Money is said to be a good slave, but a bad master. Only those who know its’ true value and can manage it will keep it. However, we often make mistakes when it comes to making money, managing money and even using it.
Worse still, a closer look into our lives will reveal that we’ve been making the same money mistakes over and over. No wonder financial consultants call them common money mistakes.
If you didn’t make the mistake, probably your grandmother or uncle did. Or you know a close friend who made the same money mistake as you did, more than once!
In fact, psychologists say that humans are creatures of habit. Our brains love the neutral gear so that we can do the same activity effortlessly.
This applies whether it’s a good habit or a “bad habit.” Once we form the neurotic pathways in your brain, we’ll do it even without thinking about it.
Coupling this explanation with Kahneman and Tversky’s Nobel winning Prospect Theory, which describes the irrationality of humans in economics, it is clear why people make “common money mistakes.”
Our economic decisions are often emotional and we relish the habits because we’ve established neurotic pathways.
In this article, we appeal to the intelligent and rational person in you. We’ll evaluate common money mistakes you could have made in 2018 and how you can make sensible decisions to avoid the same mistakes in the coming year.
Not Having a Budget
Budgeting is the most essential money decision that turns cash from being a master to a slave. It doesn’t matter how much you have, a person operating without a budget is under the control of money. This is the root of all common money mistakes.
Just like highly effective people plan for their time on the day before, you’ll need to plan for your money before you lay your hands on it.
However, several people ignore the need for a budget and choose to pay for supplies and other needs as the bills come in. That’s why most folks live paycheck to paycheck.
It’s a common habit and a common money mistake.
Scarcity is an inherent property of money. However, we can change the habit of living in scarcity by budgeting and sticking to the budgets.
What you can do?
Take a piece of paper or open a new blank document on your smartphone and write your monthly take-home pay. Then subtract regular monthly expenses such as rent, transportation, and utilities. After that, set aside monies for living expenses and allocate about 20% to 30%, of the take home, to savings and debt repayment.
If you don’t know how much you spend on living expenses, start tracking your expenses on Trim Financials or Personal Capital apps. If you are not into the mobile Apps frenzy, check out Charlie for an excellent solution.
Your budget is crucial to attaining your financial goals.
Not Realizing How Little Things Add Up
We are all guilty of making this common money mistake. Many people don’t realize how much they pay in little expenses. Bank interests, “small fees,” a cup of coffee here worth seven dollars and ten dollars there, all don’t seem like a big deal. That is unless we start tracking the payments and do the math.
If you are paying you’re making too many “small payments” MyBankTracker can help you stop these leaks and find ways to save and grow money in 2019.
If you are spending too much on “small and frivolous” bills check your budget. Chances are high that you don’t have one or you’re not sticking to one.
Log on to websites such as TheMoneySavingMom and learn tricks for frugal living, and you’ll see how “little things” add up. Lastly, learn how you can convert these little things into substantial investments on Acorns.
You’ll be surprised at how fast these “little” expenses pile and see that opportunities for alternatives abound.
Now, don’t blame yourself yet. Here’s an example of why Americans don’t save.
Often, you’ll tell yourself “I should pay my credit card bill as fast as possible.” This is good reasoning because we don’t want to pay a lot of interests.
There’s an immediate consequence (punishment) when you don’t pay your credit card bill on time. However, few Americans would say, “I should set aside some emergency cash as fast as possible,” because there’s no immediate corresponding “reward” for our action.
It seems like the stick beats the carrot.
Consequently, our minds form neurotic pathways that default to fire-fighting credit card bills instead of saving. So, it’s not entirely your fault that you don’t save.
But, you are an intelligent being and you can make rational choices. Right!
What you can do?
Now that you know how you can track your expenses and that you need to budget, you can take advice from Warren Buffet.
Set aside some savings before you spend any of your income. Save $100 or even $ 50 from your paycheck and in a savings account which you cannot easily access.
The ultimate goal is to build a substantial fund that can take care of your living expenses for about six months should you encounter a catastrophe such as a job loss.
Not Saving For Your Retirement
Here’s a popular admission to a common financial mistake you’ll hear from the baby boomer generation. “When we were in our 20’s, retirement was the last thing in our minds.
But as we got older, not only did we realize how fast time flies, but it also became difficult to put aside some cash for our retirement due to the burdening financial obligations.”
Not saving for retirement during our “youth” is a common financial mistake because our minds prefer dealing with issues at hand. We don’t give much regard to the future.
Think about it, we make the same mistake concerning our health when we eat junk food or smoke and when we don’t exercise. Essentially we relish living for now!
However, you can make rational choices and avoid all the misery that comes with an unplanned retirement. Take advantage of the eighth wonder of the world – compound interest – and start building your retirement corpus. Remember, time pays better than the interest rate or the amount you put aside. So start now!
Living on Borrowed Money
The credit card is an excellent way to build your credit score and an amazingly convenient way to shop. Moreover, several credit card companies offer reward points, including cash back, whenever you use the card.
However, if you are ever late on your payments or stick to the bare minimum pay, you are living on borrowed money.
Think about it, why should you toil for your money all week long and then live on borrowed cash which you pay high interest?
It’s a paradox and a trap towards living beyond your means. But you can stop the cycle. Pay your entire credit card bill on time and stop paying interest for your groceries, gasoline and a host of other items.
Earning From Only One Source
Whereas the baby boomers and preceding generations may have “justified reasons” for making this mistake, later generations, especially in the digital era cannot get off the hook.
Narrowing your income source to just one makes you susceptible to financial instability due to industry shocks. On average, an American can expect to be laid off from a job three to four times during their productive lifetime. That doesn’t include voluntary resignations and career changes.
Fortunately, you can avoid this financial mistake and diversify your income streams. You can start by simply taking surveys on websites such as Harris Poll US, and later on take-up freelance gigs on platforms such as TaskRabbit and Fiverr. You’ll be amazed at how much you can make during your “spare time” without affecting your 9 to 5.
Being Late on Your Insurance Payment or Having Incorrect Insurance
If you are late on your health insurance payment, ask yourself: Do I have a spare $ 10,000 lying around? That’s the average cost of hospital stay in the US, according to the Business Insider.
The same goes for your car insurance or your life or home insurance. The opportunity cost of being late on your insurance payment is the meeting the cost of the worst that could happen.
Therefore, make the rational choice and ensure that you have the right kind of insurance to cover your risks and that you are prompt on the payments.
Lastly, Not Investing In Your Goals
Your future financial well-being is an outcome of how you invest in your goals now. Former President Abe Lincoln said the best way to predict the future is by planning it.
So, along with avoiding these common financial mistakes, don’t make the mistake of not planning and not investing in your goals.
You can invest in learning a new skill on websites such as Udemy at a fraction of the cost, and unstuck yourself from an unrewarding career or build skills that’ll land your dream job.
But remember, there are many ways to earn money, but to sustain your wealth you have to know how to handle your own money.