card. However, the interest rates would be applicable.
7. Hand-To-Mouth Living
Out of all the financial mistakes, failing to save is the main one. Do you know that 9.4% of families in America does not have a saving? It might sound fine for young adults starting to earn and still under the parachute of their parents. But, with more responsibilities, one should be ready for rainy days. 1 delayed paycheck or a sudden layoff could turn your life upside down if you do not have savings. The standard tip is to have three months of paycheck value as your savings.
8. Retirement Is A Long Way Ahead
Do you know that you can add a considerable amount of money into your retirement nest by starting to save for your retirement in your twenties? Your investments should be able to work for you and provide you with a stable income. Thus, when the time comes for you to throw off your apron and rest, the money will work for you. There are several retirement management options. However, wealth management experts recommend the employer-sponsored plan and a tax-deferred retirement option.
9. Savings Can Clear Out My Debts
Most people swipe their debt with retirement accounts, thinking they can enjoy the difference. But, you should take the compounding interest into account. Moreover,
paying back those retirement funds is hard when you are already in a rut, and also it comes with hefty fees. When your debt is cleared, you will not think twice about filling back your retirement account.
10. Yet To Make A Financial Plan
What is the rush to make a plan or learn finance tips when you are just starting? Starting saving and investing a decade later would mean losing a considerable chunk of money in compounding interests. Start with a simple financial plan of saving a little every month.
Financial mistakes need not be million-dollar ones. It could be a small blunder every month, adding over time. It would be best if you started thinking about your future and present. Saving money every month isn’t enough; you should know to secure them from inflation, tax, and others.