It is no secret that many of us struggle or have struggled with our finances before. We could always use more education on how to manage our finances.
Here are 7 of the biggest mistakes that we make that have the largest impact on our financial future.
Not Having a Budget
The first step in solidifying you financial future is to control your spending. Spending more money than you should be saving is the fastest way to sabotage your long term savings.
We have always been shown that the way to communicate our worth is through the acquisition and display of expensive things. The more we make, the more we have to spend to communicate our status to the world. However, many of us have been trying to communicate a status beyond our financial worth. This practice of living above our means could be avoided if we stuck to a budget that would limit our spending.
Sometimes just the act of creating a budget makes you aware of what you are actually spending, and on what. That shock alone can help correct the over spending. So make a realistic budget that satisfies your financial goals and stick to it. Visit my post on creating a Bulletproof Budget for more information.
Loaning Money to Family
Turning down a family member when they ask for money is difficult. Of course we want to help them and we understand their situation and sympathize. However, becoming the family bank can have devastating affects on all of our finances.
Saving money is hard enough to do with our current income and expenses. When you take additional money out of savings, or even go into debt to help a family member, it can have devastating, long-lasting affects. In most cases, the money you loan will not be paid back. If you loan $500, that could have turned into $2,500 over 20 years. Do this multiple times and that amount will quickly add up.
Then there is the idea of tough love. Not giving money to somebody who has gotten into a preventable situation will hopefully change future behavior. Admittedly this is not always the case, but you would have better insight into what their reaction may be. At the very least, you may decide you don’t want to be the enabler anymore.
No Savings or Emergency Fund
Let’s face it, bad things happen all the time and having savings to fall back on is a life saver. Ideally you should have 8 months of living expenses saved in the event you lose your job or have a medical emergency. When we do not have adequate savings and emergencies happen, we make bad financial decisions. You will have to go into debt or borrow from your retirement savings. Both of these decisions are costly.
Using debt will cause you to have to pay interest on the borrowed funds. Also, paying back the debt will hurt future savings. Withdrawals from your retirement accounts significantly hurt your retirement nest egg. There is also an early withdrawal penalty and tax implications from the additional income. Growing your savings is the first step in securing your financial future.
Credit Card Debt
Having credit card debt is a risk to your long-term financial health in many ways. Paying high rates of interest on credit card balances directly affects how much you are able to save for your future. However, I do believe that it is a good idea to have and use credit cards. The caveat is that your balances need to be paid off every month. If the previous steps have been followed and completed, your need for credit card debt will be reduced.
Not Being Aware of What Impacts Your Credit Score
In order to purchase things like houses and cars, it is important to have established credit. Responsible use of credit cards is the quickest way to establish your credit history. See my post about Improving Your Credit Score. Our credit scores impact so many decisions that it’s importance cannot be understated.
Credit is used in everything from renting an apartment to getting a new job. Credit cards are not something that we should be afraid of. We just need to know how to use them carefully.
No Life Insurance or Long-Term Disability
It is difficult for young people to imagine that they need life insurance or LTD. People of a certain age may also not have any or enough life insurance or LTD to be useful. It is always a good idea to have both of these things, regardless of our age. In most cases, basic coverage is included from our employers for free, but I recommend purchasing additional coverage.
If you are under 40, the cost of this coverage may only be $5-$10 a month. The burden that this will remove from our loved ones far outweighs its cost. Buying Long-Term Disability coverage is also very important so your income is not severely affected by any medical problems. Young people and older ones alike may be the victim of an accident that could impact their ability to work. Having a financial safety net is important to you and your family.
No Retirement Savings
The most obvious mistake that people make regarding money is the lack of retirement savings. If you have been anywhere near a retirement calculator, you know you will need $1M+ in retirement to live comfortably. However, the average 35-44 year old has a net worth of about $14K, according to Smartassets.com. To bridge that gap is going to take considerable effort and planning.
The longer you wait, the more compounding you’re missing out on.
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