At some point or another, everyone makes financial mistakes. Even if your debt levels have skyrocketed or you’ve simply overspent on expenses, it isn’t too late to turn things around and fix things.
Learn from past errors and try to avoid repeating them in order to reach your financial goals more quickly. Here are five mistakes you should avoid when managing personal finances.
1. Not having a budget
Create a budget is the key to taking control of your money. Be it on paper or through an app, it allows you to visualize exactly how much income comes in each month and where all that money goes out again.
Saving can also help protect you against unexpected expenses, like doctor’s bills or car repairs; having money set aside in a savings account for such emergencies could prevent having to use credit cards instead.
Not only should you establish a budget, but you should also regularly monitor your spending. Doing this will enable you to identify any spending habits that require altering and help ensure you meet your financial goals successfully. You can do this by reviewing income and expenses on a weekly basis.
2. Not having an emergency fund
An emergency fund provides you with a financial buffer against unexpected expenses like car repairs or medical bills that might crop up unexpectedly, while also protecting you from credit cards or loans, which may carry higher interest rates or be difficult to repay in full.
Experts advise having three to six months’ of expenses saved in an emergency account. Automated savings methods like direct deposit or automatic withdrawal are an efficient way of getting you closer to this goal quickly. You could also consider investing your emergency savings into high-yield savings accounts such as Marcus by Goldman Sachs or Ally Online Savings Account that provide easy access and competitive yields.
To save faster, consider cutting costs by canceling any unnecessary subscriptions or services which cost money, freeing up more funds to add to your emergency fund. This may help accelerate savings.
3. Not prioritising paying off high-interest debt
One of the worst mistakes you can make is neglecting to prioritize paying off high-interest debt, such as credit card or auto loans that incur high-interest charges over time.
Sean Fox, president of debt solutions at Achieve, suggests paying as much toward your smallest debts each month until they are gone. Once these have been cleared off, transfer their monthly payment onto another debt until that one has also been cleared away – this process should continue until all your debts have been addressed.
Remembering one-time expenses like birthday presents, haircuts, annual bills, and vacation costs is also key in creating an accurate budget and improving finances. By keeping track of these costs you can help prevent overspending while strengthening your financial status.
4. Not investing your tax return
Investing your tax refund can be an excellent way to meet both short and long-term financial goals. Whether it’s used specifically towards something such as buying a new car or taking a trip, or placed into an investment account where it will earn interest over time and can help bring you closer to meeting savings goals faster.
Investment of your tax refund can also help you reach your retirement goals. Saving 10 to 15% of your salary each month into a tax-advantaged retirement savings account such as an Individual Retirement Account or 401(k) will help to ensure you will have enough for retirement. Depending on how much money you receive, target date funds may also offer beneficial assistance; they automatically adjust investments as the date nears for your retirement date.
5. Not saving for retirement
Retirement savings can be challenging when you have student loans, mortgage, and car payments to make. But saving is essential if you wish to retire comfortably; start saving as soon as you start earning income by tracking spending regularly and automating savings (e.g. via an employer retirement account).
If you’re in your 20s, try setting aside 15-20 percent of your pre-tax income as savings – it won’t be hard! Once you’ve saved enough, focus on other financial goals such as debt repayment or emergency savings plans – so that when the time comes you’ll enjoy retirement knowing there won’t be anything to worry about financially.