While there is likely an endless list of money mistakes you should avoid, some bad money moves can really wreak havoc on your finances. For example, spending more money than you make or buying a home you can’t really afford can put you on the fast track to personal bankruptcy.
Car financing company Carvine shared the following list of nine big personal finance mistakes you should avoid:
Living beyond your means
If you want to keep your finances in good shape, then you must learn to live within your means. However, that doesn’t just mean not spending more money than you make. Instead, it means that you should have enough money left over each month to save in an emergency fund. In fact, you should actually pay yourself first by having a certain percentage of your paycheck automatically deposited into your savings account each pay period.
A good rule of thumb is to save at least 10 percent of your discretionary income to give yourself a decent financial cushion.
Failing to track your expenses
Not keeping track of your expenses is another big personal finance mistake that many consumers make. How can you expect to live within your means if you don’t know where all of your money is going each month?
One easy way to track your monthly expenses is to review your bank records on a regular basis. You could also create a spreadsheet to record each time you pay a bill. Some consumers even use computerized accounting programs like Quicken to help them track and manage their expenses.
Putting off saving for retirement
The sooner you start investing in a 401(k) plan or an IRA (Individual Retirement Account), the more money you will have for retirement. Even better, the earlier you start saving for retirement, the less money you will have to save each month.
For example, a younger worker who saves 10 percent of their income in a 401(k) or IRA has the potential to build a substantial amount of wealth by the time they retire. However, a worker who doesn’t start saving for retirement until they are 40, will likely need to save considerably more – 15 percent or even 20 percent – of their income just to have enough money to live on after they quit working.
Buying a house without considering the full cost of home ownership
It takes more than just paying a mortgage payment to own a home. You must also pay real estate taxes, homeowners insurance, and utilities. Furthermore, you will need enough money to cover household maintenance and repairs. Unfortunately, many homeowners discover that they can’t afford the house they bought because they failed to account for all of those extra expenses.
That is why you must calculate the full cost of home ownership before you buy a house.
Lending money to those who won’t likely repay you
You work too hard for you money to just give it away to others who aren’t likely to repay you for a loan. Ideally, you shouldn’t be lending money to anyone who isn’t an immediate family member who you might feel obligated to help. If you become known as someone easy to get money from, then you risk giving it all away to others.
Co-signing a loan that you can’t afford to repay
Surprisingly, a lot of consumers don’t realize that when they co-sign a loan, they’re 100 percent responsible for repaying that loan should the primary borrower fail to repay it. That means if you co-sign for a loan that you get stuck repaying and you can’t afford to make the payments, then your credit score is going to take a big hit. Furthermore, you could get sued by the creditor.
Therefore, you should only co-sign a loan on two conditions:
- You are certain that the primary borrower will be able to repay the loan.
- You have the necessary funds to repay it if need be.
- Spending money on frivolous purchases
Most consumers make nonessential purchases. For example, you might treat yourself to a meal at your favorite restaurant or go to a movie. It’s fine to “treat” yourself on occasion as long as you have the extra money. However, when nonessential purchases start taking up a huge chunk of your budget – and impede your finances – they become frivolous purchases.
If you find yourself running up a big credit card bill that you are unable to pay off each month or you are having difficulty paying other bills on time, then you likely need to cut back on your spending – especially on nonessential items.
Investing too much money in company stock
Investing a significant portion of your money in company stock isn’t a wise investment. For example, what happens if your company goes bankrupt? In addition to losing your job, you will lose all of the money you had tied up in company stock. A good personal finance practice is to have no more than 10 percent of your total investments invested in company stock.
Investing your retirement savings in well-diversified, professionally managed mutual funds is a better investment. That way if you lose your job, you won’t lose all your money.
Cashing in your 401(k) plan early
Finally, one of the biggest personal finance mistakes that cash-strapped consumers often make is to cash in their retirement savings early. Unfortunately, if you withdraw money from your 401(k) plan prior to age 59 and 1/2, you could face some steep financial penalties.
For instance, you will have to pay income taxes on the money you withdraw. Furthermore, you can get hit with an additional 10 percent penalty for making an early withdrawal. That means you can end up losing a significant portion of the money that you had saved in your 401(k) plan. Not to mention that is money that won’t be there when you retire.
In short, the best way to avoid making personal finance mistakes is to adopt good money habits – like spending less than you make and saving the rest to create a financial cushion for yourself. There are also a number of financial tools and apps that can help you better manage your finances. Your financial institution might even offer budgeting and wealth-building tools.