If you’re typical you probably never had a class in personal finance either in high school or college. If you were lucky one of your parents sat you down and at least discussed the importance of budgeting your finances.
You could be merrily cruising along thinking you’re doing okay with your finances when you’re actually making some serious mistakes. You may not be guilty of all five of these mistakes but it’s likely that there are several areas where you can improve.
Failing to have a spending plan
There’s a great quote, “A goal without a plan is just a wish”.
You can have some really great goals but if you don’t have a spending plan they’re just wishes.
Is yours is a two-week vacation in one of our national parks or at the beach? Or maybe it’s to buy a house. If you don’t have a spending plan it’s impossible to prioritize the decisions, you must make financially or to be aware of where your money is going. In fact, if you don’t have a personal spending plan you may never achieve any of your goals.
There are a number of apps available designed to take the work out of creating a spending plan. Some of the most popular of these are You Need A Budget, Mint PocketGuard, GoodBudget and Mvelopes.
Sit down, check out several of these, choose one and get started. You’ll find that developing a spending plan is much easier than you might have ever imagined. And a spending plan is the only way to make sure that you’ll achieve your important goals.
Living from paycheck to paycheck
Are you able to save anything or are you just living from paycheck to paycheck?
According to the Federal Reserve 45% of all Americans don’t have enough money saved to cover a $400 emergency. And 63% of us don’t have enough in savings to cover a $500 emergency.
When you create your spending plan you need to budget so that 10% of your net earnings for an emergency fund. Ideally you should build a fund equivalent to at least three months of your living expenses. Don’t despair if you can’t put 10% of your earnings into an emergency fund right away. Start with whatever you can – even if it’s only $20 a pay period. Then try to increase that amount as you can.
Not matching your employer’s 401(k) contribution
Would you like some free money? We certainly don’t know anyone that would turn up their noses at this.
That’s what your employer’s contribution to your 401(k) is – free money.
US News.com has reported that an estimated $24 billion in unclaimed 401(k) matching funds go unused every year.
If your employer does offer to match your 401(k) contributions then for heaven sakes, take advantage of this and contribute at least up to the percentage of your salary your employer will match.
If you can’t afford to do the full match, contribute as much as you can. Choose a safe investment such as an index fund and let the power of compounding go to work to help you towards a good retirement.
Never reviewing your credit reports
Have you seen your credit reports recently? Or have you ever seen them?
It’s important to get and review your credit reports on a regular basis because they could include errors that are damaging your credit score.
A study by the Federal Trade Commission released in 2014 revealed that as many as 42 million of us have errors in our credit reports that could be causing us to pay higher interest rates or keeping us from getting loans.
It’s really important to review your credit reports from the three credit bureaus (TransUnion, Experian, Equifax) to make sure they do not include errors.
The most common ones to look for are identity errors, incorrect account details and fraudulent accounts.
If you find errors in any of your credit reports make sure to dispute them. All three of the credit bureaus have forms on their websites specifically for this purpose but the experts say you really need to write a letter to the appropriate bureau enclosing whatever documentation you have to prove your case.
Failing to understand the difference between good and bad debt
There are experts that preach all debt is bad debt.
However, most experts in personal finance now recognize the fact that there is such a thing as good debt. It’s defined as debt used to purchase items that will grow in value over the years. For example, a mortgage can be considered good debt because the value of the home will increase over the years. Paying for a college education can also be considered good debt because it should help you increase your earnings going forward.
On the other hand, bad debt is money you borrow to pay for stuff that you consume or use up quickly such as that aforementioned two-week vacation, clothing or electronic games.
Of course, the truth is that all debt is essentially bad debt. The biggest difference between good debt and bad debt is that bad debt can damage your finances a lot quicker.
The smartest thing to do is to avoid debt like the plague because the faster you can become debt free, the better.