Do you have credit card debt? Are you often unable to pay your credit card bills in full? Would you be able to handle a sudden $1000 bill? Are you living paycheck to paycheck?
If you’re facing these problems, you are making common money mistakes that you CAN AVOID.
Millennials and Gen Zs are living in circumstances that are extremely different from their parents’ generation. The traditional financial paths are not very relevant to us. Due to rising costs of living, expensive real estate and increasing tuition costs, our life’s milestones are getting delayed.
It now takes us longer to achieve goals like paying off college loans or buying our first house.
Our parents’ methods of saving money, accumulating wealth and retirement planning are becoming obsolete. They are not footsteps that we can easily follow in our current world.
Technology has redefined everything – the way we bank, the way we invest and the way we work. People can now start a business from their homes!
Our generation is paving its own way! We hold jobs that didn’t even exist 5 years ago. We are rewriting the conventional means of accumulating wealth, redefining what success means and molding new paths to financial freedom.
But what many of us lack is BASIC financial education. Because of this, we are making some critical money mistakes which could impact our future if we are not careful.
As Otto von Bismarck once said, a smart man learns from his mistakes but a wise man learns from the mistakes of others. So read on to find out the biggest money mistakes and how you can avoid them.
1. Living in the NOW
It is so easy to get caught up with living in the moment and not thinking about your financial future. If you had $500, would you rather invest the money or treat yourself? It is tempting to pick the second option.
Thanks to Instagram and the social media culture, our generation is all about racking up experiences. We are much more prone to overspending on the ‘present’. Be it expensive vacations, designer clothes, latest gadgets or concert tickets.
And it is possible to feel that retirement is a far away goal – something that a 20 year old need not be concerned about. But this kind of financial procrastination could end up being costly.
The simple truth is that the earlier you start saving, the sooner you can achieve financial freedom. I like to think of it as every year that I don’t save is another year that I have to spend working.
Investing in your retirement early will help you reap the rewards of compound interest. You can literally watch your money work for you! Investments need time to grow. It is not something you can accelerate later in life.
Give your future goals a thought and plan how much you need to contribute toward your retirement. You can then start making conscious decisions which align with your future financial goals.
If you feel that you don’t make enough to save for your retirement just yet, it might be a good opportunity to rethink your current spending and lifestyle. Or evaluate options to earn a secondary income.
2. Accumulating debt
High interest debt could potentially trap you in a never-ending debt cycle. Credit card loans, payday loans and other high interest debts are quite possibly the worst money mistakes that young people make.
As a naïve college kid, I signed up for a 6 month interest-free credit card. They are marketed in such an appealing way – they highlight the interest-free period and entice you with cashbacks and rewards.
I started out okay and paid my monthly statement balances in full. But eventually I started slipping and let a few hundred dollars go unpaid each month. Since I was a fresh grad awaiting my first job, all I could manage to pay was my minimum balance. And the interest on interest ensured that I barely made a dent in my balance.
So if you have high interest debt, consider refinancing it. It may be possible for you to get a lower interest rate with debt consolidation. And create a schedule for yourself to pay off your high interest debt at the earliest.
The next time you think about buying something on credit, stop and think if you really need it. If you really need it, consider saving money for it.
Living debt free is truly amazing. But it takes discipline to get there.
3. Not tracking your money
Being oblivious to where your money is being spent is one of the basic money mistakes. If you don’t know where your money is going, you wouldn’t know where to cut back.
Some people have no idea that they pay monthly checking account fees or that their credit card has a $250 annual fee!
I used to live that carefree life! I just swiped my card and never bothered to evaluate my purchases. When Dhruv and I started tracking our expenses, we realized that we spent $800 a month on restaurants! And that was not a lifestyle that we could afford to maintain.
Tracking your expenses gives you important insights into your spending habits.
Since we now knew where to cut back, we were able to set a budget and gradually learned to spend less. My Progressive Budgeting plan helped us get from ZERO savings to saving 35% of our paycheck! I’m sharing my Progressive Budgeting bundle for free, to help you get started! 😊
Reviewing your expenses also helps you catch fraudulent charges, unwanted subscriptions, increased utilities or annual fees, among other things. It literally needs just 10 minutes every month and it can save you your hard-earned money!
4. Not having a financial focus or plan
Having a plan for your money and setting financial goals is crucial. Trying to save money without a plan is ineffective. Saving with intention will take you much farther!
Want to pay off your student loans? Save for an emergency fund? Contribute to your retirement account? Invest in stocks? Or save for a down payment? List out the financial goals that you have in mind.
Once you track your monthly expenses and create a budget for yourself, you’d know how much money you have for your savings. Use a portion of these funds to tackle your top financial goals.
Dhruv and I used to live paycheck to paycheck with zero savings to fall back on. After experiencing constant stress about our finances, we set a goal to save for an emergency fund.
Within 7 months, we reached our goal of $25,000! We even paid off our auto loan and became completely debt free.
Just that simple decision to create a budget and set a goal helped us create a healthy emergency fund and become debt free.
5. Overspending on lifestyle
If you find yourself unable to pay your monthly credit card bills in full or if you are living paycheck to paycheck, this could apply to you. Spending more money than you make is unfortunately all too common.
The idea is not to live like a monk. The idea is to spend less than you earn. Sounds reasonable right? Here are some of the top ways in which people overspend.
Trying to keep up with your friends
Comparing yourself to your peers inevitably leads to overspending, bad financial decisions and stress! I’ve seen people with a $60K salary buy brand new BMWs and make $700 in monthly payments.
That is 20% of their monthly paycheck!
It’s wise to note that just because someone appears to be rich, doesn’t mean that they are doing well. More often than not, they probably have loads of debt and have made serious money mistakes to maintain their appearances.
But most importantly, comparing yourself to others always leads to an unhappy life. If you don’t appreciate what you have now, you won’t be able to appreciate what you’ll have in the future too.
Lifestyle creep
Once you get used to a certain level of luxury, you may get the urge to upgrade your things. Even though your old things are perfectly adequate.
This could be due to societal pressure or because you feel like you deserve it. This slow, steady creep may sometimes happen without even thinking.
Your salary gets a hike, so you start shopping around for a larger apartment even though your current apartment is perfect for your needs. Or you may decide to upgrade your gadgets, your car or your furniture.
To curb this constant urge to buy better things, you need to stop and consider if what you have is enough. Is this upgrade a practical choice or are you chasing luxury? Will it reduce your monthly savings?
Expensive hobbies or shopping habits
Each person is unique and has their own spending vices. There are some who spend $500 a month on beauty treatments and some who drop $2000 on a handbag without a thought. Some have expensive hobbies like golfing, travelling or fine dining.
It’s important to be realistic about what you can and cannot afford. These expensive habits will affect your future finances.
In general, you should aim to save 20% of your take-home pay. If you track your expenses, you can figure out where you might be overspending.
6. Not investing your money
Investing in the stock market may sound challenging. But it really isn’t that scary!
Investing is an important step toward financial freedom. A traditional savings account offers about a 2% interest rate. At that pace, it would be an uphill battle to save for your retirement. Whereas, investing earns you about 7-9% on average.
Dhruv and I were freaked out about investing our money too. But we did our research and took the time to educate ourselves. And it was worth it!
If you don’t have the time to constantly be on top of your investments, look into passive investment opportunities. Index funds and ETFs are a good place to start your research. There are plenty of apps in the US and Canada that help you invest too. Do your research and get started!
7. Not maintaining an emergency fund
Accidents don’t announce themselves! Saving up for a rainy day will be one of the best decisions you make. It can save you a lot of money and stress in the event of an unexpected emergency.
Imagine your car breaks down or you have a medical need, or you are let go from your job. Instead of making purchases on credit, your emergency savings will help you out until you can recover from these costs.
You should aim to save for about 3-6 months worth of living expenses. This depends on how easy it is for you to find your next job.
Your emergency fund will literally safeguard you and protect you from paying insane interest fees. But most importantly, the peace of mind that comes from having a rainy day fund is priceless!
Parting thoughts:
At the root of it, all of these money mistakes are caused because of a spending mindset. So train yourself to transition into a savings mindset.
That means, instead of thinking about how your money can make you happy today, think about how your money can get you financial freedom.
It may sound challenging but with time and discipline, you WILL be able to make your money work for you! 😎 If you found this list of money mistakes helpful, share a link with your friends!