This article discuss the 5 biggest money mistakes that you and I have made. We also look at ways to fix money mistakes on the journey to financial independence.
1. Not Keeping a Budget
Perhaps the biggest money mistake that people make, is not keeping a budget. Keeping a budget, lets you know what money you are bringing in as well as where it all goes.
Without a budget you might still be able to pay your bills and buy things but you have no way of keeping track of your financial health. A budget makes it easy to find ways to shift your spending and savings to help you achieve your goals.
There are tons of different ways to keep a budget, spreadsheets, notebooks, apps, websites, I guarantee there is one that will work for you. I personally use a combination of my free budget binder, a spreadsheet and Mint/Personal Capital to keep track of my budget and net worth.
Don’t be afraid to try different methods until you find the one that works for you!
2. Not Paying Yourself First and Saving
A recent survey by GoBankingRates found that 69% of people have less than $1000 dollars in their savings account, and even more shocking, 34% don’t even have a savings account.
A savings account is a must. It can buffer the impact of unexpected life events such as job loss, emergency home maintenance, and car repairs. Having an emergency fund of at least $1000 is a great place to start, however you should be contributing to it consistently until you have a more substantial amount. Experts typically recommend you have 3-6+ months of living expenses stashed away in your emergency fund.
Once you have your emergency fund lock down, you can use your savings for bigger purchases; such as vacations, a car, or home improvements. You could also transition the money that you had been putting into savings and start investing it.
3. Not Investing Early
The best time to start investing for your future is yesterday, but since we live in the present, today is the second best day.
The more time you give your investments to grow, the more you can take advantage of compounding interest. I run through the whole principle of compounding interest and investing early in this article.
Basically the sooner you start investing, the sooner you start earning interest, and the sooner you start earning interest on your interest.
If you want to retire, start investing early, even if it is just a few bucks a month. For retirement, it is best to use tax advantaged accounts such as a 401k, IRA, or Roth IRA, to really get the most out of your money.
One of the simplest ways to start investing is through apps like Acorns. Acorns rounds up your transactions and transfers the difference into an investment portfolio. One of the great things is that there is no minimum to the Acorns account, so you could even use it to start investing before you meet the minimums for larger investing companies
4. Not Paying Off High Interest Debt
Debt can ruin your financial health and be a burden on many aspects of your life. Whether its credit cards, student loans, car loans, collections or any other type of debt, it is not doing you any favors.
The more debt you carry, the more you money you lose to interest payments and fees.
Set up a plan to pay off your debt to set yourself up for a better financial future. Both the snowball and avalanche are great plans for repaying debt.
Destroying your debt is not easy and it will require sacrifices but it will be worth it in the end when you can use your money for other things instead of interest payments.
Related: Steps to paying down debts
5. Not Living Below Your Means
It is very tempting to live above your means. Buying and owning nice things might give you the outward appearance of living the dream, but it can leave your budget hurting.
Living above your means can lead to debt, lack of savings and investing, and stress about money.
To avoid spending above your means, make sure you think carefully about how each purchase fits in with your budget and goals. Make sure you assess all aspects of a purchase.
For example, buying a new car to replace your old beater you own out right. On the surface you might think you just have to deal with a new car payment, but have you thought about how your insurance is going to skyrocket? Maybe you live in a state whose registration is based on the value of the car? What’s the difference in gas mileage?
Avoiding and correcting these 5 budget mistakes will help you on your journey to financial freedom.