Top 10 Money Mistakes You Can’t Afford to Make
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I recently met a man who had been financially ruined.
It all started when his health went south and he could no longer work. He lost his house and was living in a small apartment on oxygen with his wife and children. His wife was the sole bread winner and didn't earn enough income.
His faith, dreams and positive outlook on life were shaken. I could tell depression had sunken in. Where he once thrived, he felt all was lost.
Health issues, accidents and job lose happen all the time. You never know when they will strike your family. It doesn’t have to take a natural disaster to send your situation into a tailspin of devastation.
Many American’s live paycheck-to-paycheck where missing a single payday would cause serious money problems.
Let’s take some time to talk about mistakes you can avoid now to put your family in a better financial situation so that when unfortunate circumstances show up, big or small, they don’t knock you into financial ruin.
Mistakes You Can’t Afford to Make
Mistake #1: No Emergency Fund
Nothing can sink your financial situation worse than being unprepared for an emergency.
None of us are immune from this, so you need to plan now for what you will do to pay for the inevitable.
A credit card is not a good emergency plan. A credit card can put extra stress on your already strained situation.
It’s best to start with $1,000 or 1 month of living expenses (whichever is more) for your emergency fund. Keep this money in an account separate from your everyday spending or money you are saving for a vacation.
You don’t want to dip into this money unless a true emergency arises, so don’t mix it with money for bills. Pizza is not an emergency. Christmas isn't an emergency either.
Mistake #2: Not Budgeting
You shouldn’t look at budgeting as putting limitations on your spending, rather it’s creating an intentional plan for your money.
Without a budget your money will wander right out of your hands and into someone else’s.
If you don’t have a plan for your money, someone else will. Why give all your money away and make someone else rich?
If you need help getting your budget started, try my 5-Day Challenge, From Busted to Balanced. Not only will this challenge help get your budget going, it’ll help automate as much of it as possible to make it easier on you.
Mistake #3: No Plan for Big or Irregular Expenses
Your budget shouldn’t just include regular monthly expenses.
We all have irregular expenses that lay dormant for months or even a year. We forget to plan for them until they all the sudden ambush us and break our budget.
These are things like membership or subscriptions, holidays and birthdays, car maintenance, and many more.
You might also be planning a vacation, home renovation, or need a better car in the next couple of years. Planning ahead for big expenses will allow you to avoid debt and keep your spending within your means.
Taking the 5-Day From Busted to Balanced Challenge will help you identify and plan for these expenses in the easiest way possible.
Mistake #4: Relying on Credit Cards
Just because most merchants have made it easy to buy anything we want by putting it on a credit card doesn’t mean it’s a good idea.
There are several reasons you should avoid credit cards; here are just a few:
- Credit card companies don’t care if you lose your job or someone in your family gets sick and you suddenly have an obscene amount of medical bills. They still want to get paid.
- There is no emotional attachment to money spent on credit cards, so studies suggest items purchased with credit cards are not as highly valued.1 In other words, if you buy a new lamp, you’ll like that lamp better (value it more) if you paid cash than if you paid with a card.
- Likewise, because of the emotional detachment from credit card spending, studies show that consumers spend more than they would if they used cash.2 In other words, credit cards (even debit cards) encourage overspending.
- Studies have shown that consumers are more likely to purchase unhealthy food when they use credit cards. This is because they aren’t as concerned with what makes it into their cart when paying with a card and are more selective of what they buy with cash.3
- Points won’t make you rich. None of my wealthy friends became wealthy off points they accumulated. Points are a gimmick to get you to spend more. With the idea of a reward attached to spending, you are again more likely to overspend.
- The same goes for cashback rewards. Just another gimmick to get you to spend more. If you aren’t paying off your card each month (or get into a situation where you’re no longer able to pay in full) you cancel out all your rewards with the interest you pay.
Rather than use credit cards, buy things the good ‘ol fashioned way and save up and buy it with cash.
Mistake #5: Overspending
Overspending isn’t always related to the use of credit cards. You can easily overspend with a debit card or even cash.
Overspending happens for a variety of reasons; impulse buys, keeping up with the Joneses, a poorly planned budget and shopping addictions (among others).
The key to stop overspending is to recognize that you have a problem and identify what triggers your overspending.
If you overspend at the grocery store, what gives you the “grab-n-drop-syndrome”? (You know, where you grab something off the shelf and put it into your cart without much thought.)
Would it help to create a meal plan and bring a shopping list? Or would it help to stuff a snack in your glove box so you’re not ravishingly hungry as you walk up and down the isles?
If you overspend online, maybe you could unsubscribe from mailing lists from stores that tempt you into purchasing from a sale when you don’t need to.
Mistake #6: Getting Behind on Bills
Typically, getting behind on bills isn’t anyone’s intention. If you fall prey to the above mistakes, you increase your chance of getting behind on bills.
To avoid getting behind, start working on getting ahead.
The most important bills to get ahead on are your living expenses, like housing, utilities and food. If you’re working on paying off debt, I recommend using a different strategy.
Part of getting ahead is having an emergency fund and sinking funds (as discussed above). Another way to get ahead is to gradually pay an extra amount on your bill. If you can have a credit on your bill, it gives you a buffer if you miss a paycheck, or your paycheck isn’t as much as you need.
This works especially well for those living on variable income, where you don’t know if you’ll be able to make a full payment next month.
Here are some steps you can take to get a month ahead on bills:
- Choose a bill you’d like to get ahead on (just work on one bill at a time).
- Pay your bill when it’s due as you normally would but add an extra 50% to your payment.
- On your next paycheck, pay another 50% toward your payment. (If you can't afford to on your next paycheck, try to on your next payment.)
Mistake #7: Buying a House Too Soon
There’s nothing wrong with renting for a while to save to buy a house. Even if all your friends are going out buying a house, it doesn’t mean you are ready for the purchase (and maybe they aren’t either).
In most cases, it’s much better to save your down payment and pay off as much other debt as you can before taking the leap into home ownership.
If your circumstances permit, I’d encourage you to buy a house. Just make sure you’re in the best position possible to avoid losing your house a few years down the line.
Home ownership doesn't only include a mortgage. Be sure to consider any taxes, insurances and maintenance fees on the home. After all, if something breaks (and it will) you no longer have a landlord to call to make repairs.
Mistake #8: No Insurance
Insurance is so important to protect your family. I know there are cases where you might feel insurance is prohibitively too expensive, but there are some insurances you should make room for in your budget.
Your emergency fund should allow you to pay for small emergencies, but here are some insurances you should consider if you don’t already have coverage:
- Health Insurance – to cover anything from well-care visits to major medical expenses. If this is cost prohibitive, look into programs that will help get your family covered.
- Life Insurance – Specifically Term Life. Think of your ability to not only cover the cost of funeral expenses but also the ability to pay bills if a bread winner should pass away. Likewise, consider the cost if you have a stay-at-home parent who passes away. If are suddenly in a position where you need child care, you'll want to have enough insurance coverage to help your family. Insurance is not an investment, it’s simply to protect you.
- Disability Insurance – Disability Insurance will protect you if you lose your ability to earn income due to a short-term disability (like having and recovering from surgery) or long-term disabilities where you may be physically impaired and unable to work.
- Property Insurance – Once you own a home, you’ll need to have insurance to protect your home from catastrophes like damage, theft or other lose. Property insurance could also include renter’s insurance and auto insurance.
The best place to find good insurance is through a trusted insurance agent. Be sure to shop around for the best rates. Employer rates are a good place to look but may not always be your best option, so be open minded to looking at rate through an agent. If you need help finding an agent, try Dave Ramsey's ELP service.
Mistake #9: No Retirement Plan
No matter how old you are, you need to start saving and planning for retirement now.
The surest way to get yourself into trouble with your retirement is to believe you have plenty of time. Unless you’re in your early 20’s and off to a good start with retirement, you really don’t have plenty of time.
Your retirement savings should be able to replace 70%-90% of your current salary. You’ll be in good shape if you’ve also paid off all your debt, including your house, by the time you retire. Compound interest will work more to you advantage the sooner you’re able to start saving.
You can try this calculator at NerdWallet to see how you’re retirement goals are coming along.
Mistake #10: No Will
Believe it or not, not everyone realizes that having a will directly relates to your financial planning.
Your will is there to help your family decide how to divide up your assets after you pass away (among other things).
You will assign someone as a beneficiary who will oversee handling your assets. You may also consider having your assets moved into a Trust Fund and divided up incrementally over the course of several years. There are several options for deciding your will, which should be discussed with an attorney.
Even if you don’t feel like you have financial assets, you need to decide who will care for your children in various conditions if one or both parents pass away.
When we met with our attorney to plan our will, there were several things the attorney had asked us about that I had not thought of. Professionals are there to help you fill in all the blanks so all of your wishes can be met.
Start Planning Now
Now that we’ve identified some of the worst financial mistakes, it’s time to chop away at them and work on creating a plan to move your family toward the best possible financial outcome.
Decide what would be best to work on in your unique situation and refer to the recommended reading throughout this article to discover ways you can improve and move in a positive direction.
Start with an emergency fund and get appropriate insurances in place. Work out your budget and reign in your spending habits. Then you’ll be in great shape for planning your future.
Have you found yourself guilty of any of these mistakes? What did you do to turn your situation around?