10 money mistakes anyone can make
The habits you form now will affect you for the rest of your life. Understanding the most common financial money mistakes will help you make better financial choices in the future.
Avoiding costly money mistakes will save you money, time & stress.
I have listed below the 10 money mistakes that most people make with their financial situation:
10. Not having an emergency fund
An emergency fund is your first line of defense against unexpected financial problems.
Unexpected financial problems happen rather regularly. Cars and the family home need repairs, health, kid’s needs, and so on. It’s a fact of life.
If you don’t have an emergency fund, you will likely have to borrow money when an emergency pops up. And as we’ll see soon, borrowing is an even worse money mistake.
So how much should you save in your emergency fund? A good rule-of-thumb is to have six months’ of living expenses saved up. In addition, be sure to keep your emergency fund in a safe place — you certainly want it to be there when you need it. Don’t worry about earning a ton on it, no one ever became rich by making money off their emergency fund, just make sure it’s safe and accessible.
9. Neglecting to make a will
Without a will is, guess who decides what happens with your finances and your kids? The government! Do you want to let your state decide these issues for you?
To avoid this a financial money mistakes move, you need a will and the other documents that account for good inheritance tax planning. And be sure to update them regularly as your life situation changes.
8. Not having enough insurance
I think of insurance as a very big emergency fund that supplements your cash emergency fund. It covers the things you couldn’t save up to cover in advance, helping to replace/protect the largest assets you have – your career, your home, your investments – if you experience a major accident, death, or injury.
I believe the following are the most adequate for having insurance coverage on:
- Long-term Disability
- Long-Term Care
One more bit of advice: Do not go overboard and become over-insured.
7. Marrying the wrong person
Couples, where both spouses know and apply financial basics, do much better than ones where one or both spouses have bad financial habits. The Millionaire Next Door says:
“What if your household generates even a moderately high income and both you and your spouse are frugal? You have the foundation for becoming wealthy and maintaining your wealth. On the other hand, it is very difficult for a married couple to accumulate wealth if one is a spendthrift. A household divided in its financial orientation is unlikely to accumulate significant wealth.”
In addition, a divorce is a major hit to any couple’s finances.
6. Not saving
As I noted earlier, the formula for financial prosperity is pretty simple:
- Spend less than you earn
- Do this for a long time
If you do these two things, you will be wealthy. Why? Because you’re saving money.
On the other hand, if you’re not saving, you’re not making progress financially. And the longer you wait to save, the harder it will be to catch up later.
The safest move to avoid money mistakes is to save a portion of every paycheck you receive. A good rule-of-thumb is to start by saving at least 10% of your income, and from there the amount should increase over time.
And some may ask just what you are saving for? Any major expense you know you’ll have in the future: a house, retirement, cars, education costs for kids, etc.
5. Buying too much house
The 5th money mistakes people do is buying too much house.
If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than four times your household’s annual income but is conscious and understand the effects of rising interest rates.
4. Waiting to invest
Three factors determine how well your investments (savings) perform:
- The amount that’s invested (how much is invested)
- The return rate on your investments
- The length of time they are invested
Most of what we see in the press deals with getting the best return on your money. But actually, the factor that most influences the value of your investments is the time you have invested.
And the longer you wait to save and invest, the more you’re costing yourself.
Here’s an example that illustrates the power of saving early:
Smart Saver starts saving £3,000 every year, starting at age 20. After 10 years, her £30,000 total contributions are worth £47,000 (at an annual growth rate of 8%). At age 30, Smart Saver stops saving and makes no further contributions. She just lets the money grow at an 8% annual rate of return for the next 30 years, until age 60. At age 60, the £47,000 will have grown to £472,000.
Her sister, Late Saver, waits until age 30 before she starts saving £3,000 a year. Unlike her Smart Saver sister who stopped saving after 10 years, she doesn’t stop saving. She saves every year for 30 years, from ages 30 until she is 60. At age 60, her account is worth only £367,000.
Now below are a couple of extra points to this example to show how Smart Saver could have made it big in saving and investing for retirement:
- If Smart Saver would have kept saving £3,000 her whole life, she would have ended with almost £835,000.
- And if that £3,000 would have been £5,000, she would have ended with £1.4 million.
So, the solution to this money problem is to: save early, save often and save more (as a percentage of your income) as time goes by.
3. Being deep in debt
The solution to this mistake is simple:
- If you’re in debt, start utilizing these steps to get out of debt.
- If you’re not in debt, don’t get into debt.
2. Not working to maximize your career
Your career earnings are your most likely important financial asset.
This is because the average person can reasonably expect to earn in the neighborhood of £1.5 million during his lifetime. But if that person works hard and grows his income at 8% per year, he could have more than £2.25 million more than that. If he doesn’t, his £1.5 million can dry up to a bit over £750,000 (or even less). So not working to make the most of your income can cost you millions of pounds.
To avoid these money mistakes, simply develop and execute a plan to make the most of your career.
You must take care of yourself physically. Eat well, get plenty of rest, exercise, and enjoy life. Your career and its earning potential are dependent on you being able to work.
If your outflow exceeds your income, then your upkeep will be your downfall.
The first step to gaining wealth is spending less than you earn — it’s vital to making any financial progress. So, when you over-spend, you’re doing the most damage possible to your finances.
There are two types of over-spending that can ruin your finances:
- Over-spending on the little things – the small amounts that seep out of your pockets here and there and eventually become large.
- Over-spending on the big things – homes, cars, boats, and so on.
The top complaint I hear from people who don’t have balanced budgets is, “I don’t make enough money.”
The vast majority of cases (probably 95% or more), it’s not the amount these people make – but the amount that they spend that’s the problem. (In some cases it’s true that people simply don’t make enough money to save, invest, etc. As such, they need to concentrate on increasing their income as much as they need to control over-spending.)
About Mike Coady
Mike Coady is an expat expert based in Dubai and is on hand to help with all of the above and more.
Mike is an award-winning money coach and industry leader in the financial sector.
Qualified to UK Financial Conduct Authority (FCA) standards, a member of the Chartered Insurance Institute, a Fellow of the Institute of Sales Management (FISM), a Fellow of the Institute of Directors (FIoD) and featured as a highly qualified Financial Adviser in Which Financial Adviser.
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For more insights, further advice or guidance, you can get in touch HERE.
Blog published by Mike Coady.