Ideally, everyone would like to live without any financial stress, although this is much easier said than done. However, when it comes to handling personal finances, many people run into common personal finance pitfalls that negatively impact their financial health and ruin their financial freedom. Many of these mistakes are easy to make, so it’s important to avoid them.
Fortunately, it’s fairly easy to avoid making many of these mistakes as long as you’re aware of them. Sometimes it just takes a few simple changes to handle your finances and to put yourself in a much better position. Plus, as time goes on, these changes will help you save more money, reduce your debt, and live with much more financial freedom. Here are 10 of the most common personal finance mistakes to avoid.
1. Living Paycheck-To-Paycheck
Far too many people make the mistake of thinking that, as long as they’re earning a certain amount each week, they can also afford to spend the same amount. Although it can be fun to blow some money now and then, blowing every single paycheck will force you into a position where you’re constantly on the edge of going broke and having to live paycheck-to-paycheck.
One should learn to save effectively and stop relying on each paycheck to get through the month. Opening a High-Interest Savings Account and putting away a significant portion of your earnings will help you avoid overspending and set you up for a better financial future. You might also want to cut down on your living costs. For instance, if you earn $3000 a month and spend $1500 on rent and utilities, you should find a cheaper apartment or even consider staying at a shared home for a while.
2. Paying Full Price For Everything
Another common finance mistake many people make is paying the total price when they don’t need to. If you want to save as much money as possible, you should always look for cheaper deals on everything you buy. However, even if you occasionally pay the total price for things, you should avoid doing it constantly.
This is particularly important when it comes to major purchases such as a home or car, especially as you can haggle these prices down by thousands. However, even when it comes to minor purchases such as clothes and electronics, you should wait a few months for seasonal sales. This way, you can take advantage of any discounts and cashback offers available to you. This will help you save more money and reduce how much you spend each year.
3. Using Payday Loans
No matter what kind of financial position you’re in, you should avoid using Payday Loans or Cash Loans. Many companies offer these loans and make them sound appealing. You can get the money instantly without any checks and can use it for whatever you want. However, they also come with many downsides.
Although Payday Loans are easy to get, they also come with excessive interest rates. That means that if you can’t pay them back rapidly, you’ll end up paying far more than you need to. Some people end up losing a lot of money by relying on these loans when they don’t need to. Suppose you’re desperate for a quick loan. In that case, it’s much better to borrow from a friend or family member than to use an instant cash loan from a predatory lender.
4. Allowing Debt To Accumulate
Many people end up with various debts that they need to pay off, from student loans to mortgages. Sometimes these loans are essential for advancing your life and financial situation, so you don’t necessarily need to avoid them. However, if you don’t take care of your debt, it’ll accumulate fast.
One of the biggest mistakes you can make is taking on more debt than you need to. For instance, many people end up overspending on credit cards or even financing purchases such as their phone or laptop. Both of these things should be avoided if you’re already dealing with mountains of debt. What’s more, you should try to clear your debts as quickly as possible instead of paying the minimum payment each month. You might want to take on your lowest debt first or tackle the one with the highest interest payments.
5. Excessive Spending On Non-Essential Purchases
It can be tempting to start buying all kinds of things you don’t need when you’re earning money. Unfortunately, these costs can quickly add up from expensive coffee to luxury purchases like clothes and gadgets if you’re not paying attention to your finances. As such, you should try to limit unnecessary spending as much as possible.
That doesn’t mean that you can never make a leisure purchase again, just be smart about it. For example, instead of buying new clothes every month, wait for big sales and treat yourself after you’ve spent months saving up. You might even want to make a weekly budget with a little wiggle room for unnecessary but enjoyable purchases.
6. Not Keeping An Emergency Fund
Even if you’ve got the hang of weekly budgeting and you feel like you’re on top of your finances, things can quickly go wrong if you’re hit with unexpected costs. For instance, you might end up having to pay hundreds of dollars for home repairs or thousands of dollars in medical bills. That’s why it helps to keep an emergency fund.
An emergency fund is a significant chunk of money that you keep in a savings account in case anything goes wrong. Not only will this make you act smarter when it comes to saving money, but it can also be a lifesaver when you encounter an unexpected cost. Therefore, it would be best to start building an emergency fund as soon as possible as you never know when you might need it.
7. Paying For Unnecessary Subscriptions
Subscription services are all the rage these days. Many people subscribe to entertainment services such as Netflix, Amazon Prime, Disney Plus, Spotify, Hulu, Apple Music, and even various apps and websites. This also includes monthly payments for things like gym and club memberships.
Although many of these services offer great deals for what they give you, you should avoid signing up for too many subscription payments. These take money from you monthly and, if you’re not using them to their full potential, you’re losing money for no reason. It can also be tricky to cancel them if you don’t get on top of it fast. While you don’t need to cut every subscription out, try to limit yourself to the ones you use the most and save money by eliminating the rest.
8. Not Using The Best Savings Account
Everyone should have a Savings Account. This can encourage you to stash your money away safely instead of leaving it in your Current Account, where you’re more likely to spend it. More importantly, a Savings Account will give you interest back on all the money you save, meaning you’ll earn extra cash with no effort whatsoever.
With that said, many people make the mistake of using a lackluster Savings Account. Many people use the basic Savings Account offered by their bank. Instead, they should be looking for one with a higher interest rate. Whether you want to put your money away for a few years or have an open Savings Account that lets you take money out of it whenever you want, make sure you look around and find the one with the highest interest rate possible.
9. Not Investing
Another major mistake many people make, especially young people, is by failing to invest money in anything. Although earning money and saving it is great, you can make your money go a lot further. You can do this by putting your money into appreciating assets instead of leaving it lying around and letting it devalue due to inflation.
There are many appropriate routes to investing. For instance, you might want to start contributing to a pension, which can set you up for minimal financial stress after retirement. You could also consider investing in stocks, bonds, and even cryptocurrencies if you want a lucrative investment opportunity.
10. Overpaying For Groceries And Utilities
Certain essential costs can’t be avoided, such as your water bills, gas bills, electricity bills, and weekly grocery shopping. However, since you’ll need to pay for these things every month, you should make sure you cut the costs wherever you can and save as much money as possible on them.
Many people find that they save hundreds simply by switching their energy, heat, or even internet provider to a cheaper option. It would help if you also looked into cheaper ways around your mobile and TV bills. When it comes to groceries, try to buy staple foods in bulk and avoid expensive brands in favor of more affordable alternatives.
Suppose you want a more prosperous, less stressful, and more financially stable life. In that case, it’s crucial to avoid making any significant financial pitfalls. These are ten of the most common financial mistakes people make and, by learning to avoid them, you’ll set yourself up for a much better future, financially speaking.