For many of us, it’s not fun to think about money, budgeting and finances. We’d rather spend our time spending money than assigning it a place on a spreadsheet.
However, having a healthy, honest approach to a personal budget can silence that nagging voice that all of us hear: “Should I really be buying this?” “Can I say yes to bottomless brunch again this weekend?” “I hope that rattling when I start the car doesn’t turn into an expensive repair!”
Taking a proactive approach to managing money can silence that voice and make your money work harder for you. Here are seven financial mistakes to avoid.
- “Comparison Is the Thief of Joy”
Perhaps the most common money mistake is trying to keep pace with friends, family and even celebrities and trendsetters. Keeping up with the Joneses, however, is a fool’s game. Why? You don’t know their real story: maybe they are loads in debt, maybe they shop consignment and just look like a million bucks, maybe they received an inheritance. The point is, they aren’t you. Theodore Roosevelt said, “Comparison is the thief of joy,” and trying to measure up to others will leave you unhappy and broke.
- Ignoring a Budget
So, now that you are living for you and not for your idea of someone else’s lifestyle, it’s time to organize your money. Yes, budgets sound boring and lame, but they are the only tried-and-true way of getting out of debt and amassing wealth. If every dollar that you earn has a purpose, it will make you wealthier and less anxious. Websites like mint.com and budgettracker.com make it easy, but you can also just use old fashioned envelopes and a paper budgeting form.
Seeing your income in one column and your fixed costs – like rent, insurance, student loan bills and car payment – in another will help you visualize cash flow in an era where most of us use debit or credit cards without ever handing over a greenback.
- Spending More Than You Make
So, you’ve seen how much money you have left at the end of the month to pay off debt and save. That number – whether it’s $100 or $1,000 – just sits there, tempting you to trade it in for shoes, a dinner out or tickets to a game. Not so fast.
By automating a monthly transfer from your checking to your savings account, mortgage provider or student loan debt, you can remove the temptation to spend your surplus on short-term pleasures instead of long-term goals. Of course, you’d go crazy without any creature comforts, so set a reasonable amount aside for whatever it is that brings you a surge of happiness, like a monthly brunch with friends.
- Ignoring Compound Interest
You’ve probably heard someone say that youth is wasted on the young. They might as well be talking about compounding interest. This is the concept that interest earned – like that in a mutual fund or retirement account – is added back to the principal nest egg and then interest is earned on that new, bigger amount. This cycle continues as long as the account is earning interest.
Let’s take a real-life example. You got $1,000 in 25th birthday money from family. You could go out and spend, or you could put it in a mutual fund, which will grow at about 8 percent. Even if you never add another penny to that account, when you retire at age 65, it would be worth more than $21,000.
- Living Without an Emergency Fund
So, you’ve got a budget and you’re sticking to it, but then a major car repair is needed, and you do not have the money. Or a relative is seriously ill and you need to take a last-minute flight to visit them. It is so easy to put those charges on a credit card and re-enter the debt cycle you just got out of a few months ago.
By having an emergency fund of $1,000 to $3,000 – depending on your expenses, size of family, etc. – will help you pay for true emergencies with cash instead of going into debt.
- Letting Fees and Recurring Payments Add up
Every Friday your coworkers go to the local farmers market for lunch, and you are always without cash. So you withdraw $20 from the ATM and eat the $1.50 fee. No big deal, right? Well, that’s actually about $80 over the year, and it’s just one example of fees that can add up to make a big impact on your budget.
Another personal finance parasite is recurring payments. That gym membership that you haven’t used in six months? That online movie-streaming membership that you keep forgetting about? Not only could you find extra money in your budget by cancelling unused services, you also need to be aware of potential overdrafts if the necessary funds aren’t in your account.
- Thinking Insurance Isn’t For You
While your focus on getting financially healthy is typically cutting costs, investing in the right insurance coverage will save you money in the long term. For example, renters insurance, car insurance and health insurance may be something you think you don’t need to worry about, but not having it can cost you not only in fines but also in out-of-pocket costs should something happen. Car accidents are scary enough; you don’t need the worry of a huge bill to add to your anxiety. Don’t put off insurance until later – once you need it, it will be too late.
As you can see, a few simple steps now can set you on the road to financial stability for the rest of your life. Leave your advice – or regrets – in the comment section.
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