5 Common Money Management Mistakes to Avoid
Managing money is a life skill, and most people do not get everything right all the time. Avoiding these five common money mistakes can help you overcome money challenges and help you achieve your financial goals.
- Using retirement savings to pay down credit card debt
If you have a retirement plan (and you should), withdrawing funds to pay down your credit card debt is a bad idea. It might seem like it makes sense, especially if you are in your 20s or 30s and retirement seems a long way off, but the truth is that dipping into your retirement nest egg can put your financial future at risk. Once you pay down your debt, building up your savings again can be a difficult and slow process. Paying yourself back requires discipline and many people fall behind. If you borrowed from a 401(k), there are additional issues you need consider.
- Overspending on a wedding, car, and other big-ticket expenses
It’s easy to get carried away when planning a wedding, buying a car, or decorating your home. Look for ways to cut corners so that you can keep your costs down.
If you are getting married, consider having a smaller wedding, a modest honeymoon or less expensive decorations. Decide on your priorities and then look for ways to save money on the rest. Your guests will still think your wedding was a beautiful affair, and most likely will never ask you how much anything cost.
Instead of buying a new car, can you keep your current car for another year or buy a reliable certified pre-owned car? If you are in the market for furniture or appliances, do your research to help ensure that you get a quality product that will last. Be sure to comparison shop, look for military discounts, and take advantage of any sales or special rebate offers.
- Using credit cards instead of cash
When you’re tight on money it’s easy to pull out the credit card to pay for just about anything. Even if you have all the best intentions of paying off the balance in full as soon as the bill comes in, for many people that isn’t reality. That one time purchase grows to two and three purchases, and before you know it, you have amassed a large amount of long-term revolving debt you can’t get rid of. Credit cards have their place, but for most day-to-day expenses, it is better to pay with cash whenever possible. If you have to make a larger purchase, save up the money you need and stay within a predetermined budget.
- Not having an emergency fund
Stuff happens. You have incurred unreimbursed costs associated with a PCS move. The car breaks down. Your dog has to go to the vet. An emergency fund can help you avoid having to pay for those expenses with a credit card. Ideally your emergency fund should have enough cash to be able to cover at least three to six months of living expenses. If that sounds a little daunting, start small with a goal to have at least $1,000 in savings. Allot $25-$100 of each paycheck to your emergency fund and in time, you will have a valuable extra cushion of cash when you need it.
- Damaging your credit history
High credit card debt and late or missed payments can damage your credit history—and your credit score. A good credit score is essential if you ever plan to apply for a loan for a home, car, or even a business. Your score helps lenders evaluate your credit worthiness and decide whether you are a good “risk” or not. People with lower credit scores pay much higher interest rates for loans, and in some cases, won’t qualify for a loan at all. If you have a poor credit score, it is not too late to get back on track. Here are 5 easy ways to improve your credit score.
Everyone makes money mistakes from time to time. No one is perfect. What is important is that you learn from those mistakes and make smarter decisions going forward. While it may be tempting to “keep up with the Joneses,” the best thing to do is to live within your financial means and keep an eye on your long-term goals.