Financial Mistakes People Make (And How to Avoid)

Financial Mistakes People Make (And How to Avoid)

Can people make ridiculous financial mistakes? Of course, it is a daily occurrence all across the world. While many of these are commonly made by young people, they can be made by people of any age or walk of life. Some of these can actually look pretty funny to those who have mastered their personal finances. In the rest of the text, you will read what those mistakes are and how you can avoid them.

1) Many don’t make a budget and regularly spend more than they earn. Budget issues can lead to nightmares, anxiety, depression, and a sense of hopelessness. To prevent this from happening, you need to learn to make a budget. How does it work? The simplest way is to take a pen and paper and write down your basic monthly expenses such as rent, food, clothes, debt payments and insurance. Then write down your income. Subtract the difference to see what is left. Put that into an emergency savings fund for sudden repairs. Pen and paper has its limitations. You might be interested in trying out our free web based budgeting software.

2) Inexperienced people (aka young people) take a “that won’t happen to me” attitude towards back luck. But life does happen, such as breaking your leg at a trampoline party. In order to avoid tough choices (like paying rent vs fixing your broken leg), it is necessary to create an emergency fund. Every month, you should set aside money for emergencies so that you have enough money in case of a major breakdown.

3) Credit card debt can easily get out of control. Some people carry 10+ credit cards with them at all times! High credit card debt means high interest payments. It is funny because that $300 pair of shoes you just bought will cost you more like $600 over 10 years if you only make the minimum payments. This is super fun for the credit card company. Again, NOT fun for you if you are actually doing the math. To avoid paying high interest, see point #1 about building a budget. If possible, pay off your credit cards each month. If that isn’t possible, look into the avalanche or snowball approach to eliminating debt

4) A mistake that young people often make during their college years is to take out a huge student loan for a degree that has no return on investment. They don’t realize it is money they owe, and it’s serious. Some schools cost more than others, and some degrees have better job prospects than others. 

There’s an old joke: Engineers say “such and such”, Lawyers say “such and such”, but Sociologists say “would you like fries with that?”

When it comes to going into debt for school, make sure it is very intentional and you have a solid plan for paying it back. In some professions such as medicine and social work it is possible to get your loans cleared if you work for a public institution or not for profit for a certain number of years after graduating.

5) Many people believe that they don't need health insurance, so they don't bother to pay for it. The idea is “I’m not sick so why pay for it”. The problem is, like any insurance, you don’t really need it until something goes wrong. If you don’t have it when you do need it, it is too late. In the US, even the smallest health problem can be insanely expensive to pay for out of pocket. It is hard to find the humor here where people can’t afford to pay for the doctor or a medicine. 

6) Another big mistake young people make is not contributing to a retirement fund. The younger you are when you start saving the more that time is on your side in terms of compound interest. That said when you are in your 20’s thinking about life in your 60’s seems impossibly far away. However, getting disciplined about saving in your 20’s is one of the smartest financial moves you can make.

7) Lending money to friends and family is a bad idea. Surely it seems acceptable at first glance, but there is a famous Shakespeare quote from Hamlet: “neither borrower nor lender be”.

Basically it means you will be happier if you stay away from lending people money (and also taking on debt). Mixing friends or family with finances can be a serious mistake that can threaten to damage the relationship. If you have to, make a contract and get it in writing. Co-signing is another option but you can be stuck paying their debt if they are unable / unwilling to pay. Better yet, help them establish credit and get a loan from their credit union. 

8) Borrowing from your retirement plan - this can be necessary in emergencies, but not for spending on a fancy car or vacation. In other words, consider your retirement funds as expressly off limits until retirement. You tell yourself that you will pay back the amount quickly, but sometimes that never happens. You can actually get in trouble credit wise if you miss a payment.

9) You bought too big of a house and are now “house poor”. This happens when you buy a bigger house than you need, so you have higher expenses to pay every month, and in addition, you have to pay taxes, and the tax is higher if the house is bigger. To avoid this, you need to buy a house that is right sized vs over sized for your family. That way you will have lower housing costs and more flexibility in your budget.

Conclusion: These are just some of the mistakes that happen due to the carelessness when it comes to money.

The post Financial Mistakes People Make (And How to Avoid) is part of a series on personal finances and financial literacy published at Wealth Meta. This entry was posted in Financial Literacy
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