Money Smarts Blog
10 Common Money Mistakes & How To Fix Them
Aug 25, 2020 || Elizabeth VanCamp
Whether you’re just starting off on your own or you’ve been adulting for a while, there are plenty of money mistakes you might be making. Some are small mistakes which have easy fixes, while others are big ones which require more work and time, but most money mistakes have this in common: they’re avoidable and fixable.
This is good news for those of you who, like me, have realized that you’ve made some irresponsible or simply ill-informed financial decisions and want to do better going forward. To help you avoid some money related heartache, here’s my list of 6 common money mistakes and how to fix them.
1. Not saving
There are lots of mistakes you could be making when it comes to saving and savings accounts, but the biggest one is not saving at all.
You might think you don’t need to save because you’re young and you have plenty of time to do that, or maybe you don’t save because you don’t have a lot of extra money after your bills are paid each month. Either way, if this is you, it’s time to change your mindset.
Whether it’s saving for retirement or just building a rainy day fund, the sooner you begin saving for your future, the better off you’ll be.
Here’s how to fix it: Start paying yourself first every month. When you build your monthly budget, plan how much money you can afford to “pay yourself” after paying all your bills. Have this amount automatically deposited into a savings account.
If you make saving a routine part of your budgeting process and set up automatic deposits it’s easier to stick to. And if you ever need to dip into your savings you’ll have a better picture of how much money you can really afford to spend!
2. Not taking advantage of free money
A second saving mistake you might be making is not taking advantage of free money. There’s two different ways you can make this mistake: you don’t shop around for the best savings account interest rates for your needs, or you don’t take advantage of your employer’s 401(k) or other retirement plan match.
How to fix it: Look into the savings account options your financial institution offers and make sure you meet the balance and transaction requirements so you get paid dividends on your account.
You can also shop around for the best rates or products if you aren’t 100% happy with what your current financial institution offers. You might get a better rate with a certificate of deposit than a traditional savings account, but you’ll have to be willing to lock your money down for awhile.
Also, if your employer offers a match on retirement plan contributions, make sure to contribute at least enough to secure that match. If you can contribute even more, that’s a plus.
3. Using credit for things you don’t need
One of the easiest ways to get over your head in credit card debt is by charging things you don’t need. If you have a cash back or other rewards credit card you might use it for all your day-to-day purchase to take advantage of reward points, but this system isn’t for everyone.
If you can’t pay off your card every month, or you know it’ll lead to over spending, you need to make a change.
How to fix it: Identify all the things you splurge on throughout the month and make a plan for eliminating those purchases (bye bye, Target runs) or build them into your budget. If you can’t budget for it, you can’t afford it, and you certainly shouldn’t charge it.
Then, keep yourself accountable to the plan by looking at your checking account before making purchases. A general rule of thumb I suggest following is only charging things you have the money to pay for already. With mobile banking, there's no excuse for not knowing your balances.
It’s a good habit to get in so you can safely build credit while protecting yourself from unnecessary debt.
4. Not making a plan to pay down credit card debt
I’ve been there with credit card debt. It’s so easy to fall into debt using a credit card even when you have good intentions of paying off the balance.
Once you’re in too deep, it can be incredibly difficult to dig your way out, especially if you don’t have a lot of extra income to put toward the balance. If you’re carrying high interest credit card debt month-to-month without paying it off, you’re wasting money and you’re going to need a plan.
How to fix it: If you have multiple credit cards, make the minimum payments on all the cards, and apply whatever extra funds you have each month to either the largest balance (debt avalanche) or the smallest (debt snowball). As you start to pay off card balances, you can take the extra money and apply it to your remaining debt, which will help you pay off all your debt quicker.
If you only have one card, start planning how much you can reasonably put towards the balance each paycheck, and set up automatic payments so you can start paying down your debt as soon as you get paid.
Pro tip: Consider consolidating multiple cards into one low rate card. This makes managing payments easier and you'll pay less in interest over time. Many cards offer 0% for a certain time (just make sure you know the rate after the intro period is over).
5. Not budgeting for fun
Whether it’s going out with friends, doing a fun activity with family, or going on a date, you want to be able to have fun without stressing about what you can or can’t afford. This is where budgeting for fun comes into play.
No matter how great your budget is, if it’s too rigid and it doesn’t allow you to have a life it won’t work.
How to fix it: If after planning for bills and paying yourself (as discussed above) you still have some money leftover each month, budget it for fun activities.
Setting aside some cash that’s specifically for having fun, relaxing, or enjoying hobbies will help you stick to your budget, and that means more money staying in your savings, fewer charges lingering on your credit card, and less money anxiety for you.
And if you don't have extra funds leftover, it's okay. A few months will pay off in the long run when you see the difference you're making in paying down debt.
Pro tip: if you have “fun money” leftover at the end of the month, roll it over for the next month and plan something relaxing for yourself to enjoy!
6. Thinking you don’t need credit
Some people view having credit as unnecessary, and those people are wrong. A good credit score can help you snag that dream apartment or an amazing rate on your mortgage, and a bad score can keep you from a lot of your financial and life goals. Don’t let this happen to you!
How to fix it: First of all, if you don’t have credit, start building it. A low limit credit card or a small personal loan that you can pay back quickly are both good places to start establishing and building credit. Also, putting household bills like electric and gas in your name can build credit.
7. Ignoring your credit score
Keeping your credit healthy is a balancing act and neglecting it is a mistake that’s made too often. It’s up to you to catch mistakes with your credit score or report, and chances are a mistake might pop up from time to time.
For reference, in 2016, 74% of the consumer complaints made to the Consumer Financial Protection Bureau (CFPB) were regarding incorrect information on a credit report.
How to fix it: Once you start building credit, don’t forget to monitor your score. Learn what negatively and positively affects it and adjust your finances and debt accordingly (if you can), and make sure your credit score is correct so you can reap the best benefits from it as possible.
8. Living without a budget
Have I beat this dead horse enough yet? You need a budget. You need a way to track income vs. expenses, as well as the accountability that a budget provides. Creating a budget isn’t fun but it doesn’t have to be complicated.
How to fix it: Find a budget method that works for you – like the envelope budget, a simple spreadsheet or an online app like our Money Management tool or Mint. Just find a way to track your income and expenses that makes sense.
Once you’ve created a realistic budget with bills, savings, and fun money all built into it, don’t stray from it unless you absolutely have to.
9. Taking out loans you don’t understand
There are several kinds of debt mistakes that can hinder your financial well-being, like not fully understanding student loans and how you’ll be affected by them after graduation.
If you need student loans (or any other kind of loan, for that matter) for your education, try to gain a good understanding of the repayment process and only take as much out as you absolutely need for school.
How to fix it: If you’re still in school and using loans to pay for it, do the math to find out how much you actually need for each semester and don’t borrow even an extra penny. Taking out extra loan money is only going to hurt you in the long run.
If you’ve already graduated, talk to your lender about your interest rate and set up a repayment plan. If you have government loans you might be entitled to special repayment plans, and you owe it to yourself to find out if you qualify.
At the end of the day, you’re going to have to pay them off so you better get started.
10. Paying for life events with debt
If you can help it, don’t take out loans or rack up credit card debt for things like weddings. Although my wedding was a wonderful event that I remember fondly, I wouldn’t say a one day celebration (no matter how special in the moment) is worth racking up more debt.
The same idea applies to other life events, like buying a new house or car. I’m not against getting a mortgage or car loan, but really assess your needs vs. wants before taking on new debt.
Do you really need a bigger house or a fancier car? If so, can you afford the new, higher payments? Or, could you continue to live within your means so you can avoid adding new debt?
As nice as a larger house or a fancier car might be at first, it’s another thing that might not be worth adding more debt and money related stress to your life.
How to fix it: If there’s a wedding in your future and you’re the one paying for it, set the date for far enough in the future that you have time to save for it.
If you’re truly ready to ditch your clunker or upgrade to a larger home, use a financial calculator to have a ballpark idea of what your future car or mortgage payments will be.
If the estimated payments are much higher than you can afford, it might not be the right time for these life changes.
Managing your money well and avoiding money mistakes takes time and effort, but avoiding these ten common money missteps can lead to more stability and less stress for you.
You can point your financial journey in the right direction by addressing any of these mistakes you might be making with your money or finances, but remember to take baby steps.
You didn’t get yourself into your current position overnight, so it’s going to take time to fix things and get back on track, but you can do it!