10 Money Mistakes To Avoid
August 19, 2011
Sometimes it’s hard to keep track of all the things we’re “supposed” to do with our money. If you’re feeling overwhelmed, it can help to start by focusing on a smaller list of things that you shouldn’t do. The following money mistakes can cost you dearly whether they impact you immediately today or slowly over time. Avoid them and you’ll be better off.
1. Spending More Than You Earn
The root of most financial problems is the inability to control spending. No matter your income level, if you spend more than you earn you will be broke and in debt. Whether you have $10,000 in income or $1,000,000 in income, you must spend less than you earn.
2. Not Doing an Annual Review of Your Finances
It’s “okay” to make a money mistake for a little while if you are unaware of it. Real problems start if that mistake sustains itself for years on end. Sitting down at a specific time every year to review your finances can ward off these problems.
You might notice an extra fee on your cable bill due to a data entry error. Or you can make it a habit to comparison shop your car insurance and home internet costs in order to negotiate for the best rate. They say ignorance is bliss, but it can cost you dearly.
3. Over Paying for Convenience
It’s easy to justify spending money when it is convenient. You don’t plan out your meals and find nothing in the fridge to eat, so you go out to a restaurant and spend enough money to feed you off of groceries for a week. You need your coffee in the morning, but instead of getting up a little bit early to make it for pennies per cup you spend $5 at Starbucks. Paying for convenience is fine, but do it all the time and in excess and you will always wonder why you never got ahead financially.
4. Avoiding Tough Decisions
Sometimes life is tough. Sometimes your income goes down or disappears. Sometimes your bills go up dramatically. During those times you have a choice: you can try to finance the gap between what you make and what you spend, or you can start cutting items from the budget.
Having an argument with your spouse and whether to cut cable or not isn’t fun, so you avoid the conversation even though you could really use $100 per month to buy groceries. At the end of the day if you have the necessities of life: food, water, shelter, clothing on your back, your health, and a way to generate income to live, you’ll be okay.
5. Not Protecting Your Credit Score
A bad credit score can cost you thousands of dollars in interest. People with bad scores are seen as credit risks, there’s no doubt your credit score impacts your interest rates. It might cost you $1,000 on a car loan or $40,000 on a home mortgage to have a bad credit score. That’s a mistake when you can improve your credit score by making your payments on time and lowering your overall debt utilization.
6. Spending Impulsively
A big mistake many people make is buying impulsively. They see something they want (or think they want, thanks to clever commericals), and it is right in front of them so they buy it. A few weeks later they discover they don’t really use what they thought was so important, and have wasted money.
Before making a big purchase, sleep on it. Your emotional craving for the item should die down after a while and you may come to your senses with the realization you didn’t really need it in the first place.
7. Avoiding Preventative Maintenance
Doesn’t it make sense to spend a few dollars now in order to save hundreds of dollars later? Avoiding maintenance is one of the easiest mistakes to make because it doesn’t usually immediately impact you. You avoid some car maintenance and it saves you $300 now, but the engine blows up a year from now costing you $3,000 for it to be rebuilt.
Or maybe you live an unhealthy lifestyle and don’t exercise. It doesn’t cost you much today to sit on the couch, but when you have a heart attack or stroke earlier than you should the cost will be real. Spend the time and money necessary for preventative maintenance and avoid the major costs on the back end.
8. Thinking Everything is an Emergency
It is wise to have an emergency fund handy for when things go wrong. Having 6 to 12 months of living costs set aside really protects you from unemployment or big disasters. But even if you’ve been smart enough to build an emergency fund, you can start to think everything is an emergency. That’s a mistake that can whittle your emergency fund down below what you really need, and when the actual emergency comes along you aren’t financially prepared.
9. Letting Compound Interest Work Against You
Compound interest is a beautiful thing if you are the one with the money being lent out. If you deposit funds into a savings account, you are letting the bank borrow from you to lend to others. They pay you interest for this privilege. On the flip side if you are carrying a balance on a credit card or taking out payday loans, compound interest works against you.
10. Paying Your Bills Blind
A simple mistake to make is to simply pay your bills without looking at them in detail. Every bill you receive has a summary of the charges and then a breakdown showing what you were charged. It is easy for companies to have data entry “mistakes” that throw an extra charge in on your account. If you don’t review the bill it can easily slip past you. While setting up online billpay and automatic payments is a good thing because it helps you avoid late fees, be sure to check the actual statement to make sure you were charged the right amount.
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