Here we take a look at some of the most common financial mistakes that often land people in deep economic trouble. Even if you’re already facing financial difficulties, avoiding these mistakes could be the key to your survival.
1. Excessive and Frivolous Spending
Great fortunes are often lost one dollar at a time. It may not be much when you’re having a double cappuccino, going out to dinner or ordering a pay-per-view movie, but every little bit counts.
Spending $25 a week in a restaurant costs you $1,300 a year – money that could be used to pay off an extra credit card or car, or to make several extra payments. If you’re facing financial difficulties, it’s very important to avoid this mistake – after all, if you’re just a few dollars away from foreclosure or bankruptcy, every dollar counts more than ever.
2. Never-Ending Payments
Ask yourself if you really need items that require you to pay every month, year after year. Things like cable TV, music services or high-end gym memberships may require you to pay endlessly, but they won’t leave you with anything. When money’s tight or you just want to save more, adopting a slimmer lifestyle can go a long way toward increasing your savings and protecting you from financial hardship.
3. Living on Borrowed Money
Using credit cards to buy essentials has become commonplace. But while a growing number of consumers are willing to pay double-digit interest rates for gas, groceries and a host of other items that run out long before the bill is paid in full, this is not sound financial advice. Credit card interest rates add considerably to the cost of billed items. In some cases, using credit can also mean spending more than you earn.
4. Buying a New Car
Millions of new cars are sold every year, but few buyers can afford to pay for them in advance. However, not being able to pay cash for a new car can also mean not being able to pay for the car. Being able to pay the monthly installment is not the same thing as being able to afford the car.
What’s more, by borrowing money to buy a car, the consumer is paying interest on a depreciating asset, widening the gap between the value of the car and the price paid for it. Worse still, many people change their car every two or three years, losing money with each change.
Sometimes a person has no choice but to take out a loan to buy a car, but how many consumers really need a big SUV? These vehicles are expensive to buy, to insure and to fuel. Unless you tow a boat or trailer, or need an SUV to make a living, it can be a disadvantage to buy one.
If you have to buy a car and/or borrow money to do so, consider buying one that uses less fuel and costs less to insure and maintain. Cars are expensive and if you buy a bigger car than you need, you risk spending money that could have been saved or used to pay off debts.
5. Spending Too Much on Your House
When it comes to buying a house, bigger isn’t necessarily better. Unless you have a large family, choosing a 6,000-square-foot home will mean higher taxes, maintenance costs and utilities. Do you really want to make such a major, long-term dent in your monthly budget?
6. Using Home Equity Like a Piggy Bank
Refinancing and taking money out of your home means giving the property to someone else. In some cases, refinancing may make sense if you can reduce your interest rate, or if you can refinance and pay off high-interest debts.
However, the alternative is to open a mortgage line of credit (HELOC). This allows you to use the equity in your home as if it were a credit card. This may mean that you pay unnecessary interest to use your mortgage credit line.
7. Living Paycheck to Paycheck
In June 2021, the personal savings rate for U.S. households was 9.4%.Many families live paycheck to paycheck, and an unforeseen problem can easily turn into a catastrophe if you’re not prepared.
The cumulative result of overspending puts people in a precarious situation where they need every penny they earn, and where a missed paycheck would be disastrous. This is not the situation you want to find yourself in during an economic recession. In that case, you’ll have very few options.
Many financial planners will advise you to keep three months’ worth of expenses in an account you can access quickly. Job loss or changes in the economy can deplete your savings and plunge you into a cycle of debt. A three-month reserve can mean the difference between keeping or losing your home.
8. Not Investing in Retirement
If you don’t make your money work for you in the markets or through other income-generating investments, you may never be able to stop working. To enjoy a comfortable retirement, it’s essential to make monthly contributions to designated retirement accounts.
Take advantage of tax-deferred retirement accounts and/or your employer-sponsored plan. Understand how long your investments will need to grow and what level of risk you can tolerate. Consult a qualified financial advisor to match these to your goals, if possible.
9. Paying Off Debt With Savings
You might think that if your debts cost you 19% and your retirement account earns you 7%, swapping your retirement for debt means you’ll pocket the difference. But it’s not quite that simple.
In addition to losing the compounding effect, it’s very difficult to pay back retirement funds, and you risk paying high fees. With the right mindset, borrowing against your retirement account can be a viable option, but even the most disciplined planners find it difficult to put money aside to replenish these accounts.
Once the debt is paid off, the urgency to repay it usually disappears. It will be too tempting to continue spending at the same rate, which means you risk going back into debt. If you plan to pay off your debt with your savings, you’ll have to live as if you still had a debt to pay, namely your retirement fund.
10. Not Having a Plan
Your financial future depends on what happens now. People spend countless hours watching TV or scrolling through their social media feeds, but spending two hours a week on your finances is out of the question. You need to know where you’re going. Make financial planning a priority.
The Bottom Line
To avoid the dangers of overspending, start by keeping an eye on the small expenses that add up quickly, then move on to controlling the big ones. Think carefully before adding new debts to your payment list, and remember that being able to make a payment is not the same as being able to make a purchase. Finally, make saving a portion of your income a monthly priority and devote time to developing a solid financial plan.