Life is full of financial pitfalls. Even with the best of intentions, it’s easy to make financial mistakes. But it’s not just about the mistakes you’re making — it’s the opportunities you could be missing.
The good news is it’s never too late to recover from these mistakes, and it’s never too soon to learn how to avoid them! Let’s look at 10 of the most common financial mistakes to avoid and how to steer away from them.
1. Going Without a Plan (or a Budget)
One common financial mistake is failing to build a financial plan or a budget.
Your financial plan is your road map to accomplish your financial goals. It’s about establishing SMART (specific, measurable, achievable, relevant, time-bound) goals and an investment and savings strategy to get you there. Meeting with a financial planner is often recommended for a strong start.
Your budget is how you allocate your income every month. A strong budget helps ensure you’re taking care of your needs and living within your means, as well as allocating funds to your wants, debt repayment and investments in your future.
One good rule of thumb to use when establishing a budget is the 50/30/20 rule:
- 50% for needs (housing, car, healthcare, etc.)
- 30% for wants (entertainment, etc.)
- 20% to savings, debt repayment and investments
Depending on your available income, financial goals, and stage of your career, flexibility is important. If you can comfortably allocate more than 20% of your income to savings and investment, you’ll be better off over the long term.
2. Leaving Money on the Table
Does your employer offer matching funds for your 401K retirement plan? Do they offer you the opportunity to buy stock at a discount? Don’t leave free money on the table!
Many employers offer a 401K program as part of your benefits package, and some will match your contributions up to a point. If your employer offers to match your retirement contributions up to 3% of your income and you don’t take advantage of it, it’s like turning down part of your pay.
If you have life insurance or similar benefits through your employer, make sure you list a beneficiary on them. Your benefits package is part of your compensation—you want to ensure you’re maximizing all potential benefits you receive.
3. Foregoing Life Insurance
No one wants to think about their mortality. Don’t let that force you into the mistake of not planning for the security of your loved ones if something unexpected happens.
The average funeral in 2021 is expected to cost between $7500 and $12000. Life insurance will help your family handle the expenses incurred if you pass away as well as ensure they have the resources to get through a difficult transition after you’re gone.
Life insurance is often inexpensive for adults in good health, and the peace of mind it offers is priceless. Knowing your loved ones have the resources to thrive after you’re gone is one of the smartest moves you can make.
4. Making Major Purchases Without Comparison Shopping
When it comes to recurring expenses such as car insurance, consumers often stick with what they have. However, it pays to shop around. Consumers who review their accounts before renewing and comparison shop can often save hundreds of dollars per year! Even if you stick with the same company, review your coverage to see if you’re carrying more insurance than necessary.
5. Maintaining Unused Services & Memberships
How many streaming services do you actually use? Like many Americans, you may not even realize how many recurring payments are coming out of your account. Among Americans who utilize streaming services, the average consumer wastes $348 per year on services they don’t even use.
It’s a good idea to go through your bank account periodically and highlight recurring payments such as gym memberships or streaming services. There are even apps you can download for this purpose. Think carefully about whether you use each service enough to be worth the expense. While each individual payment may only be 10 or 20 bucks, these can add up to hundreds of dollars every year.
6. Choosing Not to Invest in Your Future
Not putting your money to work is a huge financial mistake. The best way to meet long-term financial goals is with a smart investment strategy that takes advantage of not only your 401K but tax-advantaged programs such as an Individual Retirement Account. Where possible, diversify your investment portfolio by participating in programs such as peer-to-peer lending.
The earlier you begin to invest, the better off you’ll be later. However, it’s never too late to implement an investment strategy that meets your long-term financial goals. A qualified financial advisor can help you develop a strategy that balances risk with return based on your goals and timeframe.
7. Buying a New Car
Just because you can afford the payment doesn’t mean you should buy a new car. Cars are depreciating assets, which means they drop in value as they age. A new car loses 20-30% of its value in the first year of ownership. Depreciation slows down after the first year or two, so a used vehicle is usually a better value than a new vehicle.
Many manufacturers offer certified pre-owned vehicles, which are typically two to three years old with low mileage. These programs usually include a full overhaul of the vehicle and a manufacturer warranty. You get the advantages of a new car for a much better value and all you give up is the new car smell.
8. Overusing Credit Cards
One of the most common financial traps, especially for individuals in the early stages of their adult life, is accumulating credit card debt. A credit card is a powerful tool to help build your credit history, but a high credit limit can encourage living beyond your means. Many people don’t realize that the minimum payment generally only covers interest. While many Americans carry debt from student loans or car loans, stacking credit card debt on top of other debt causes much financial stress.
Responsible use of credit cards can provide many benefits, but you’ll want to avoid getting in over your head. However, if you’re already carrying big credit card balances, it’s not too late to recover! Consider using a personal loan or a credit card with a low balance transfer interest rate to knock down those balances. Then find a card with a solid rewards program and a reasonable interest rate to use for everyday purchases while paying it off every month to improve your credit score.
9. Letting Your Credit Report Go Unmonitored
Even if you’re careful with your credit, it’s important to regularly monitor your credit reports and ensure that you’re actually responsible for all the items on them. Identity theft is a growing type of crime, and it’s also possible that a creditor or the credit bureau could make an error that reflects poorly on your credit.
You’re entitled to a free credit report from each of the three credit bureaus once every year, which you can request via annualcreditreport.com. You may dispute any items that are incorrect and the credit bureau will investigate each disputed item.
10. Reluctance to Pursue Financial Education
Most public schools offer very limited education on personal finances, so many Americans get by with what their parents taught them and what they pick up along the way. It’s easy to think you’ve got things handled, but by learning more about financial literacy and best practices, you could avoid many financial mistakes and find your path to financial well-being. You’re already doing so by reading our blog, and we’re so glad you’re here and taking the steps to learn!
The good news is there have never been so many free ways to learn to be a financial maestro! Whether you prefer to read blogs, watch videos or listen to podcasts, educating yourself is the best way to avoid making financial mistakes.
Avoid the 10 Most Common Financial Mistakes
It’s okay to make mistakes; that’s how we learn. It’s always better to learn from the mistakes of others, though. We hope our list of 10 common financial mistakes helps you avoid the common errors so you can financially thrive!
Read more:
Financial Literacy 101: What You Need to Know
The Secret to Paying Off Your Debt Faster
The Journey to Financial Empowerment: 8 Tips to Get On the Right Track
How to Evaluate Your Financial Health in 5 Steps
Better Money Habits: 9 Steps to Developing a Positive Money Mindset
All personal loans made by WebBank, Member FDIC.
The post 10 Common Financial Mistakes (and How to Avoid Them) appeared first on Prosper Blog.