Money Management Mistakes to Avoid

Money management is one of the most important life skills you can have. When you know how to make the most of your money, you can get rid of debt, build your savings, and prepare for the unexpected, like emergency expenses or a job loss.

One of the best ways to improve in this area is to avoid the typical money management mistakes that people make. There are several common pitfalls that can turn into costly learning experiences. To help you avoid them, here are our suggestions for the money management mistakes to watch out for.

Unnecessary Spending and Small Purchase Mistakes

People often focus on their big expenses, but over time, small unnecessary purchases can do plenty of financial damage. Maybe you splurge on things that catch your eye when they go on sale at your favorite stores or you visit a nearby convenience store for snacks on your lunch break.

It’s easy to ignore small purchases, because you think an extra $20 or $30 isn’t going to do much. But $50 a week adds up to $2,600 per year. It will cost you even more if you put those purchases on a credit card and pay interest on them.

Here are a few tips to break the habit of making small, unnecessary purchases:

• Ask yourself if it’s a want or a need. Before buying anything, ask yourself if it’s necessary. For example, groceries are a need, but food deliveries, takeout, and eating in restaurants are all wants.

• Make more meals at home. Pack a lunch for work as often as possible, and have food available at home so you’re not tempted to go out or order through an app.

• Unsubscribe from store emails. It’s harder to avoid impulse shopping when you’re bombarded with marketing emails about sales and new products.

This doesn’t mean you can never spend money on yourself. A good way to manage your spending is to give yourself a weekly fun money limit. Your amount could be $20, $30, $50, or whatever works with your budget. You can use your fun money however you want.

Using Credit Cards—Not Money—to Fund Your Lifestyle

Credit cards generally have very high interest rates. If you’re going to use a credit card, the best approach is to pay off the entire balance every month. That way, you’re not going into debt and dealing with costly interest charges. Americans have over $1.2 trillion in credit card debt, so it’s safe to say that not everybody pays in full.

Be careful about borrowing money for things you don’t need with credit cards. A credit card may be a convenient way to cover vacations or meals at expensive restaurants. Those purchases will ultimately end up costing you more for each month you carry a credit card balance. The better strategy is to save in advance and pay in cash. 

Credit cards can also be dangerous because the minimum payments are typically only a small portion of what you owe. This makes even large amounts of debt look affordable. But if you only pay the minimum, your payment may barely cover the interest charges on your balance, so you make hardly any progress each month.

Let’s say you have a card with a $5,000 balance and a 25% APR. If you make just minimum payments every month, you could be in debt for nearly 24 years and pay $9,736 in interest total—nearly twice as much as the amount you originally charged. If you’re in credit card debt, you’re better off putting as much as you can toward your balance to get it paid off ASAP.

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 end up in debt doing 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 could 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 look at 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.

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 get rid of it.

With an emergency fund of at least three to six 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, Poshmark, or eBay. 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 plan meals. Planning your meals in advance can help you save on food so that you have more to put toward your emergency fund.

Overstretching Your Housing Budget

Housing is most people’s biggest monthly expense. It’s also an area where people often stretch their budget to the limit.

Housing cost guidelines

The 30% guideline for housing costs has been around for decades. This rule recommends that you spend no more than 30% of your gross income on housing payment. Here are a couple of important details about this rule:

• Gross income is your total income before any deductions, including taxes and retirement contributions. For example, if you make $4,000 per month, your housing costs should ideally be no more than $1,200.

• Housing costs include renters/homeowners insurance and utilities. If you own a home, they also include any other costs and fees you have, such as property taxes.

Some people need to exceed the 30% rule, especially if they live in cities with a high cost of living. This leaves little money left over for savings or debt payoff.

Hidden costs of homeownership

When you’re a homeowner, your mortgage payment is just the beginning of your housing costs. You’re responsible for property taxes and homeowners insurance. You may need to pay homeowners association (HOA) fees. If you didn’t make a down payment of at least 20%, you may need to pay private mortgage insurance (PMI).

You’ll also need to cover repairs and maintenance. While these costs vary, a rule of thumb is to budget 1% of your home’s purchase price for them. If you paid $300,000 for your home, then you’d set aside $3,000 per year for repairs and maintenance.

How housing decisions affect financial stability

Housing decisions have a huge impact on the amount of money you have available every month. If you have an expensive housing payment, you could find yourself living paycheck to paycheck, without any extra money after you pay your bills. You could even end up relying on credit cards for everyday expenses, going into long-term debt.

On the other hand, an affordable housing payment could make money management much simpler. If your home doesn’t cost you too much, you can probably comfortably handle the rest of your bills.

Consider alternative housing options

Moving is a serious decision, but in the long run, it could pay off in a big way. You may want to consider downsizing to a smaller home or relocating to a cheaper neighborhood. Another option is to get a roommate, either to move in with you in your current home or in a new one.

Any of these options could free up $300, $500, or more every month. That kind of money can have an immediate impact on your debt payoff play or toward your emergency savings.

Living Without 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.

Putting Off Retirement and Long-Term Savings

Even if retirement is decades in the future, that doesn’t mean you should delay planning for it. In fact, you have a great opportunity to get an early start on your long-term savings.

Time is your most valuable asset

Compound interest can lead to incredible results with your retirement savings, and the earlier you start the less you’ll need to save. 

Imagine you start saving $300 a month when you’re 25. A 7% annual return is a realistic assumption and would give you $719,000 at age 65 when you’re ready to retire. You would have contributed just $144,000. The rest$575,000—is compound interest.

If you wait just five years to start saving that same $300 a month, you’d have a lot less at age 65. Another 10 years, and the numbers really start to show the impact on your retirement nest egg. 

If you start saving the same $300 a month at age 40, you could have $228,000 when you turn 65. Still a great return—you would have put in $90,000—but not nearly as much.

Here’s how it looks when you start saving $3,600 a year at different ages:

No one can go back in time and start saving sooner. But you can start saving for retirement today, if you’re not already, so your money grows as much as possible.

An employer match is free money

If your employer offers a 401(k) match, take full advantage. A 3% match on a $50,000 salary would mean another $1,500 in extra money each year for your retirement savings. You can check with your company’s HR department to find out how much of a match your employer offers and how much you need to contribute to get the full amount.

Debt blocks you from planning your financial future

Retirement savings is like paying the future version of yourself. You set aside extra money now so you have savings you can draw on later and won’t need to work forever. Debt does the opposite—it takes money away from future you, because you pay interest on purchases you made in the past. It also gets in the way of your long-term savings, because your money is tied up in debt payments.

Once you get free of debt, you’ll be in a better position to build your financial future. For example, if you’re paying $500 toward debt every month right now, that’s money you could use later to contribute to your 401(k).

Postponing Real Financial Planning

A financial plan is an important part of your money management. Here’s how to make your own financial plan.

Write down your goals

A written plan gives you a clear target and provides accountability. If you write down a goal to save $5,000 in a year and keep it in a place where you can look at it, that could help you keep your spending aligned with your goal.

Be proactive, not reactive

A plan could keep you from scrambling for solutions during emergencies. Without a plan, if your car breaks down and you might need to put the repair on your credit card, where you’ll pay costly interest charges. A plan allows you to be proactive with your finances andsave money ahead of time in an emergency fund. When an unexpected charge pops up, you can turn to your savings.

Start simple

Financial plans and goals don’t need to be complicated. Your first financial plan could be a monthly budget, a debt payoff plan, and a short list of savings goals. You can use your budget to figure out how you’ll manage your money and the amount you’ll pay toward debt and later savings every month.

Tackle your debt first

High-interest debt should usually be the priority because of how much it costs you. For overwhelming debt, consider working with a structured debt relief program. A debt relief company can create a customized plan for you and help you settle your debts so you can regain financial stability.

Take Control of Your Debt

If you’re struggling with debt now, you don’t have to continue to struggle. Freedom Debt Relief is a professional debt settlement company that can help you take control of your situation. Certified Debt Consultants will work with you to come up with a monthly deposit to fit your budget. Then, they’ll negotiate with creditors and debt collectors on your behalf. Contact us today to take the first step toward being free of debt.