If you’re struggling with your finances, or finding it difficult to save and build wealth, it may be because you’re making one of these common money mistakes.
This post covers some of the biggest and common financial mistakes people make that can make it harder to live financially free and lead to financial ruin.
Common Money Mistakes to Avoid
1. Not Having A Financial Plan
One of the biggest money mistakes people make is not having a financial plan.
Alan Lakein, author of How to Get Control of Your Time and Your Life, has this great quote:
“Planning is bringing the future into the present so that you can do something about it now.“
A good financial plan will touch on key areas of your financial life such as savings, investing, managing debts, retirement, estate planning and so on, and help you set priorities.
Setting specific financial goals are impressive, but a financial plan helps you tie everything together. It helps you focus on the bigger picture and not be derailed or discouraged by what is happening with one area of your finances.
You’ll know when to start prioritizing each of your goals and the next ones to focus on.
2. Not Setting Financial Goals
Every financial planning starts with identifying what your specific financial goals are. So not having financial goals is a big money mistake to avoid.
Without financial goals, it will be difficult and almost impossible to know how well you’re doing with your finances or how close you are to being to keep financially independent.
Everyone should have both short term and long-term financial goals like setting up an emergency fund, saving for a car or down payment for a house, and investing for retirement.
And of course, the goals should be specific with a dollar amount and a time frame. Then come up with a plan to achieve them.
Work out how much you’ll need to save every month, when to start and where to put the money. Also, check your progress regularly and adjust your plans if necessary.
3. Waiting Till Tax Filing Time to Think Of Tax Planning
Taxes are the highest expenses for many households in Canada and in many other countries.
The average Canadian family spent 44.2 percent of its income on taxes alone in 2018, compared to just 36.3 percent for basic necessities like housing, clothing and food.
An effective tax planning ensures you’re paying your fair share of taxes to the government, but nothing more. Beyond paying less tax on your income and investments, you’ll be able to defer taxes on your assets and potentially transfer them to your heirs under more favourable terms.
But tax time isn’t the best time to start thinking of tax planning. You need to be more intentional and plan your taxes year-round.
And depending on how complicated your finances or personal circumstances are, consider working with a tax professional. The benefits will outweigh the fee you pay.
4. Not Investing For Retirement
Not saving or investing for the future is another common financial mistake.
Retirement may still be decades away but putting it off till when it is convenient is a big mistake.
Don’t wait till the right time – it may never come. Start investing with the little money you have now.
Even if you have other short-term goals like getting out of debt or saving for a house, you should still put some money into your retirement saving, however little. And you can gradually increase the percentage of your income that goes towards it over time.
The earlier you start investing, the more chance your money will have to harness the power of compound interest, especially if you’re saving through a tax-advantaged account.
5. Investing In What You Don’t Understand
There is a big difference between investing and gambling.
Avoid investing in anything you don’t fully understand. Don’t put your hard-earned money into an investment simply because it’s going up or for the chance of an exponential growth in the short term.
As Peter Lynch said “Know what you own and know why you own it.”
6. Wrong Asset Allocation For Your Financial Goals
One of the problems with saving without specific goals is that it makes it difficult to invest optimally.
Putting 100% of your investment into equities may be okay if you’re saving for retirement that is 40 years away, but very risky for shorter term goals that are months or a few years out.
The right asset allocation for your investment should factor in your investment time horizon and your risk appetite.
While it is advisable to take on more risk for longer time investments, it is alright to be more conservative if you know you can’t take any huge drop in the value of your assets.
7. Paying Too High Fees
This is another money trap that is not obvious.
Don’t overlook the impact of higher fees on your investment returns.
A 1% fee per annum may look insignificant, but compounded over 20, 30 or 40 years, it can quickly add up.
Not only are you losing some of your money to the fees, you’re also missing out on the compounded returns they would have earned.
To illustrate: Consider how 3 investments with different investment fees performed after 25 years – assuming an annual return of 6 percent.
With fees of 2 percent per annum, you would have lost more to fees than you actually gained.
Here are some tips to reduce how much you pay in investing fees:
- Do an annual audit to check how much fees you’re paying. You can use online tools like Personal Capital (US) or Wealthica (Canada) to track your investment fees.
- And If possible, switch to low-cost passive investing options. Buy and hold for the long-term and keep investment turnover low.
8. Spending Too Much On Housing
Another common financial mistake to avoid is spending too much on a house.
Many people underestimate the total cost of home ownership. Consider the mortgage payment, insurance, property tax, repairs and maintenance when making the decision on how much house you can afford.
Keep renting till you can truly afford to buy a house. Don’t let anyone convince you that paying rents is a waste of money.
A monthly rent of $2,000 is not the same as a mortgage payment of the same amount – you need to include the other costs of home ownership to do a like for like comparison.
When done at the right time, owning a home can be a blessing. But a house you can’t afford can become a financial curse.
9. Buying A Car You Can’t Afford
There is a difference between how much car you can afford and being able to afford the car payments.
If the car loan must be for a term of 6, 7 or 8 years before you can afford the monthly payment, be honest with yourself – you can’t afford the car.
Consider buying a smaller car or even a used car. If possible, pay cash for the car.
There are several rules of thumb to estimate how much car you can afford. For example:
- The 20-4-10 rule says you should have a down payment of at least 20%, not go beyond a loan term of 4 years and the total car payment, including insurance, should not exceed 10% of your monthly gross income.
- Dave Ramsey suggests buying a car that is not more than 50% of your annual gross income.
Whichever rule you decide to choose, remember they are a guideline. Buy a car that won’t stop or slow you down from achieving your other financial goals.
Related Post: 15 Must Ask Questions When Buying A Used Car
10. Not Protecting Your Assets With Insurance
There is the saying about being penny wise but pound foolish. Don’t ignore insurance simply because you want to save some money.
This is a money mistake that can cost you severely.
Protect your assets with the right insurance coverage. A home insurance will only cost you a few dollars monthly, but it can save you a lot of stress and huge costs in the future.
And if you have loved ones that will be left financially vulnerable if you die, then protecting them through life insurance is very important.
A Will is also a good idea if you want your assets to be shared according to your wish when you die.
11. Not Budgeting
If you’re struggling with getting your spending under control, then creating a budget is a good place to start.
Why do you need to budget? By setting a monthly budget, you are putting yourself in control of your finances. You can dictate where your money is going, curb overspending and allocate your income to the things thar are important to you.
To get started, you can download a budget template on a spreadsheet or use a budgeting app like Mint.
12. Not Tracking Your Expenses
With budgeting, you plan for where you want your money to go. Tracking your expenses tells you where your money is actually going.
By tracking your spending throughout the month, you’re in a better position to stick to your budget.
It gives you better insights into your spending pattern, can help you combat mindless spending and identify hidden expenses you may be missing.
That extra cup of coffee a day may only cost $5, but that’s $1,300 in a year. Imagine what you can do with the extra cash.
13. Living Beyond Your Means
It doesn’t matter how much you earn; you’ll always be stressed about money if you’re spending more than you make.
This could mean buying what you can’t afford, funding an expensive lifestyle with credit cards or other debts, or trying to keep up with the latest trends and fashion.
When you live beyond your means, you’ll struggle to save and invest for your financial goals.
To stop living beyond your means, you should
- set a monthly budget and track your expenses.
- Understand the difference between needs and wants.
- And get rid of any expensive habits.
14. Using Credit Irresponsibly
When used wisely, credits can be a valuable financial tool. Imagine how long it will take if we all have to buy a house with cash and not take a mortgage.
On the other hand, an irresponsible use of credit is a costly financial mistake. Are you financing an expensive lifestyle or funding an annual vacation with credit cards? Buying a new and expensive car just because you have access to credit?
The more debts you take on to finance non-essential items or spending, the more you spend on interest and the longer it will take to achieve financial bliss.
As your debt load starts getting out of hand, you may start missing payments and see a big drop in your credit score. With a bad credit score, getting approved for new credit will be difficult and if approved, it will be at higher interest rates.
Also, check your credit scores and credit reports regular and take steps to correct any errors.
- 7 Surefire Ways to Improve your Credit Score fast!
- How Credit Scores Are Calculated and How To Interpret Them
15. Not Monitoring Your Credit Score And Credit Report
Make it a habit to review your credit scores and credit reports regularly. It will alert you to any key changes in your credit file such as a credit inquiry or new accounts.
Monitoring your credit score and credit report is especially important if you’re planning to apply for a loan in the short term. For example, a mortgage or car loan.
You’ll detect any error quickly and have enough time to correct them or improve your scores. And the great news is: you don’t have to pay to get your credit report or credit score.
There are several services that lets you track changes to your credit scores and report for free every month. Sign up for one them.
see the link below for credit monitoring services for Canadians.
- How to Get Your Credit Score and Credit Report for Free in Canada (in minutes)
- How To Check and Correct Errors On Your Credit Report
16. Not Having Some Emergency Fund
When financial surprises happen, an emergency fund can help you absorb the stress.
An emergency fund is a pool of money you’ve set aside to cover any financial surprise that comes up. This could be an unexpected expense or a temporary job loss.
The funds should be easily accessible and be protected from market fluctuations. High interest Savings Accounts are a good place to stash your emergency funds.
Depending on your personal circumstances, you may need enough money to cover your essential expenses for 3-9 months. But even a $1,000 emergency fund can be the difference between covering an unexpected expense easily and having to borrow money at a high interest rate.
Learn more about emergency funds, how much to set aside, where to put them and so on by reading the emergency fund guide linked below.
Related Post: Emergency Fund: The Benefits And Tips To Build One Fast
17. Getting Stuck At A Dead-End Job
Sometimes, it’s okay to take a survival job that pays your bills. It becomes a money mistake when you don’t have a plan for how you’ll move on to a better job.
If your work has not evolved, you’ve been stuck at the same position for years and had little to no increase in salary, it may be time to move on.
Think of the type of job that excites you. What skills do you need to fit into the role? If you don’t have them, then invest in acquiring those skills.
18. Relying On A Single Source Of Income
If Covid-19 has taught us one thing about our finances, it is that: relying on a single source of income is a big financial mistake.
Actively look for opportunities to diversify your income. If your work permits, spend some extra hours each day to work on a side gig.
Even if your current job is very secure, some extra hundreds or thousands of dollars every month will go a long way in super-charging your financial goals.
19. Not Working With A Professional
DIY is all the rage these days. And it is fine. You can easily get answers to many financial questions you may have through a simple google search.
But there’s some benefit in working with professionals, especially if you have a complicated personal circumstance.
For example, a tax professional can help you come up with strategies to minimize the taxes you pay, both now and in the future, and let you sleep better at night knowing that you’re not making any serious error.
So rather than seeing the fees as a cost, treat is as an investment.
20. Taking Money Advice From The Wrong People
Here’s another common money mistake many of us make.
Finance is personal. Different people have different financial goals and motivations. No two people have exactly the same financial situation.
So be careful when taking advice from people, including family and friends. Because it worked for them does not mean it will work for you.
Always try to understand the nuances of every advice you receive. Listen to the advice but reassess them and decide if they are applicable to you.
Your friends and family may mean well and be sincere, but still be sincerely wrong.
If you must get outside help, consider speaking to a professional that can give you their unbiased opinion.
21. Having Expensive Hobbies
Hobbies are a great way to recharge every now and then. But if your hobby requires you to keep buying expensive gears or supplies, then stop to do an assessment.
And this applies to hobbies for children too.
Ask yourself if you can afford it given your current finances. If you can’t, consider another hobby that won’t require regular fresh supplies but still serves the same purpose.
Getting out of some of these money traps may take some months or even years, but it’s not impossible.
So if you’re making one or more of these financial or money mistakes, it is time to stop before it is too late.
Take steps to correct the money mistakes today.
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