As a teenager, I became a much better driver after my only car accident, in which I crashed into an oncoming vehicle and both were totaled. I was a much more aware motorist, and certainly drove more carefully, after this event. Mistakes can be the best teachers, as the lessons learned are ingrained by the outcome of our failures. Finances are the same way. You can avoid making bad financial mistakes (that could land you in the poor house) by learning what not to do. Here are ten of the biggest financial mistakes people make that you can avoid.
1. Spending more than you earn
Whether you make $20,000 a year or have another zero on the end, your spending habits are the single biggest influence on your financial success or, conversely, your failure. Avoid the poor house by spending wisely and keeping your expenses in line with your income. Ideally, save and invest a percentage of each paycheck or income source you have. And don’t spend money on a credit card that you can’t pay off when the bill arrives.
2. Wasting money frivolously
Spending money wastefully, even if you do spend less than what you earn, is another bad money idea. Even if you think you can afford the payments, buying a new car every two years just doesn’t make fiscal sense for most people. Ironically, most first-generation millionaires buy slightly used vehicles or drive their new ones for many years instead of frequently buying expensive, depreciating vehicles. The problem with wasting money is that you have less for saving and investing.
3. Not having a financial plan
Eschewing a financial plan, and not setting goals can set you up for financial problems. Success in any area is largely dependent on having a written plan, short-term and long-term goals, and by working that plan. Reevaluate your plan and track your progress often using whatever method best suits you, whether it’s through online software or in longhand in a notebook. Discuss money with your spouse or partner, meeting regularly to go over the budget and common financial goals.
4. No insurance or the wrong type
Allowing yourself and your assets to be exposed to damage, injury or lawsuits without proper coverage is another way to lose everything you’ve worked to obtain. Health insurance protects you in case of physical injury and high medical bills, and an umbrella policy over your house, auto and other policies protects you from lawsuit judgments.
5. Investing in get-rich-quick schemes
Putting your money in investment vehicles you don’t understand or buying those get-rich-quick packages will put you on the fast track to the poor house. Your best bet for avoiding all of that is to invest in things you understand and regularly adding to and diversifying your holdings. Don’t waste your money on online courses and packages that promise to teach you how to earn six figures online. Do the research before you spend the money. Investing in mutual funds is a great way to start.
6. Taking on too much debt
How much is too much debt? Some financially-savvy advisors say any debt is too much, including Dave Ramsey, who became a millionaire and then lost everything because he relied too heavily on debt in his personal life and for business finances. Others are comfortable with small amounts of debt, or house mortgages and auto loans. But realize that even student loans can be hard to handle if money is tight. If you do acquire new debt, do so cautiously and after researching the best loan options.
7. Not expecting the unexpected
Life happens, and if you don’t have any emergency savings, life insurance on yourself and your spouse and contingency plans for potential income loss, you’re setting yourself up for financial trouble. Plan to save three to six months’ expenses in easy-to-access savings accounts as a starting goal for a rainy day, whenever it happens.
8. Working the minimum
Whether you’re just doing the bare minimum at your job or only making enough money to scrape by, working the absolute smallest number of hours you can get away with or completing only the essential tasks, you’re putting your career in jeopardy. To get ahead at work or in your business, give your work the time and attention it deserves. After all, your ability to make income is likely the biggest financial asset you have.
9. Counting on Social Security funds
If your retirement plan is entitlement benefits, it’s past time to reevaluate that plan. Social Security is on shaky ground, and the sensible approach is to discount it entirely when planning for your future. That way, if anything does come through, it’s just icing on the cake in retirement.
10. Putting money above family
While most people tend toward not doing enough for their financial success, there are those at the opposite end of the spectrum whose priorities have been warped until money takes the highest place in their lives. Take the time to evaluate your life and the place money has in it. Money is simply a means, a tool, and should never be sought as the end in itself.
Just Say ‘No!’
It is not just a cheesy anti-drugs campaign. Saying ‘No!’ should be a regular expression for someone trying to stay in the black. Anytime you’re presented with a reason to spend, be it for just a large sized fries at lunch, additional coverage, or buying two to get the third free, alarms should sound and you need to ask why you’re forking over that extra dough. Don’t let it just apply to things you add on to a bill. Just say ‘No!’ to everything that forces you to open your wallet, then take a good hard look and decide if it’s worth your hard earned money.
What financial mistakes have you made? Which ones have you been able to avoid?