Financial management is challenging, especially if you’re unsure of which pieces of advice to follow.
Luckily, we’ve created this guide on the 10 money mistakes and myths to avoid to help with your personal finances.
Mistake #1: Overspending
Many people spend more money than they have.
Overspending, or wasteful spending, results in falling behind on bills, not saving, and not investing in the future.
Roughly 3 out of 5 Americans, especially Gen Z and Millennials, don’t know how much they spent last month.
To avoid this habit, consider which purchases you do need. Impulse buying, unnecessary recurring subscriptions, or dining out causes wasteful spending, especially if you do not end up using what you’re paying for.
Keep track of your weekly spending by following along with your bank account or credit card. Look at your statements monthly to see where your money is going. Another option is to use financial apps that track your purchase and keep them in categories.
Mistake #2: Falling for Get-Rich-Quick Schemes
We all want to have financial freedom or extra income, but some desire it too quickly to the point they will fall for getting rich quick schemes.
Pyramid schemes are common, where companies want money upfront and promise future profits.
It is essential to be realistic with business ventures, as six-figure income in a year is not common unless there’s luck involved, and most are unlucky.
If something sounds too good to be true, trust your instincts and avoid this trap.
Mistake #3: Not Saving Money
For the last decade, many people were not saving enough or had little to no savings.
However, near the end of 2020 in the US, the personal saving rate spiked, signaling that Americans realized the power of saving, especially during hardships.
Savings are significant for future endeavors or emergency funds, having it in a separate bank account. High-yield savings accounts are available, and retirement accounts can function as savings accounts.
An excellent method to begin saving money is to set aside a percentage of your income every month into a high-yield account. Within a few years, the account will grow substantially.
Mistake #4: Not Having Financial Goals
Having no financial goals is a mistake many people make, as future endeavors await that may increase finances.
Saving to buy a home, start a business, going back to school are common goals that change people’s lives.
The easiest way to avoid having no financial goals is to plan and have a timeline. For instance, if you want to buy a home, calculate how much you must save every month or year to build up a healthy down payment.
Mistake #5: Getting Behind on Payments
Whether it’s a student loan or a credit card, getting behind on payments creates financial stress due to interest rates increasing.
Paying the minimum balance may be enticing, but always paying your statement in full is the best way to keep up with payments. If you can, pay more to reduce your balance, reducing the amount of interest you pay over the long term.
Myth #1: Credit Cards Are a Great Debt Solution
Credit cards are a great way to build your credit score, but they can also be harmful if you do not manage them correctly.
Think of credit cards as a tool. For instance, if you want to make a big purchase but don’t have the money, credit cards come in handy. But keep in mind that you’ll need to pay back the amount — with interest — to build credit and not fall into debt.
Credit utilization also comes into play, meaning you should use 30% or less of your credit card balance to continue having a great credit score.
Overusing and relying on your credit card has its implications because if you miss a payment, the interest rate goes up, causing more unnecessary expenses and debt.
Myth #2: You Only Need One Source of Income
In today’s world, there are various sources of income to keep individuals and families afloat.
Having one income source, especially for the lower or middle class, may not pay their monthly expenses.
In 2019, a survey revealed 3 out of 10 Americans need a side income to keep up with their payments. Most of those who have “side hustles” were the younger generations, compared to their grandparents.
Many side incomes exist, especially with online gigs available or freelance apps for extra income. Learning a new skill and applying it may increase your odds of getting a promotion, but you can also apply your abilities to a contractor or freelance job.
Myth #3: You Don’t Need Investments
The stock market is not for the faint of heart, as turbulent times reveal huge downfalls and consolidation, which creates doubt in millions of people’s retirement accounts.
However, looking at the bigger picture, the Dow Jones or S&P 500 have the most significant returns, as the US market is in a continuous uptrend.
Timing is an essential factor when it comes to investments. For instance, the infamous “boom and bust cycle” describes our economy, as recessions are the bust, followed by the economy picking itself back up. Oddly enough, when times look grim, that may be the best time to invest.
If you are unsure, consult with a financial advisor to open an investment account. Index funds are available with their return percentages, but an advisor can also show you the best ways to invest your money.
Myth #4: You Only Need One Bank Account
Spreading your money into several accounts helps to keep spending under control.
Whether it’s having a savings or rainy day emergency fund, having another account separate from spending may help increase your net worth.
Having your accounts for large payments—such as loans, car payments, and mortgages—separate from groceries and household essentials bills is another smart way to use multiple accounts for saving.
Myth #5: Not Everyone Needs to Budget
Creating a budget is one of the best practices you can do to control your finances, and it’s not just for people who are struggling with debt.
Compare your income and expenses, then follow these tips to start budgeting:
- Focus on where you spend the most money, then cut costs, becoming frugal
- Think of your income and what percentage goes towards wasteful spending
- Savings = Income – Expenses
- Download a budget app or use Excel to track your spending
Final Thoughts
Becoming aware of these 10 money mistakes and myths to avoid may help you in your financial endeavors.
Start today by applying these tips to begin saving, budgeting, and investing for the future—the right way!