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Someone once said, “Be thankful for your mistakes. They teach you valuable lessons.” Nothing could be truer when it comes to making mistakes with your money. Here are five common ones that can leave you not only feeling blue, but in the red.
1. Spending frivolously.
Without a budget, people tend to buy impulsively. Dining out frequently, using shopping as entertainment, and frittering away money on this and that are surefire ways to drain your funds and undermine your attempts to start saving or to get out of debt. Just think: Eating out once week at $50 a pop means by the end of the year you’ve spent $2,600—more than enough for an extra mortgage payment.
2. Not having an emergency fund.
The car dies. The furnace blows. What do you do? If you’re like most people, you take out plastic and wind up paying for the expense for months—plus interest. Most experts agree you should have three to six months of expenses in a liquid savings account for just those types of emergencies.
3. Buying everything on credit.
Many people conclude that they can “afford” a major purchase because they can cover the monthly payment. But the two are far from the same! Instead of buying everything on credit, and getting caught in the trap of never-ending payments, force yourself to save the money first. Try setting up separate bank accounts for each major purchase you’re planning to make, and then fund them gradually from each paycheck. When you’ve reached your goal, that new flat-screen TV is yours!
4. Buying too much car (or house, or...).
Trying to keep up with the Joneses only spells trouble. Sure you may want it, but do you really need an enormous, gas-guzzling SUV? Or a 6,000-square-foot sprawling home? Very few people do. Take the time to figure out what you and your family really need and can afford. Live below your means, and then pocket the difference in savings.
5. Waiting to save for retirement.
Ben Franklin said, “A penny saved is a penny earned.” But Ben never put that penny in an IRA to take advantage of compounding. Rather than pennies, let’s say that from age 25 you contribute a dollar a day to a Statement Savings IRA. By age 65 you’d have contributed $14,560 but your balance would have grown to $35,984.* Wait until age 40 to start those deposits, and you’ll contribute $9,100 but wind up with only $15,642. The moral: Save your pennies (nickels, dimes, and dollars, too!) early and often.
*Assumes a weekly contribution of $7 at 4% return with daily compounding.