9 Money Mistakes That Can Hurt Your Finances
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9 Money mistakes that can hurt your finances…big time!!!
Let’s be honest, most of us have made money mistakes. Some mistakes were minor and didn’t cause long-term damage. But you might have a few major ones under your belt too. And if so, it might take years to dig yourself out of a hole.
Unfortunately, many people don’t learn personal finance skills at home. And since financial literacy is missing from many classrooms, what we know about money often comes from self-education, and of course, trial and error.
We aren’t born knowing about money, yet a willingness to learn the basics can have long-term benefits. So whether you’re in a financial rut, or you’re trying to avoid one, here’s a look at 9 money mistakes that can ruin your finances.
1. Lack of “sufficient” savings
A savings account is something that some people don’t fully appreciate until they need it.
Yes, saving money takes discipline and sacrifice, and you can probably think of many things to do with your cash instead of saving it. But lack of a rainy day fund can actually complicate your finances.
If you don’t have a safety net to deal with emergencies or a loss of income, you might rely on a credit card—which can throw you into major debt.
So while there’s nothing wrong with enjoying your money and having experiences, saving needs to be a priority.
Aim for a $1,000 emergency fund to start, and then shoot for a savings account of no less than 3 to 6 month’s of living expenses or income. Look for ways to cut back so that you can gradually increase how much you’re able to save each month.
2. Inadequate insurance
Insurance is a protection. It’s something we need, and something we hope we never have to use.
The problem with insurance is that it’s difficult to know how much we need, so there’s a tendency to underestimate our needs and choose a policy with less coverage – often because it’s cheaper.
Now, I understand that your income dictates how much insurance you’re able to buy. And when you’re on a tight budget, some coverage is certainly better than none.
But if you can afford better coverage, seriously consider whether your current policy is adequate for your needs. This applies to all types of insurance, but especially health and life.
A high-deductible health insurance plan will save you money each month, but if you’re sickly or have a lot of medical problems, you could end up paying a lot out-of-pocket with these plans.
If you haven’t lately, re-evaluate your life insurance policy, too. The coverage you purchased as a single person with no kids might not be sufficient if you’re now married and have a family.
As a general rule of thumb, if others rely on you financially, get a life insurance policy that’s 10 to 15 times your income.
3. Forgetting due dates
Forgetting to pay your bills can have a huge impact on your personal finances. You’ll get hit with late fees when you don’t pay on time, and these fees aren’t cheap!
Your mortgage company might charge a $50-$60 late fee, and your credit card company might charge $25-$35.
Not only that, paying a bill 30 days past a due date can lower your credit score. And as a result, getting a loan becomes more expensive (if not impossible).
To avoid paying late, make sure you have an airtight budget. Know where your money goes and reduce spending, if necessary. Spending less than you earn is how you’ll have enough money for your needs, and some of your wants.
If you have a bad memory, automate your monthly payments to ensure timely arrivals.
4. Lending money (you can’t afford to lose)
Now, I can’t tell you what to do with your money. So if a family member or close friend needs a loan, you have to decide whether to lend them money. I will say this, though. When lending money to someone—ONLY LEND WHAT YOU CAN AFFORD TO LOSE.
Some people are quick to lend money and never consider how this decision will impact their own finances. Even if someone says they’ll pay you back in a week, this might not happen.
It could take several months to get your money back. And if the person never repays what they owe, your relationship pays the price.
Bottom line: If you lend money, make sure it’s cash you don’t need, and cash you’re willing to lose.
5. Quitting your job prematurely
I’ve been self-employed for about 15 years now, so I’m all for people being their own boss and doing their own thing.
If you’re on this path and have a thriving business, you might be tempted to take a leap of faith and quit your job. This way, you can devote more time and energy to your business—helping it grow faster.
But while a leap of faith works for some people, it doesn’t work for a lot of others. And the truth is, if you quit your job too soon, you could face serious hardships and find yourself back in the workforce.
Having one or two “good” months doesn’t mean that it’s time to give up a steady paycheck, so don’t make any hasty decisions.
Knowing when to quit your job is tricky. My advice to you: Only quit when your business consistently brings in more income than you need, and only after you have three to six months of living expenses in savings.
Another tip is to take your business income on a test run. For six months, see if you can live solely off your business income (after setting money aside for taxes). If so, then your business is probably stable enough to support your lifestyle long-term.
6. Ignoring financial red flags
One of the worst things you can do in a relationship is look the other way or ignore a partner’s bad money habits.
You might reason, “this is their problem and their headache.” However, their financial decisions will likely affect you at some point. So speak up and work together.
And if you’re dealing with someone who’s stubborn or who doesn’t want to improve their finances, consider keeping your money separate. This can soften the impact their decisions have on your financial life.
7. Doing business with a handshake
If you want to start a business with someone, it only makes sense to go into business with someone you trust like a family member or friend. But although you’re looking out for each other’s best interest, never do business with a handshake. Always, always, always have a contract.
To be clear, this has nothing to do with trust. It doesn’t matter who you are, or who you’re dealing with, misunderstandings can happen. You might think one thing while your partner thinks another, and with nothing in writing, there’s no way to know who’s wrong and who’s right.
A contract, on the other hand, lays the ground rules with regard to responsibilities, and outlines the compensation.
Once everything is in writing, both of you will sign the contract, and then maintain a copy for your personal records.
8. Over-borrowing
A lot of people think bigger is always better, so they’re always upgrading their houses and cars. But just because you’re able to get a large loan doesn’t mean you should.
The more you borrow, the less money you’ll have for other things. You might be unable to contribute to savings or retirement, or you might neglect your home’s upkeep because there’s nothing left after making your house payment.
There’s nothing wrong with having a nice home and nice vehicles, but sometimes, less is more.
9. Prioritizing saving for college
It’s great to save for both retirement and a child’s education—and some people are fortunate enough to afford both. But if you have to choose one over the other, it is important to prioritize retirement over college, and many experts agree for one big reason.
When it comes to college, there are many ways to pay for an education including scholarships, grants, federal loans and private loans. Yet, there’s no loan for retirement.
If you prioritize saving for a kid’s education at the expense of preparing for your future, you might have little income in retirement. You might have to work longer than expected to catch up, or work part-time after retiring to make ends meet.