It’s difficult to make the smart money choices every time, yet at the least, you should make it a point to avoid the common or too expensive errors. Be it preparing a budget for the month instead of an entire year, overlooking future emergencies or more, these are some of the common money management mistakes that will dramatically affect your finances if not corrected on time.
To help you know more, this article reveals the top 10 money management mistakes along with the various steps that must be taken to avoid them.
1. Working without a budget
Effective management of money is based on your budget. This is because if you don’t have a budget by your side then you will never know what’s coming into the account, where it is going and the places where you are prone to overspending. A good practice is to come up with a budget considering three important factors:
- Income: Your income is the key component of the budget. Without regular source of money, you will never have a sustainable way for making purchases and paying bills. For budgeting focus on the take-home pay or net income only.
- Fixed Expenses: These refer to the expenses that remain the same from one month to another. Your insurance, car payments, rent and associated bills are amounts that are specified before a given period of time. Due to this predictability, determining what the fixed expenses of the month would be becomes quite easy.
- Unplanned Expenses: Emergencies can happen anytime and by setting a certain portion of money would help in dealing with those unexpected situations without financial troubles. This can be anything from health hazards to air conditioning repairs, water heater issues or more.
- General Savings: Experts often emphasize on paying oneself first, and this is where your savings have a huge role to play. Set at least 10 per cent of income prior to paying any other bills and soon you’ll find yourself saving to your maximum potential.
Thus, with budgeting you are able to plan your financial priorities in a much better way.
2. Lack of Tax Planning
Proper tax planning is critical for financial stability, as it allows you to invest and save more. A large volume of the income goes for paying taxes, this is the reason why avoiding or deferring the taxes using provisions for tax exemptions must be incorporated in your financial planning. To do this, focus on tax-saving instruments that will reduce the tax liability and improve investments.
3. Lifestyle Inflation
Say that you have been rewarded with a raise of 20% and by this you might be thinking about enhancing your lifestyle by the same margin. Maybe you settle for expensive cars spending 20% or being to eat out 20% more often. Here, resisting such an urge is probably the smartest decision that you can make for management of finances. Particularly when they are much bigger objectives in your life such as buying a house, saving for your kid’s college and paying off the car loan.
4. Thinking burrowing for home equity isn’t the best choice
Let’s face it, keeping the house online for some funds is a situation that most of the people tend to avoid. However, there’s more to this. Think about it, by refinancing with the help of loanable banks the high interest on the credit card debt you will be able to tackle the economic hardship in a wise way- interest rates get much lower and the tax deductibles too.
5. Mixing Business and Personal Finance
Many studies reveal that most of the business owner utilizes the same account for business and personal finances. Though it may not seem to be a deal to separate those dollars, yet neglecting this only complicates the ability to keep a track of the household bills, revenue generated and the deductible expenses of the business.
In order to avoid this, first determine whether you wish to draw or pay yourself and then open a checking account for the business. Having a separate account offers innumerable benefits like the flexibility of connecting with various payment services (credit and debit cards) to the account and simplifies the process of bookkeeping too.
6. Living on Paycheck to Paycheck
There are several households that live on paycheck to paycheck and when an unforeseen problem arises it can lead to financial disaster in no time, if you aren’t prepared for it. Basically, the cumulative result of spending too much puts you in a situation- one where you require every bit of the net income and one missed paycheck would mean complete disaster. This is not a very pleasant situation, especially when the recession hits and you are left with a few options.
Today, financial planners strongly recommend saving about an year’s worth expenses in accounts where they remain accessible to you. Changes in the economy or loss of employment could drain the savings in no time and place you in a precarious position of debts.
7. Not Prioritizing Retirement Investments
If the money that you earn is not working at the markets or other income-producing instruments then you won’t be able to stop working. Designate monthly contributions to the retirement accounts and you can even take advantage of the employer-sponsored schemes and tax-deferred accounts for the purpose. Evaluate what would be the appropriate taken for the investment to grow and the risks that you are able to tolerate.
8. Using Savings to Pay Off Debts
When the debt account costs about 15%, while the retirement account is 6%, swapping the accounts would mean that you can pocket the difference- well that’s not exactly the truth. Apart from losing the compounding power. it is equally difficult to pay the retirement funds back and you could possibly have to deal with hefty charges. With a proper mind-set, borrowing from your retirement account could be a viable decision, but there are times when even the most disciplined financial planners experience tough times.
9. Leaving a Negative Impact on Credit History
Missed payment or high credit card debts can affect the credit history significantly and the credit score too. A promising credit score is invaluable when you are planning to apply for loans by online lenders for car, business or home. The score allows lender is understanding your true credit worthiness and whether you are a good match or not. Those people that have lower credit score end up paying higher interests and in worst cases do not qualify for loans too.
10. Living in the present
An underlying mistake is the failure to consider the big picture while working on the finances. Here, it’s not just about the savings that you are making now, rather knowing that the money you have will be able to meet the needs of the future or not. From internet giants to millionaires, the once concept that made them what they are is their ability to include the big picture into the financial approach.
There you have it, these are the common money management mistakes that you should avoid for good finances.