Managing your personal finances is not always easy. There is a lot of information available to help you to identify what you should be doing, but what about the things you should not be doing!
It can be easy to try to take additional steps to improve your personal finances but much harder to change certain habits you may already have.
In some cases you may have been making financial mistakes for five, ten or more years and have never even realized it.
This short guide will help you to identify things you may be doing which are hurting your financial health. Use this guide to help you to identify the mistakes you may be making and learn how to fix them.
Here we go!
Getting the basics right
- Overspending
One of the most common financial mistakes people make is spending on things they simply don’t need. How many things have you bought in the last 12 months that you never used?
Probably a lot!
This type of spending can be particularly high at certain times of the year. In January for example many people aim to have a healthier new year so buy lots of fitness equipment and expensive gym memberships which they never use.
Spending in this way can continue throughout the year though. Think about how many times you go to the Grocery store and buy branded goods when there is a perfectly good store own brand option available.
In order to end this cycle of overspending you need to make sure you have a budget. When doing this budget however write down what you spend and try to identify opportunities to cut costs, remove the overspending from your life.
It also means that you have to plan your spending. Every time you go out make sure you set yourself a target and stick to it.
This may seem difficult at first but you will very quickly find out that you will have a lot left over at the end of each month following that simple process.
- Never Ending Payments
There are so many subscription services available now that you may find out that you have a never ending cycle of monthly payments.
This can include everything from multiple video on demand services to gym memberships and premium online shopping options.
Wait!
How many of these services do you actually use and how often? It is important to regularly review all of the monthly payments which may be leaving your account. If you have not used the service at all in the last month then it is time to cancel it.
It is highly likely that you will not even notice that you no longer have this subscription. Multiple subscriptions leaving your account monthly can accumulate to a large monthly deduction form your bank account without you even really noticing.
In addition to cancelling it you can also try to see if there is a free alternative available or perhaps a free trail available at another comparable service.
Active management of the monthly subscription services you use can save you hundreds of dollars annually with very little work involved.
When a new service comes out you should ask yourself, is this something I will actually use, is it value for money.
- Living on Debt
One of the most common financial mistakes we all make is using debt to finance our lifestyle. At times this may be unavoidable; very few people have enough cash in the bank to buy a home outright for example.
However in a lot of other cases living on debt is perfectly avoidable. How much you have you borrowed to buy luxury items you don’t really need?
If you have found yourself in this situation then there is a tried and tested way to avoid this going forward. This tip has been mentioned on the blog before but it warrants repeating.
Before you use debt to buy an item consider the interest rate you will be paying on that debt. Does the item seem like such a good purchase then when you include the interest costs?
You may buy the latest phone if it cost $400 but would you buy it if you knew it would cost $800!
Probably not!
That simple mental trick could save you thousands of dollars over your lifetime. It may seem like an unnecessary step but a simple mental trick like that can help you to avoid making a lot of financial mistakes.
- The New Car Trap
One of the most expensive purchases you can make outside of a home is a new car. In can be very satisfying to drive away from a dealership in a new car and it can give you a great sense of achievement.
Stop!
As soon as you drive the car from the dealership it has already lost thousands of dollars in value due to depreciation was that feeling worth that much?
It can get even worse. You may have used expensive financing to buy the car too, this can make the loss you have made on the car even bigger!
Buying a new car regularly can be one of the biggest potential financial mistakes made by most people. It is easy to fix.
Buying a nearly new car, in some cases as little as six months old, can save you thousands of dollars. An even better way to save money is to buy a car for cash and avoid expensive finance!
If you can not do that then at least try the six month old option, you still get to drive an almost new car out of the dealership but you also save thousands of dollars!
Major mistakes to avoid
- Equity Draw Down
At this point you may have built up a considerable amount of equity in your home. It can be very tempting to use that equity to fund a big purchase through the use of an equity draw down.
This can be a really expensive form of finance. It is very likely that if you undertake an equity draw down you will be able to make the repayments over a very long period of time.
When it comes to any form of borrowing, a long repayment time means really high interest costs.
In some cases such as paying for a college education, this may be an option you will consider. Although there are many other options available too!
In other cases you may wish to use an equity draw down to fund improvements to your home and thus add value.
If you are considering an equity draw down its important that you consider the very large interest costs you will incur when you do it. Even if you are doing it for productive purposes like those mentioned, ask yourself, does this make sense given the interest costs?
No?
Then don’t do it and save tens of thousands of dollars.
- No Savings
If there is one thing that people should do that they do not do it is save enough. This is not just about having a safety blanket, it is about ensuring that you have access to money when you need it.
This means that you can avoid having to rely on expensive short term debt. There is a range of other benefit!
Forcing yourself to save means you have to force yourself to spend less, this extra discipline may seem difficult, but will pay off big time in the long term.
Saving also forces you to think more deeply about any events which may be coming up, whether you can actually afford them and whether you actually need to go or can go!
One of the most helpful things you can do to assist yourself here is to budget. Luckily there are a lot of helpful tools out there to assist you here.
It may seem a boring or overly cautious thing to do but it is something that you have to do! Think back over the last 12 months, how much money would you have saved had you planned a bit better?
How much better could you have managed your finances if you had a little more advance notice of any events that were coming up!
- Not saving for retirement
Hopefully once you have obtained your first full time job you have started to save for your retirement. If not, you have to try to start one right away!
There is a lot of advice out there as to how you might do this. The biggest mistake you can make is starting too late. You simply will not have enough time to build up a sufficient pool of assets to support you when you stop working.
Starting early not only allows you to save more but it allows the amount you save more time to grow.
There is one thing which will protect you from a poor retirement and that is compound interest! If you start to save early enough the amount you save in the early days will continue to grow whilst you continue to add to it.
In addition how you save is also a potential mistake which will need to be avoided. If all of your retirement assets are kept in cash, they will not grow much every year, but after taking professional advice, you may be able to identify assets with more risk, which will grow faster.
Obviously this is not for everyone and you may not be comfortable with the risk but it is something that you should explore. To not do it would be a big mistake!
- Paying Full Price
If you are making any big purchase one thing you have to always remember is that there is room to negotiate.
Many retailers operate on very high margins with built in room for negotiation. A big retailer will try to get the highest price possible but they often have a target price which is far lower than the advertised price.
This is well known when it comes to buying cars but it should also be kept in mind when you are making any large purchase. This is especially so when it comes to things like electrical goods for your home and a whole host of services.
Most service providers who you have a long term contract with for which you make a monthly payment are also usually open to negotiation. It is much easier to retain and existing customer than to try to win a new one!
This is important
Certain things like broadband and cable TV subscriptions are particularly open to negotiation and you should attempt to negotiate with these suppliers regularly.
- Not maximizing your earnings
It is really important to ensure that your employer is paying you the market rate for your services. You may feel awkward doing this but it is really important that you do and that you do it regularly.
It is unlikely that your employer will voluntarily give you a raise on a regular basis. It is something you need to approach in a calm and reasonable manner.
If you are going to ask for a raise you need to do so in a calm and reasoned manner. You should have relevant data to support your request and make sure that you highlight and changes to your roll or any additional responsibility you have recently taken on.
The biggest financial mistake you can make is to undervalue yourself. You need to regularly review how much you are paid relative to the market rate and ensure you keep your income as close as possible to that.
There may be other things you wish to take into account as well as money but make sure that you don’t overvalue them!
Maximize your earnings.
Hopefully the following ideas have given you some tips to help you to try to avoid any mistakes you have been making.
Making small changes to your behavior now can reap big rewards for your financial health going forward. You may be making some financial mistakes but as you can see any mistakes which you may be making can be easily fixed.
Good luck on your continuing journey to financial freedom!
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