Your mistakes can be a great learning opportunity. Fortunately for us all, so can those made by others. Save yourself time, money and the headache by avoiding some common financial pitfalls. While this is certainly not an exhaustive list, we’ve put together a quick rundown of some major no-no’s when it comes to your finances.
Not building an emergency fund
We know, it’s not the most exciting endeavor, but you’ll thank yourself later if (read:when) you find yourself in need. According to Forbes, 78% of Americans are living paycheck to paycheck. In other words, they can barely cover their monthly expenses. This means they have a higher chance of being impacted by an unexpected turn of events.
An emergency fund isn’t just a nice-to-have. Having a cash umbrella stashed away is a necessity to help shield you on a rainy day. But exactly how big of an umbrella are we talking? The general reference for years has been to save for 3-6 months in expenses.
However, more recently, some financial experts have changed course, recommending that people simply save what they can. Examine your personal budget and determine what you can comfortably afford to set aside. There’s certainly no one-size-fits-all solution, but saving something is better than nothing at all.
Putting your money in one place
Once you’ve saved a sufficient emergency fund, you can get a little creative. When it comes to finance, diversification is your friend. While it’s important to have money that is easily accessible, dumping large amounts into savings is never a good idea.
You want your money in several different places, doing several different things. Do your research to determine which financial tools will work best for your current circumstances and goals. You can also speak with one of our financial professionals to help you understand your best options.
Ignoring your credit report
Your credit score is a measure of your financial health. It provides a condensed snapshot of a bigger, more in depth picture. By monitoring your credit report, you can easily identify and rectify any threats to your credit.
Even if you don’t notice anything unusual, it’s a good idea to check in with the credit reporting agencies (CRAs) periodically to verify the accuracy of all entries showing up on your credit report.
By law, you are entitled to one full credit report per year from the three major CRAs which you can request online, by phone or by mail. If you happen to come across anything inaccurate or suspicious, you can open a dispute with the associated credit bureau.
Living above your means
It’s easy to find yourself in over your head with so many opportunities for consumption. One of the most effective ways to ensure you live within your own financial capacity is by budgeting.
Budgeting is a great tool to help you better align your expenses with your income. To get started, you’ll first need to outline your monthly income and expenses.
Next, you’ll want to separate your fixed expenses from variable expenses. If your finances feel tight, this is your chance to skim down on non-essentials. Once you determine how much additional wiggle room you need, you can identify opportunities to expand that space.
That expansion may come with some sacrifice – one less dinner date with friends, a pause on deliveries from your favorite online boutique, or even delaying major travel plans for a year or two. Not willing to subtract? You can always consider adding more income to the equation.
Whichever route you choose, it’s important to create a healthy balance between what’s coming in and what’s going out.
Making minimum payments on high-interest debt
While minimum payments are designed to be manageable, you will pay more money overtime if you approach debt this way. Interest for most lending accounts accrues daily, which can prolong your repayment timeline if not managed properly.
By paying a small amount more than the minimum payment (even as low as $5), you can pay down your principal balance faster. So if you want to pay less on borrowed money, this is the best route to take.
As your account balance goes down, the amount of daily interest accruing goes down as well. Also, your payments become increasingly effective since more goes to principal rather than interest over time.
As you continue to learn more ways to effectively manage your money, know that every situation is unique. What works for one person may not be what makes sense for you.
Take the time to examine any advice and only implement what can logically be applied to your own finances. Most importantly, never stop exploring new ways to expand your own personal wealth.
