5 Common Money Mistakes and How to Avoid Them
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Managing your finances is a crucial part of adulthood that can impact your current and future health and happiness. While money can’t buy happiness, knowing where your money is going and how to start saving money can reduce stress and help you plan for the future. Unfortunately, many people don’t know where to start when trying to manage their finances.
Most of us weren’t taught about personal finance in school, which left us unable to track our expenses and plan for retirement properly. Knowing which money mistakes to avoid can help you budget and plan better to help you save for the future and make the most of your money right now. Here are five common money mistakes and how to avoid them.
1. Not Budgeting
A monthly budget is crucial to helping you understand where your money is going. Many small purchases add up throughout the month and year, such as gym memberships you may not use, eating out, and unnecessary purchases whenever you go out. While buying yourself a coffee now and then shouldn’t break the bank, small purchases can become an issue if they become a habit and don’t fit into your budget.
The first step to budgeting is to know your monthly income and expenses. You can take net pay—the amount you bring home after taxes–and subtract monthly expenses like streaming services, rent or mortgage payments, and bills. You can track and categorize your expenses using an app or spreadsheet on any device to help you add everything up.
Remember to consider your variable costs, such as those that vary from month to month, like your electricity bill, groceries, and entertainment. If you want to work with a fixed cost, you can add your variable expenses over the period of a year and divide them by 12 (for every month) to give you a per-month amount.
After subtracting your expenses from your income, you can see how much you have left over. This amount won’t be much for most people, but it should give you a realistic estimate of how much money you can save or spend throughout the month. We recommend saving as much as possible in various accounts like rainy day funds, savings accounts, and retirement accounts.
There are several budgeting strategies you can choose from, but one of the easiest to remember is the 50/30/20 rule that divides your income into three categories: needs, wants, and savings or debt. Your needs are obvious expenses like rent, car notes, and bills you need to pay immediately, while your wants are entertainment, shopping, vacations, and more.
The final category is savings or debt. Any amount left over at the end of the month can go right into a savings account or be used to pay off existing debt, such as credit card payments.
Once you have a budget, you can adjust your spending. The less you spend, the more money you have, which is why categorizing expenses is crucial. By looking at the items you spend your money on monthly, you can compare necessities vs. wants and make better spending decisions.
2. Over-Using Loans and Credit Cards
You shouldn’t live on borrowed money because it could put you deeper into debt if you can’t make payments every month. Some loans are necessary, such as car and mortgage loans, when you can’t afford to pay a huge lump sum. However, other loans aren’t always necessary, and you don’t have to use your credit card for every purchase if you don’t know whether you can pay it off at the end of the month.
Before you commit to a loan, consider whether you earn enough to pay it off. Loans are much more expensive in the long run, so they should only be used for necessities like a house or car; you shouldn’t take out a personal loan to pay for a new pair of shoes you can’t afford with the money you already have in your account.
3. Not Researching Loan Options
As we’ve mentioned, there are some instances when a loan is necessary, such as when purchasing a house. Unfortunately, most borrowers don’t realize that tons of loan programs are available to them, including conventional mortgages, hard money loans, and non-QM loans. While each type of loan caters to a different type of borrower, knowing your options is crucial to helping you save money throughout the life of the loan and can reduce initial upfront costs like your down payment.
In addition to researching loan options, you should also consider different lenders and providers. For example, some people get their mortgage loan from a bank, while others use a mortgage lender directly to avoid the high fees associated with bank loans. You can also look into credit union loans, which may offer better terms for members.
4. Not Investing
When most people think of investing, they think of stocks. Stocks may be risky for inexperienced investors, but there are other investment opportunities, such as retirement accounts. Investing your money can help you build wealth over time; if you don’t start investing your money now, it can’t grow.
That said, many people don’t know where to start investing. A financial advisor can help you determine how to spend your money based on your unique financial situation and risk tolerance. For example, if you don’t want to take on too much risk, you can invest in bonds or a high-yield savings account to help your money grow slowly over time.
5. Not Negotiating Salary
When you interview for a job or receive an offer letter, it’s always a good idea to negotiate your salary to ensure you’re getting paid what you’re worth and can afford your lifestyle. Any time you start a new job, you should research salaries to ensure you’re paid fairly and can cover basic expenses without being stretched too thin.
Additionally, you should continue negotiating your salary throughout your employment, especially if you’ve continuously delivered good work. The cost of living increases yearly, and while you can’t always expect a raise every year, your job should cover most, if not all, of your costs and give you enough left over for healthy savings.
You can get a second job or side gig to earn more if you can’t increase your salary. Of course, the downside to this is working more hours, but it might be well worth it to increase how much money you bring home every month.
Are You Making Money Mistakes?
Everyone makes money mistakes throughout their life. Whether it’s investing in the wrong stock or accidentally overspending, mistakes happen. But, most importantly, you continue to learn from them and review your personal finances every month to avoid overspending.
Ashley Nielsen earned a B.S. degree in Business Administration Marketing at Point Loma Nazarene University. She is a freelance writer who loves to share knowledge about general business, marketing, lifestyle, wellness, and financial tips. During her free time, she enjoys being outside, staying active, reading a book, or diving deep into her favorite music.
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