Common Financial Mistakes and How to Avoid Them
Financial management might not be the most exciting topic, but managing your finances can lead to rich and interesting opportunities. Financial management can grant you the freedom to pursue your dreams without the burden of debt that comes with spending on impulse.
In this article, we’ll cover poor financial decisions that people often make. We know that life happens, including debt. If it happens to you, avoiding these pitfalls can help you lighten your load. Read through this list to find ways of bettering and maintaining your financial health.
1. Overspending and Living Beyond Your Means
One of the most common money mistakes to avoid is overspending. Overspending can easily happen in small ways, snowballing until the burden of the cost of your lifestyle is overwhelming.
It’s easy to overspend. We can shop from anywhere. You could purchase a pair of socks from the depths of the Grand Canyon if you were so inclined and had good enough service. But too much spending can result in a lot of stress when paying your bills.
Overspending on all the little niceties that life offers us isn’t worth losing sleep over. Here are some signs that overspending is affecting your life:
- You aren’t paying off your credit card balance every month
- You’re struggling to pay bills
- You’re not saving any money
- Your bank account is at zero
- You’re hiding your shopping habits
Chronic overspending is not an unsolvable problem. There are three strategies that can be deployed to help get your spending under control.
- Create a budget: Look at all of your debt, your income and recurring expenses and decide how much you can spend every month.
- Prioritize your needs versus wants: Do you really need to pay for streaming services? Can you borrow that book you want from the library rather than buying it? Stop and think about every purchase before you get your wallet out.
- Develop smart shopping habits:
- Make a list for all your shopping and stick to it.
- Pay in cash. If you’re going out shopping, paying in cash is proven to make you spend less.
- Don’t fall for the discount stickers. Just because something is on sale does not mean it’s free. If it’s not on your list, it doesn’t make the cut.
- Get store apps and use coupons. If you’re shopping for a big-ticket item, store apps may offer you a discount on something you’re already in the market for.
- Give your online cart a break. Before pressing the purchase button, leave the site for a day or two. You may find that you don’t even want the purchase that badly when you return.
- Check your subscriptions. Make sure a subscription you signed up for months ago and forgot about isn’t charging you monthly by carefully going through your credit card’s account activity each month.
There are so many more ways to become a thrifty spender without living like a hermit. Often, living more frugally means living more creatively. It can be tempting to dwell on your worst money mistakes rather than focus on finding a solution. As with any betterment goal, it helps to keep an open mind as you work toward your financial health.
2. Lack of Emergency Fund
Covering three to six months' expenses, an emergency fund can be the buffer between you and falling into debt. Putting money into a high-yield savings account on a regular basis will ensure that your money is both keeping up with inflation and there for you should you lose your job or encounter health concerns.
As a priority, an emergency fund often ranks even above paying off debt because emergency funds can often prevent a household from falling into more debt. To determine how much you need to save, look at your monthly expenses and carefully decide how much will cover three to six months. You don’t have to remember to save each month. Set up automatic saving transfers with DCU’s digital banking. For more tips on building your emergency fund, check out this article from DCU.
3. Neglecting Retirement Planning
While many of us cannot believe we will ever grow old and retirement can seem impossibly far away, failing to put money in a retirement account is one of the most common poor financial decisions. Retirement planning allows you to put money aside and benefit from tax breaks.
Whether you’re saving via a 401K or IRA, putting money in retirement funds regularly and resisting the temptation of even borrowing from the accounts is key to financially preparing for retirement. Here are the basic steps to take to keep your financial future healthy:
- Start early and maximize contributions: Check out DCU’s 401K calculator to see how much you should be contributing each paycheck
- Diversify your investments
- Regularly review and adjust your retirement plan
Don’t be afraid to reach out for help when you are starting a retirement plan. DCU offers plenty of retirement resources such as calculators and education to help you decide on ways to invest your savings.
4. Mismanagement of Credit and Debt
Managing your credit and debt shouldn’t just be about paying off as much as you can when you can. It’s important to understand credit and debt. Know what the interest rate is on the debt you owe. Pay off the debt with the highest interest rate first.
Avoid common financial mistakes made by mismanaging debt by following these three rules:
- Pay bills on time
- Keep credit utilization low
- Create a debt repayment plan
If you need help coming up with a payment plan, check out the BALANCE Program. Offering one-on-one counseling and debt education this program has helped many people find solutions to their financial woes.
5. Lack of Financial Planning and Goal Setting
If you’re worried about common money mistakes to avoid, coming up with financial plans with actionable goals will help you stay out of the red. When you set up a financial plan, you’re setting up a strategy to meet your financial goals which can be anything from saving for a house to building an emergency fund.
It can be difficult to interpret what to do with your money first. When you take a step back and assess your financial situation as well as what you want your future to look like, you’ll be able to get started with setting attainable financial goals.
Here are the basic steps to start your financial planning.
- Assess your current financial situation: take account of your debt, your income and expenses.
- Establish realistic goals: Follow the “SMART” method. Make your goals specific, measurable, attainable, relevant and timely.
- Develop a comprehensive financial plan: Discuss and assess your long-term financial goals and decide on which financial services you’ll need to achieve them.
6. Failure to Save and Invest
Whether you’re investing in the money market or you’re purchasing CDs from your credit union, it’s important to put your money out there and make it work for you. Investing your money gives you returns, which in turn also make money. If you fail to invest your money, you may be missing out on large sums of income.
This is one of the most common financial mistakes as many are worried that investing their money will end in them losing their hard-earned funds. However, there are many low-risk or even insured investments. Here are a few techniques for successful saving and investing:
- Set up automatic savings: Don’t rely on your memory. Pay yourself with automatic bill pay when you set up an automatic savings transfer. This can be done through DCU’s digital banking.
- Understand different investment options: What’s the difference between a CD and an IRA? What is a mutual fund and how can it diversify your portfolio? These are actually relatively simple questions. The answers to your investment questions are attainable and your questions don’t have to be a hurdle to investing your money.
- Diversify your investment portfolio: Don’t put all your eggs in one basket, as the saying goes.
7. Ignoring Insurance Needs
It can be difficult to dish out money every month for something you can’t see or feel, but if something goes wrong, the financial burden will quickly make it obvious that not having insurance is one of the worst financial mistakes out there — but one that’s easy to avoid!
An important and recurring theme of financial planning is preparing for the unexpected. Make sure you’re not underinsured and that you’ll be covered should you need to stay in the hospital or a tree limb falls on your parked car. That brings us to the most important insurance policies that you should prioritize: health, auto and life insurance.
Insurance plays the same role as an emergency fund but on a higher scale. No one wants the worst to happen, but when things don’t go as planned, insurance can help you avoid financial turmoil.
8. Neglecting Tax Planning
You need to know what your monthly expenses are. The same goes for what you’re going to have to pay for taxes. Plan ahead and don’t get caught off guard by unexpected payments to the state and federal government.
Here are three effective strategies for tax planning:
- Understand tax laws and regulations: Are there ways your tax regulations could benefit you?
- Maximizing deductions and credits: Don’t forget to keep the IRS updated. Details such as college debt or a new marital status could affect how much you have to pay.
- Seeking professional guidance: Taxes are complicated. Paying a professional could save you money on deductions in the end.
9. Lack of Financial Education
Do you want to know how to avoid money problems? Get to know your money! It’s not boring. It’s not stressful. Your finances are the key to achieving all sorts of dreams and goals.
Knowing how your money works and how to invest it isn’t as difficult as you might think. Check out DCU’s financial education center to read about the basics. The learning doesn’t have to stop with DCU. There are so many free resources out there on financial education.
- Books: Check out digital or paper financial literacy books from your local library.
- Subscribe to Youtube channels or podcasts for infotainment that will add confidence to your financial literacy game.
- Contact a financial counselor to make a game plan. Call a counselor through DCU’s BALANCE Program.
- Take a financial literacy workshop or enroll in a program. The internet is ripe with information. Just be sure you’re using smart shopping habits and really consider if you need to spend anything on these programs. There are many workshops out there that will not ask for a credit card number.
Moving Forward
We all make mistakes. That’s a rule. Now, what we do after making mistakes is up to the individual. If you’ve learned anything from this article, it’s probably something along the lines of “save, don't spend” and “be prepared.”
However, we also hope you’ve learned that avoiding common money mistakes doesn’t have to be a chore. Building up an emergency fund and watching your savings grow can be a delight. Finding ways to cut spending by using what you have or borrowing from others can stir your creativity. It’s hard to break habits and course correct after making mistakes, but once you start achieving your financial goals, you’ll find that all the work that you put in will be worth it.
Please note, membership is required to open a DCU Checking or Savings Account. Visit our membership eligibility page for more information.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
