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I’ve made my fair share of money mistakes. I’ve done some pretty stupid things with money in my lifetime. At one point I had over $50,000 of debt. Those are some expensive mistakes. So while I’m an expert at making mistakes with my money, I feel like I’m becoming a pretty decent expert at paying for them.
Fortunately I have learned a lot from the mistakes I have made. In essence this blog exists because of the mistakes I’ve made and the lessons I’ve learned. This isn’t to say that I no longer make financial mistakes and that I am perfect with my money now. I am not perfect and I still do stupid things every day with money– just a lot less stupid things than I use to.
I wanted to share some common mistakes people make with their personal finances. I am not picking on anyone, believe me, I have made most of these mistakes myself. And if you find yourself in a situation where you are being affected by these money mistakes, I’m hopeful you can look to my experiences for a little inspiration and hope. I’ve been there myself– I am a recovering money mistake-maker.
Here are seven common mistakes people make with their money, including the mistakes I have made.
1. No budget
Without a budget, you are just guessing what is happening with your money. It’s going to be very difficult to live below your means without a written game plan. The budget helps tell your money what to do. Dave Ramsey, a noted financial expert and popular talk radio host, always says that being on a budget will make you feel like you got a raise. Having a budget will make your money work harder and go further.
A budget is where you set your financial goals. It’s your spending plan– it’s how you track expenses, reduce debt, create savings goals, and plan for the future. Not having a regular monthly budget that fits your specific lifestyle is one of the biggest money mistakes you can make.
Solution: Make a new budget every month
Take some time every month to make a new budget and plan for the next month. Know how much money you are making and what you are going to do with it. Don’t just guess and hope that everything will work out. You might get lucky and get away with it for a short time, but eventually it will catch up to you.
Stop living in uncertainty and wondering if your next debit card transaction will clear your account or not, or if there will be enough money after you buy groceries to pay the electric bill. Having a plan is the best way to avoid making mistakes with your money. The budget is your plan.
2. No emergency fund
What are you going to do if something unexpected happens in your life? It will happen. It always does. It’s called life. Even with the best budget in place, something unplanned or unexpected– an emergency– is bound to happen. One of the greatest mistakes I ever made with my personal finances was not being prepared for the unexpected.
If you do not have a solid emergency fund– a rainy day fund– in place, you will most likely borrow on a credit card or have to take out a loan in order to cover the cost of the particular emergency. This can mess up your financial plan and make it more difficult for you to get ahead and reach your future financial goals. I do not recommend using credit cards for emergencies. You can get yourself in a big mess if this is your plan.
Solution: Get an emergency fund
Emergencies and unexpected events can be stressful enough. They are going to be even more stressful if you don’t have the money in place to cover the costs. An emergency fund will help you navigate the situation and avoid making a critical financial mistake in the wake of crises. An emergency fund can make a disastrous situation feel like a minor inconvenience.
A fully funded emergency fund should be about six months of the household expenses. This will help you stay afloat in the case of a job loss or if for some reason you have to take time away from work. If you have debt and you are trying to pay it off, then I’d recommend a smaller emergency fund until you become debt-free, somewhere between $1,000 and $1500. Get an emergency fund in place now– make it a priority. Put it somewhere where you can access it quickly and whenever you need it– a simple savings account or even an envelope in the cupboard will do. Avoid having to finance your next emergency. An emergency fund can help prevent a financial disaster.
3. Using credit cards
Credit card debt is the third largest source of debt in american households today– behind only home mortgages and student loans. Buying things on credit with the potential of paying high interest and large fees if the monthly balance is not paid in full is a risk too many are taking. While I understand many of you are responsible in using your credit cards and do pay them off as you go– avoiding interest and other fees– many others are slaves to their credit card companies and pay large monthly payments and interest, crippling their monthly cash flow. According to Yahoo Finance, credit card debt is the number three reason consumers file bankruptcy.
One of my first money mistakes was signing up for a Target Visa. I swore I would never use it or carry a balance on it. I signed up for it to get a discount on a PS2 and “to build my credit.” Well, that quickly turned into $2500 of credit card debt, which somehow snowballed into much much more. Obviously, I made many more mistakes along the way which exacerbated my credit card debt problem, but having the option to use credit cards is a risk. And I’m saying it’s not worth the risk.
I believe there is more potential to get yourself in trouble when using credit cards than there are benefits to using them. I recommend budgeting and using cash.
Solution: Budget and use cash and debit cards
A debit card can do all the things your credit card can do. And, if it has a Visa or Mastercard logo, when ran as credit it offers the same protections against fraud as your credit card. Nowadays you can even find debit cards that offer cash back features and other rewards. The only difference is that you don’t go into debt when you use it– the money comes directly out of your checking account.
Budget to live below your means and you won’t need to use credit cards to supplement your income. Plan your expenses and only buy the things you need and the things you can afford. Using cash can cause you to spend less because you will feel the pain of the exchange of money more than when swiping credit cards. Even when using a debit card, be prudent, know how much money is being spent and be aware that it is coming out of a checking account.
4. Buying a car you can’t afford
Everybody wants a newer, nicer car. Or at least we all want a car that we like, is reliable, and meets our basic needs. So how do you determine if you can afford a car or not? You have the cash to pay for it.
Car loans are at record highs, according to a story produced by CNBC.com. The average payment on a new car loan is $471 and the average payment on a used car loan is $352. The car payment is one of the highest monthly expenses in our household budget. It can cause serious cash-flow problems.
One of the biggest money mistakes consumers make is buying a car simply based on their ability to afford the monthly payment. Consumers end up asking themselves ‘how much can I afford monthly’ instead of ‘how much can I afford.’ They end up buying too much car with a large monthly payment and get themselves in a financial mess that is difficult to get out of.
My first car was a 2003 Nissan Altima. It cost me about $14,000. It was a great car– it was only 3 years old and had 39,000 miles when I bought it. But I was a poor, college student with a part-time job and living at home. The payment was only $250 and I thought I could afford it. On top of all the other things happening in my life, that car payment became a huge weight around my neck. When I bought the car, I put $3000 down up front and probably had another one or two thousand in my bank account. I think I probably could have gotten a pretty decent little car for a college student with that $4000. I made a big mistake.
Solution: Buy a quality used car with cash
Nobody wants an unreliable, used car that is going to cost them hundreds of dollars every month for maintenance. They are out there, believe me. I have bought two cars with cash in the past couple years. I’m not saying it is going to be easy if you only have a couple thousand dollars available to buy a car, but it is possible. Do your research and be patient. It is worth paying a mechanic a little bit of money to have them check out a car before you buy it (I made that mistake once, too).
Not having a car payment will free up so much room in your monthly budget. What could you do with an extra $300 per month? You could eliminate other debts, fund your emergency savings, begin investing or saving for a home. I realize there is some risk in buying a used car when it comes to maintenance and repair expenses. Most cars will have maintenance and repair costs, but only cars that have car payments will have both. And being in debt on your car is also a risk.
Let’s do the math– if you have the average car payment of $352, you are going to pay $4,224 per year in car payments. Do you think you’re going to spend that in car repairs on a used car? Doubtful.
You don’t have to drive an old, used car forever. You will have several cars in your lifetime. Save up cash and move up in cars as you go. All you need is a car that meets your basic needs for your current situation. Buying a car you can’t afford and taking on a big car payment can set you back in your financial progress.
5. Student loans
Don’t get me wrong, I am not opposed to education. I am a huge proponent of education. I believe investing in yourself is the best investment people can make. Getting a quality education or even an advanced degree can lead to well paying jobs and excellent careers. I just don’t believe you should go deeply into debt to do it.
Student loan debt has now surpassed credit debt as the second largest debt in american households, second only to home mortgages. In many cases the student loan balance is so high, it might feel like a second mortgage. I have spoken with many individuals and couples who have expressed hopelessness when it comes to their inability to repay their student loans– it can feel like a gigantic anchor around their necks. The large monthly payments can put a stranglehold on the household budget and monthly cash-flow. And student loans are not dischargeable in bankruptcy.
Solution: Pay as you go and attend a college you can afford
There are many other options aside from student loans that will allow you to graduate from college and get the degree you want. Those options include scholarships, federal pell grants, work-study programs, and other tuition assistance programs. If you are considering enrolling in a college or university talk with someone at the school to understand your options.
Working during college and paying as you go is also an option if you are unable to find additional assistance. Living at home with your parents while you go to school can also save money. Choose a school you can afford. Most state universities and colleges are going to be more affordable than a private university or attending a school out of state. Maybe consider attending a junior college or a local community college for the first few years before transferring to a four-year school to finish your degree.
Try and think differently than the norm and find alternative ways to get the degree you want. Don’t just accept that student loans are the only way to go. Don’t make them your first option. If you’ve exhausted all your options and done everything you can and you still need to borrow a little bit of money to finish your degree, a couple thousand dollars probably won’t kill you. But do everything you can to graduate from college with a degree debt-free. Your financial life will be better because of it. You do not want to begin your dream job with a bunch of debt.
Debt-Free U by Zac Bissonnette is a great resource for anyone looking to graduate from college debt-free.
6. Too much house
Paying too much for your mortgage or rent will make it nearly impossible for you to live within your means. This is what the financial world calls being “house poor”– meaning too much of your income is going into your housing costs. The mortgage or rent payment is the largest expense in most household budgets. If too much of your income is tied up into this expense, you will have serious trouble financially.
Solution: Make sure your mortgage and rent payments are right for your income
According to bankrate.com, the recommended percentage of household income going toward the mortgage or rent should be twenty-eight percent– this includes your monthly payment, taxes, and insurance costs. Keeping within this percentage will allow you room to accomplish your other personal financial goals.
If you are currently in a situation where you are paying more than this percentage and you feel it is putting pressure on your financial situation, you may want to talk with your bank or loan officer and see if there are any options available to lower the monthly payment. If you are renting and your payment is more that this amount, consider moving to another location that is more suitable for your budget.
7. Doing too many things at once
When it comes to the things we want to do with our money, the list is limitless. We all have financial goals and things we want to accomplish. We want to build up savings, pay off debt, invest for retirement, pay off our homes, give, travel and do the things that make us happy. That is why we make money in the first place– to enjoy our lives and to support and provide for ourselves and our families. When we try and do too much of these things all at once, we dilute our power to achieve them– there is a power in focus. Focusing on one goal at a time is much more effective.
Solution: Set goals and make a plan to achieve them
I love Dave Ramsey’s plan and his seven baby steps. The baby steps allow you to work on one specific financial goal at a time. It is much easier to reach your financial goals when there is a specific plan in place and specific priority given to each goal. Find a plan that works well for you and follow it. Focusing on one goal at a time will give you greater power and greater momentum to accomplish and achieve all your goals.
Making mistakes can be good. It’s one of the ways we learn, grow, and develop– at least it’s the way I do it. I am better now for having experienced the pain and stress of falling on my financial face over and over again. But I’m doing good things now– I’m recovering. If I can recover from the mistakes I have made with my money, there is hope for everyone. If you have been dumb with your money and have put yourself in a less than ideal financial situation, there is still hope– there are ways to work out of it. Keep your head up. Keep your hope alive. Keep doing your best.
It’s okay to make mistakes, just don’t make the same one twice.