Money Missteps: 5 Common Mistakes
We’re taught a lot in school, from algebraic equations to national history. We spend years of our lives sitting at desks, listening, studying and learning. But while students may be able to solve a geometric proof or quote Shakespeare when they graduate, many know little to nothing about personal finance.
When it comes to managing money, many of us are pretty clueless when we get out on our own and, therefore, we make mistakes. Even as we get older, many of us still mess up financially. Here’s a look at some of the most common money missteps that can throw your finances into a loop.
1. Impulse spending
You go to the mall and see the latest movie out on DVD. If you hadn’t been planning on buying it, but decide to right then, that’s an impulse buy. Or how about a pretty sweater that would go great with, well, you don’t know what it would go great with, but it’s such a cool sweater. You don’t really need it, but you like it, so you decide to buy it.
See it, want it, buy it. Impulsive spending can catch up with you and overwhelm you quickly. You may think that a $25 DVD here and a $40 sweater there isn’t really that bad, and it’s not if it’s very rare that you buy impulsively. The problem is, once you’ve bought something on the spur of the moment once, it’s easy to do it again, and again. And that is a problem.
Let’s say you impulsively spend only $25 a week. Over a year, that’s $1,300. Or say you impulsively spend $10 a day, which will add up to $3,650 a year. So, when you pick up that DVD or sweater that you hadn’t planned on buying, put it back down and think about it before just pulling out the charge card.
2. Not having a budget
You may think, especially if you’re young and single, that you don’t need to be on a budget. Not true. Anyone who earns money and has to pay for essentials in life with it should be on a budget, even if you have “plenty” of money.
A budget is a guide to spending, and instead of limiting you, it can actually free you. If you aren’t on a budget, you may worry about whether or not you have the money to buy a new sweater, but if you’re on a budget, you’ll know for sure. Budgeting also helps you get a true grasp of how much money you’re bringing in and where it is going. Include things like savings and investment money in your budget, and set limits for how much you spend on things like eating out and entertainment.
Budgeting is important no matter what your income. If you don’t have a budget to guide your spending, you can quickly and easily get in trouble, running out of money before your bills are paid and spending your money but having nothing to show for it. Not having a budget is a common mistake, but one that can be easily rectified.
3. Not living within your means
It’s Friday night and all your friends are going to that nice new restaurant and then to a movie, and they’ve invited you. You’re part of the group and you really should go, but you know you don’t have the money. But what the heck, you go anyway and spend money you don’t have to spend, at least not on dinner and a movie.
Living within your means isn’t fun, but when you don’t, you get into financial trouble. Not living within your means means that you spend more money on non-essential things in life than you really should. On the small end, maybe you buy a $3 cup of coffee twice a week; on a larger scale, you’ve bought a lovely home that you can’t really afford.
Living above your means is simple today. Just grab your credit card and you are on your way to all the fun. You can buy that cup of coffee or even that house. But eventually, it will catch up with you. You’ll be unable to pay your bills and will be forced to live within your means.
4. Not having an emergency fund
Most of us live pretty much pay check to pay check. If we can keep our bills paid, keep our families fed and clothed and maybe every once in a while, go on a vacation or something, we’re doing pretty well. Putting money back into an emergency fund may seem like a luxury you can’t afford, but the truth is, you can’t afford not to have an emergency fund. A couple of years ago, we had to put a new roof on our house. This year I had to replace the air conditioner in my van. These things cost money, and I didn’t have enough in the bank, so I had to charge them.
Credit cards are very handy like that, but when you have one emergency after another, the debt can begin to add up quickly. It’s much easier to deal with unexpected expenses if you have an emergency fund. Most financial experts recommend having at least $1,000 set aside, but even better is to have an amount equal to three months’ pay. That may seem impossible to most of us, but at least try for the $1,000. Then, when you have a car problem or other expense not in your budget, you’ll have the money to pay for it. When you take money out of the fund, replace it as quickly as possible.
5. Too much credit card debt
This one may seem obvious, but really, it’s probably the most common financial misstep people make. Credit card debt is related to all the other problems we’ve gone over. If you spend impulsively and don’t live within your means, you’ll likely accumulate credit card debt. If you don’t have a
budget or an emergency fund, you’ll most likely have to use your credit card
more often than you should.
Credit cards are great and convenient, but they’re also dangerous and too convenient. Sure, it’s tempting to have a card and say you’ll only use it a little and pay off the balance each month. If you can actually do that, perfect, no problem. But most of the time, even those of us who plan to do that end up charging more than we wanted to.
Credit card debt is a slippery slope. You start out with a little and before you know it, it’s turned into a lot. Stick to a budget, avoid impulse spending, live within your means and have an emergency fund and you’ll avoid the problem of credit card debt.
Managing your money isn’t really all that difficult. It may not be fun when you have to say no to things you’d like to buy and stuff you’d like to do, but avoiding these money missteps is much easier than having to deal with them.Image by opensourceway