Keeping track of your finances is a lifelong process requiring healthy, useful habits when managing your finances and planning for the future. Learning to avoid common financial planning mistakes is one of the most important parts of that process. Spending money as soon as you make it can be tempting, but planning for the future is a key part of being financially secure down the line. Here are the most common financial planning mistakes and how to avoid them.
Spending More Than You Save
The most common personal finance mistake is spending more money than you save. Spending money on things that are more of a “want” instead of a “need” might not seem like a lot at the moment — after all, what’s wrong with treating yourself to a meal out once a week? However, over a year, spending $10 weekly on food adds up to over $520. That money is better saved and invested so it can grow over time rather than keeping your local eatery afloat.
Not Setting Aside an Emergency Fund
No one can accurately predict the future. An emergency, whether personal, environmental, or professional, can be one of the most destabilizing things to happen in a person’s life — and close to half of American adults admit that they do not have the funds to handle such a scenario. An emergency fund can help soften the worst blow by paying for living arrangements, medical bills, and more. Experts recommend saving around three to nine months of expenses to prepare for an emergency.
Thinking All Credit Is the Same Kind of Credit
Regardless of how much money you make, you may have to balance various kinds of credit, whether that is credit card debt, student loans, or refinancing a mortgage. While paying off the most expensive thing before everything else seems intuitive, you should prioritize payments with higher interest rates, like credit cards. This ensures you don’t accumulate fees alongside your debt, making you pay more in the long run.
Letting Your Credit Score Slip
Good credit makes it easier to move through the world, allowing you to rent a good apartment or qualify for a credit card. If you miss rent or credit payments, your score gradually dips over time, making it harder to complete milestone tasks (like purchasing a house). Some poor credit even requires outside help, such as a loan or guarantor. Keep a close eye on your credit, even if that means just paying your credit card minimums. Making careful, thoughtful choices will help you maintain a score that’s at least 750.
Not Investing in Your Retirement
Make sure that you can enjoy the money you’ve saved up for later in life. There are several ways to invest in your retirement. First, check to see if your employer has a 401k match program. This means that with every paycheck, a little money will be set aside in an investment fund, with your employer matching contributions up to a certain point. You also may want to invest in an IRA (individual retirement account), which is a good option if you are self-employed.
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