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The journey to financial freedom starts with appreciating that you have a negative relationship with money and looking for ways to fix it. This post looks at the five top money mistakes people make and how to avoid them!
In This Post:
1. Postponing Financial Planning for Another Day
A personal financial tool is crucial for achieving both basic and major financial goals in life. This is an overview of an individual’s, couple’s or family’s current money situation and investments and how to use them to achieve long-term financial goals.
Essentially, a personal financial plan is your roadmap to financial freedom. A strong personal budget guides you on how to allocate your money. It enables you to live within your means by ensuring you’re taking care of your needs and wants (housing, healthcare, car, entertainment) while allocating funds to your loan repayment, savings and investments.
To create a personal financial plan;
- Determine your net income.
- Track your spending and identify areas you can make adjustments.
- Set short-term and long-term financial goals you plan to achieve. An example of a short-term goal is reducing credit card debt. Saving up for retirement or children’s education may be considered long-term.
- Make a plan on how much money goes to these financial requirements every month.
- Track your spending and make necessary adjustments.
- Regularly check in with your financial goals and plans to ensure you remain on track.
2. Failing to Have Ample Insurance Coverage
Life is full of surprises- some good, some bad. But if there’s anything that assures you a greater sense of peace in case of misfortune is having ample insurance coverage.
While the upfront costs may be higher, having an insurance cover assures you of financial assistance following an accident or disaster. Being open to unexpected turns down the road means having a less worried mind, which is an important tool for financial success.
The right type of insurance to buy depends on specific factors, such as age, lifestyle, dependents (e.g., kids) and employment benefits. In addition to car insurance, four policies are considered must-haves in everyone’s insurance portfolio:
- Homeowners insurance – the most common type of homeowners insurance policy is HO3, it covers property damage, legal liabilities and other financial losses in case an unexpected disaster befalls your home.
- Life assurance guarantees your family’s long-term tax-free financial assistance after your demise.
- Health insurance – allows you access to health services and medications without financial hardships.
- Disability insurance – a vital cover for people who work in injury-prone professions. It guarantees you a monthly income in the event of an illness, accident or injury that makes you unable to work.
3. Failing to Save
Failure to save is often cited as the number one reason most people face financial problems. We are not anti-spend. And you shouldn’t feel guilty spending the money you’ve worked so hard for on things you want.
But as the covid pandemic has taught us, a life without savings is not something anyone is ready for: it’s dangerous and full of harsh consequences.
Having no money saved means that you don’t have an emergency fund to cater to unexpected occurrences.
The 2021 Report on the Economic Wellbeing of US Households in 2020 shows that millions of Americans would be unable to pay their monthly bills in case of a 400-dollar financial setback.
That’s to say that an unexpected expense like a house or car repair that’s not covered by the insurance will often get most people into debt quickly.
A spend-first lifestyle also means that you’re utterly dependent on your monthly income, so much so that you can’t quit your current job to pursue something else that you’re more passionate about.
4. Living on Borrowed Money
We have to agree that borrowing is inevitable in most people’s adult life. Actually, it’s a fact that the wealthy get wealthier by borrowing. But there’s a huge difference between how the rich and the middle-class person borrows.
The rich people borrow money to make more wealth through the concept of arbitrage. They use borrowed money to exploit profitable opportunities, pay off the loan plus the interest and pocket the difference.
But in most cases, the average person borrows money to pay for unproductive and ultimately unsatisfying assets like a second vehicle, clothing and tech gadgets.
The tragedy of living on borrowed money, especially payday loans, is that it’s a vicious cycle. When you take a small loan to pay for an unplanned expense, you’re more likely to take another loan to pay for the first one.
Come payday, you repay the second loan, but this leaves a dent in your monthly budget that needs to be filled using another loan. Before you know it, you’re in a financial avalanche that leaves you ensnared in a long-term debt trap.
Here are tips to getting out of the debt cycle:
- Say no to borrowing more money.
- Put the plastic away. Pay in cash or cheque, so you know how much you’re spending with each purchase.
- Live within your means. Make sure you’re not spending more than you’re earning.
- Create a debt repayment plan.
- Cut off some of your expenses. For instance, go out less frequently and use that money to repay your debts.
5. Rushing to Buy a New Car
Rolling off the yard with a factory-fresh car is most car shoppers’ dream. It’s brand new, shiny, and the new-car scent is intact. Also, because you’re the first owner, the engine is in pristine condition, guaranteeing you peace of mind for years to come.
But buying a new car is never a brilliant investment unless you’re paying in cash, and the purchase won’t deplete your entire savings and emergency fund.
First things first. New cars are darn expensive. You’ll certainly need a higher auto loan if you’re financing it, which means a longer payment period and more interest charges. It’s not just the purchasing price that is high. Newer cars also cost more to insure due to their high replacement value, repair costs and theft risk.
Secondly, remember that you don’t own the car until you’re done paying off your loan. In other words, if you fall on hard times and are unable to make on-time payments, your creditor or dealership is well within their rights to repossess the car. While most dealers will allow you to reinstate your loan, this often comes with repossession costs and late fees, leaving less money in your pockets.