If you ever feel like you’re constantly living hand-to-mouth and never getting ahead, take a minute to see if anything on this list sounds familiar. Oddly enough, most people make the same mistakes that end up putting roadblocks that stunt their potential for financial success. What you may not realize is that the banks and credit card companies are counting on this – so much so, that their products are developed based on poor buying and payback habits.
You can change all of that by making smarter decisions and understanding how and why these mistakes happen. Today could be the day that you get it all together and take the actions that will reverse your financial situation and put you on the road to wealth-building instead of scrambling to make ends meet. Take a look at these ten common financial mistakes most people make and see how to solve them.
10. Living Hand-to-Mouth
No one likes living hand-to-mouth, yet according to an article on CBSnews.com, in 2014, over 38 million American families are living hand-to-mouth. If you’re not familiar with the term, it means living paycheck-to-paycheck without any extra cash flow. By the time you have spent your current paycheck, you are frozen until you get the next. This equates to one in three Americans, which is one-third of our country’s residents.
Those who live this way, think there is no way out. However, financial experts will tell you to go without your extras, such as daily coffees, for a couple months to save extra cash and then start a debt elimination strategy. Before you know it, you will have a much more financially stable life.
9. Credit Card Balances
Using credit cards for essentials is the first huge credit card mistake. Not paying off balances as you spend is the second. Did you know that when you don’t pay off your balances, you wind up paying around three-times more than the original amount of the item?
The credit card companies are counting on it, in fact, as that’s how they make a substantial amount of interest. According to debt elimination expert Kevin Lane, “The same money you are paying in interest could be going into your pocket. You would actually be building wealth instead of handing money over to credit card companies.”
8. Mortgage Loans
If you have ever watched the show House Hunters on HGTV, you know that 99 percent of realtors will encourage buying a home with a higher sales price that the buyers originally intended. Why? Because they are paid through commission-only, so the higher the price, the higher their portion.
Not only will they encourage it, they will justify it by telling you it is a financially sound plan because you will get a bigger interest write-off on your taxes. What they don’t tell you is that unless the sales price is in the millions, you may only be saving a few hundred extra on your taxes. What you are left with is a hefty mortgage that often puts a strain on your finances.
7. Saving Before Paying Debts
Some financial guru along the way encouraged people to sock away money no matter what the financial situation. However, we beg to differ. Consider this: if you are paying a higher interest on debts than the interest you are making on your savings account, then you are actually losing money.
It’s a simple math equation. For example: if you are paying 20 percent interest on your revolving credit card balance of $2,000 and your savings account is only making 2 percent, your money is much better spent paying off the credit card balance until it hits a zero balance. If you can’t pay it off in a couple of payments, then be sure to pay more than the monthly minimum – an amount that is intended to keep you in debt. Once the debts are paid off, you’ll have more than enough money to start creating your wealth account. Debt elimination is a huge step in creating wealth.
6. Not Having Emergency Fund
Emergencies happen to all of us. It’s doubtful that anyone is immune, however some people are much more prepared than others. One of the best ways to ensure you will always have extra money when you need it is to create an emergency account. Financial pundit Suze Orman suggests saving enough money to cover expenses and debts for eight months.
Many young couples figure this is a pie-in-the-sky amount and forget about it entirely. Yet, any amount socked away for emergencies will end up saving you in the long run. Here’s why: when you are in emergency mode, you are stuck with whatever quick fix you can find to eliminate the emergency. If your washing machine breaks down, for example, you can’t wait for the next sale or waste time applying for a personal loan. Most people will wind up buying the most convenient fix available, which will inevitably cost more. Bottom line is that not having an emergency fund will ultimately get you in worse financial shape, with few exceptions.
5. Wasting Discretionary Income
Many people who are not happy with their financial situation are also unaware of how much money they spend on life’s little extras, such as fancy espresso coffees and buying items that seem essential, but aren’t.
If you keep a log for one month, it is likely you will see exactly why you don’t have any extra money. If you buy two coffees per week, you are probably spending $32 a month versus making coffee at home for pennies. If you go out for lunch every day rather than bringing it to work, you are probably spending close to $50 per week, or $200 per month. Making lunch will probably save at least two-thirds of that amount. It is often these little extras that can be easily eliminated and will give you money to pay off debt and start saving.
4. Buying a New Car
If you have never read the non-fiction book “The Millionaire Next Door” by Stanley and Danko, it is highly recommended. It will give you a picture of what the self-made millionaires in our country do to get and stay wealthy.
One of the key findings is that they do not buy brand new cars, but rather, buy used cars that hold their value, such as a high-end Lexus. Then every couple of years, they sell their used car for almost the same amount as what they paid for it. According to edmunds.com, a new car loses its value the minute you drive it off the lot… so why waste the money when you can purchase a slightly used auto for a price that is equitable to the car’s value?
3. Using Home Equity Incorrectly
Many people who have equity in their home from paying down their mortgage, use home equity loans like it was free money. However, what they don’t take into consideration is that they have added to the overall mortgage by removing the asset they created from getting a lower balance.
According to an article in Bankrate.com, many use their equity loans to pay for college, pay down credit card debt and more. Ray Cavazos, Money Management International spokesperson, gives his perspective, “With home equity loans, you are placing your home on the line. If you default on this loan, you could lose your house.”
2. No Family Budget
Let’s say you’re the person in the household who actually pays the bills. Each month you find yourself pushed to pay bills and have money left over. Do you struggle alone or let your family members know the situation? Do you put everyone on a budget or figure you will let the chips fall where they may?
Creating a family budget is not that difficult and will do wonders for your health and stress-level. Start by having everyone in the family record their daily spending for a month or even a week. Compare the totals with outgoing debt expenses and see which extraneous items can be eliminated or reduced. Hold family members accountable by reducing their next month’s spending allotment with the amount they were over, as it will immediately force the issue. Before you know it, everyone in the family will be working together and the family budget will continue to do its job.
1. Not Saving for Retirement While Working
Knowing how much to save for retirement is difficult, yet an important step toward creating a worry-free future. Many avoid this topic, as it seems light-years away. However, time sneaks up on everyone. Before you know it, you have passed your peak earning years and will start to feel panic and a bit of fear as to how you’re going to make up for it.
The truth is that if you start saving even $100 per month at an early age, you will have nothing to worry about. Let the Baby Boom generation be a lesson to all. Since the group didn’t heed this lesson early on, many boomers are having to work until age 70 and longer. Expenses have more than doubled over the years and income has remained the same or even reduced. It’s a panic that can be avoided.