If 2020 has taught us anything, it’s that our financial situation – and everything else — can change in the blink of an eye. This is just one lesson you’ll probably take with you into 2021. To put the lesson into practice and be more prepared for the unexpected, you may want to start prioritizing money management.
One of the best ways to improve the way you manage your finances is to work on avoiding some of the common money mistakes that you may have made, or seen others make, in the past. To help you avoid a few pitfalls, here are our suggestions for the top three money management mistakes to avoid in 2021.
1. Keeping up with the Joneses
It’s all too easy to look at what your friend or neighbor has and believe that you need it as well. This is particularly true if your social media platforms are flooded with pictures of luxury cars, designer handbags, and over-the-top house renovations.
While it may seem like having all of this “stuff” can bring joy and happiness to your life, the reality is that it may do the opposite. If you try to keep up with the Joneses, Kardashians, or Joe from across the street, you can steer yourself into debt to do it, increasing your mental and financial stress.
If you live at or below your means and forget about what others think, you’ll find it easier to stay out of debt, save money, and feel more secure financially. You can also improve your mental health. Research shows that non-mortgage debt puts you at three times more risk for anxiety and depression. Here are a few ways you can quit keeping up with the Joneses.
- Be mindful on social media: If there are certain friends or followers on your social media that make you feel bad about what you have, unfriend them or hide their posts. There’s no reason to keep tabs on someone’s life if all it does is pressure you to make poor financial decisions, or make you sad.
- Plan for purchases that bring you joy: Think about what makes you happy and budget for it. Maybe it’s a hobby, or a date night with your significant other. Perhaps it’s travel, or just getting your hair done. Remember, the things that make you happy aren’t necessarily the things that make the Joneses happy.
- Consider your long-term goals: The people who influence you (including those pesky Joneses) may be the type that don’t consider how their current financial decisions can affect their future. Don’t be like them; be like you. Jot down the long-term financial goals that mean the most to you, and put them in a place you’ll see every day. The next time you’re tempted to keep up with the Joneses, take a glance at them and think about how going into debt or careless spending may derail your retirement, kitchen renovation, or college savings.
2. Forgoing your emergency fund
In a perfect world, you’d never have to deal with a financial emergency. You’d always have a job, a car that works, and good health. Since financial emergencies are almost a given, an emergency fund isn’t an option, it’s a necessity. If you don’t have one, you may have to take on debt and then struggle to come out of it.
With an emergency fund of at least 3 to 6 months’ worth of expenses, a financial setback can turn into a small bump in the road, rather than a financial sinkhole. Unfortunately, nearly 25% of Americans have no emergency savings. If you’d like to save for an emergency fund (or increase the one you currently have), here are some creative ways to get started.
- Sell what you don’t need: If you have electronics, clothing, household appliances, and other items that you no longer need, sell them on an online site like Facebook Marketplace, Nextdoor, or Craigslist. Then, stash the proceeds into your emergency fund.
- Pick up a side gig: A side gig like delivering food or tutoring online can help you save up an emergency fund quickly. If you don’t have a lot of extra cash left from your full-time job, it may be worth your time.
- Meal plan: Food is likely one of your largest expenses. If you tend to overspend on groceries or restaurant meals, you may want to meal plan. Planning your meals in advance can help you save on food so that you have more to put toward your emergency fund.
3. Living without a budget
In a recent survey by Mint, 3 in 5 Americans said they have no idea what they spent last month. This may be because they don’t have a budget. People are sometimes afraid to budget because they believe it’ll restrict them from living the life they want.
In practice, though, a budget can be freeing. If you create one (and stick to it), you’ll have a solid plan in place for how to spend your money. There won’t be that constant worry about whether you’ll have enough to cover your bills or meet your short and long-term goals. Try one of these budget options, and make your money work for you, in a more efficient way.
- Line item: A line item budget is where you list out your expenses for an entire year. As the year goes on, you compare your current expenses to previous ones to make sure you’re on track. Then, make changes as needed.
- Pay yourself first: “Pay yourself first” lets you give a certain percentage of your income to your savings account as soon as you get paid. This is a great option if saving money is your top priority.
- Zero-sum: In a zero-sum budget, you assign each dollar of your monthly after-tax income a job to do. With this method, it is easier to allocate your cash to the things that are most important to you.
Take control of your debt in 2021
If you’re struggling with debt now, you don’t have to continue the struggle in 2021. With our free How to Manage Debt guide, you can learn about how to take control of your debt. It can lead you toward a brighter financial future and help you learn to avoid common debt and money management mistakes in the New Year, and beyond.
- How Will Coronavirus Impact My Retirement Savings? (Freedom Debt Relief)
- Did You Change Your Spending Habits During COVID? (Freedom Debt Relief)
- Open Enrollment 2021: Should You Change Health Insurance in a Pandemic? (Freedom Debt Relief)
- Recessions Lead People to Make Big Money Mistakes (Bloomberg)