In challenging economic times, you can’t afford to play fast and loose with your finances. Minor missteps can add up to thousands of lost dollars over time. Avoid five of the most common money mistakes, and you’ll start adding to your nest egg in no time.
Money mistake #1: Living beyond your means
This affects millions of Americans and is the cause of the majority of financial hardships. It all boils down to this: You can’t spend more than you earn. In a society that encourages spending, this can be a challenge to overcome. After all, we are bombarded daily with marketing messages, sales and offers. If you use credit to finance your daily expenses or buy a car or vacation you can’t afford you are living beyond your means. Establish a budget to track your income and expenditures. Avoid impulse buying and make sure you aren’t confusing wants with needs.
Money mistake #2: Failing to set up a sufficient emergency fund
A recent poll by MoneyRates.com and GetRichSlowly.org found that the cash reserves people have in emergency funds is mostly less than three months’ worth of expenses. Experts contest that this is simply not enough and that a job loss or major medical expense could send them in an unprepared financial tailspin that can lead to years of debt, and in some cases, even bankruptcy.
If you don’t have a sufficient emergency fund established, make sure you start setting aside a percentage of your income every month to cover unexpected expenses. Make it a goal to set aside around 6 months worth of living expenses to be prepared.
Money mistake #3: Paralyzed by options
Many people know they need to save and invest, but end up doing nothing because they feel overwhelmed by the number of options available. This is completely understandable.
It can be daunting to wrap your mind around the world of investment – especially if you are just starting out. However, don’t let that scare you into doing nothing. Start with something simple – like your employer-sponsored retirement plan, or a CD – and build on that effort as you become more comfortable. Also, don’t be afraid to enlist the help of a financial professional.
Money mistake #4: Neglecting your retirement fund
According to the Employee Benefits Research Institute’s 2010 Retirement Confidence Survey, 54 percent of workers in the U.S. report they have less than $25,000 in total savings and investments. That’s a scary number!
If you’re not saving for retirement, you should be. Start placing money into your employer-sponsored retirement plan as soon as possible and work towards the maximum contribution. This will allow you to maximize your earning power over the long term and save substantially more.
Money mistake #5: Treating your finances as a taboo topic
Money is rarely discussed openly and is often treated as a taboo topic. After all, can you think of the last time you were at a gathering or party and the topic of conversation was investment strategies?
This self-imposed isolation can make finances even more challenging than they should be. Don’t be afraid to become money savvy and discuss money matters with your extended family and circle of friends. Educate yourself online, seek out books and articles and talk to other people about their approaches.