“A man who has committed a mistake and doesn’t correct it is committing another mistake.”
Your financial future depends on what is going on right now. So if you keep repeating the same money mistakes today instead of taking steps to correct them, you’re setting yourself up for financial failure tomorrow.
Let’s look at some common financial missteps people make and how to avoid them so you can create a financially secure life.
Living Paycheck to Paycheck
As of February 2023, 62% of US adult consumers live paycheck-to-paycheck, according to PYMNTS. If you’re among those who spend every cent they earn, it can get problematic should you fail to receive your next paycheck for whatever reason. Consequences of living paycheck-to-paycheck may include falling behind on payments, borrowing money, and stress.
Here are several actionable steps you can take to stop depending on a single paycheck too heavily:
- Reduce your monthly expenses. Create a budget to track how much money you have coming in and where it’s going. Once you’ve written a budget, you’ll see where you can cut back on spending so you have money to save and pay off debt.
- Increase your household income. There are various online and in-person side hustles you can do to supplement your monthly earnings. These include pet-sitting, selling print-on-demand products, renting out your stuff (e.g., cars, instruments), and even doing small tasks, such as surveys or sharing your internet bandwidth. The latter is possible with specific apps, and a Honeygain app would be an example.
Failing To Save for Emergencies
If the COVID-19 pandemic taught us anything, it’s the importance of saving. Global crisis or not, unexpected expenses like loss of income, car repair, and medical bills can have a debilitating impact on your finances if unprepared. This is where an emergency fund comes in.
An emergency is a cash reserve that acts as a safety net against unplanned expenses. Financial experts generally recommend putting aside three to six months of household expenses.
Research shows saving even small amounts for emergencies experience fewer hardships following an income shock and in the future in general. So you can start with, for example, a $1000 emergency fund to keep you from going deeper into debt should trouble strike.
Not Having (or Sticking to) a Budget
Budgeting is the process of planning how to spend your money each month. A budget gives you control of your finances by keeping your spending habits in check and keeping you aware of your cash flow.
If you need help establishing a budget, a simple strategy you can use is the 50-30-20 rule. The technique makes budgeting unnecessarily complex by splitting your after-tax income into just three categories of spending:
- 50% to needs. Half of your budget should go towards the things necessary for survival. These include rent or mortgage payments, groceries, healthcare, and minimum debt payments.
- 30% to wants. Wants are nonessentials that you spend money on by choice because, well, you want to. Some examples include subscriptions, eating out, vacations, beauty appointments, and hobby supplies.
- 20% to savings. The rest of your net income should go toward your future, i.e., building your savings, investing, and paying down debt beyond the minimum payment. The money for the emergency fund we discussed earlier will come from here.
Creating a budget is just the first step, though. To see real growth, you need to stick to your spending plan.
Not Setting Financial Goals
Financial goals are the short-, mid-, or long-term plans you have for your finances. They include establishing an emergency fund, paying off credit card debt, owning a home, and saving college money for a dependent.
When financial goals are SMART, it increases your chances of success. SMART is an acronym for:
- Specific: What do I specifically want to accomplish?
- Measurable: How much will I put into savings? How much debt will I repay each month?
- Attainable: Are my goals achievable?
- Realistic: Are my goals and action plans reasonable?
- Timebound: What is the deadline to complete each goal?
Financial goals give your budget purpose, making you more likely to stick to it, as you have a clear picture of what you’re working towards.
People often talk about earning more money, but not many talk about planning their finances better. You can live your best life by adopting good spending habits and avoiding common financial mistakes that can land you in economic hardship.
Start by identifying your financial missteps and how to handle your finances moving forward. So if your mistake is living paycheck-to-paycheck, you can cut expenses and find ways to increase your income to save money.