10 Common Mistakes Some People Make With Their Finances
Sometimes, making smart financial choices is as much about avoiding common financial mistakes as it is about anything else. The following 10 missteps are very common but also can be very harmful.
1) Focusing on Cost-Cutting Over Increasing Income
People often focus on trying to cut costs when money is tight. This is admirable and should be done in many cases; however, it can cause some people to miss the more important target: increasing their income. Whenever you can, try to invest your time and effort into making more money. If you have to choose between cutting costs and earning more, the latter is usually preferable.
2) Failing to Invest
Investing your money should always be a priority. When your money earns you more money, it can help you build wealth and achieve independence. For you, investing may mean buying securities or mutual funds, investing in real estate, buying businesses, or many other mechanisms. Everyone’s plan is a little different. The key is that you invest your money to earn more.
3) Spending Money They Don’t Have
Sometimes people experience budget shortfalls. There may be unexpected expenses, or they may lose their jobs. However, if this happens too often, it can quickly lead to spending money that you don’t have. Taking on too much debt can become a self-perpetuating problem. Be careful to always spend within your means, even if things are tight.
4) Trying to Time the Market
When investing, it may feel like you are trying to predict the future. However, you should always avoid attempting to time the market. While this may sometimes lead to big gains, it can just as easily lead to serious losses. For nearly every investor, the best long-term strategies don’t rely on timing the market to succeed.
5) Too Much Frivolous Spending
There is nothing wrong with enjoying some luxuries in life. In fact, at Blue Water Capital Management, we try to help our clients use their money to achieve both their long-term goals and their desired lifestyle. Nonetheless, you probably don’t need a new TV every year or 100 pairs of shoes. Be realistic about your means and never let spending on luxuries get in the way of your financial health.
6) Spending Too Much on Housing and Transportation
You need a roof over your head, and, in many places, you need a vehicle to help you get around. There is nothing wrong with spending some money on these things. In fact, even borrowing money to pay for them (especially your home) can be a sound financial decision. However, having a high rent/mortgage payment and/or high car payment can quickly eat up your income. Be realistic about what you can afford while still working towards your larger financial goals.
7) Not Creating and Reconciling a Budget
Having a budget is an essential aspect of maintaining good financial practices. If you aren’t thinking about your spending, you will always struggle to achieve financial success. Of course, simply having the budget isn’t enough. You also need to reconcile your actual spending against your planned budget. Not only is this helpful for managing your spending, but it will also increase your financial literacy.
8) Failing to Create a Long-Term Plan
Everyone should have a long-term financial plan. Having goals is perhaps the most important element of achieving consistent success in any endeavor. This is followed closely by having a measurable plan of action. Failing to plan your financial future is one of the most common financial mistakes and also one of the most problematic.
9) Investing Time and Effort in Small Wins Rather Than Big Ones
You should always be thinking about the big picture. Remember to value your time and work towards your most important financial goals. For example, you may be able to save some money on your new television by driving to a cheaper store across town. However, if you could be using that time to prepare for your upcoming salary negotiation, the small win isn’t worth missing out on the big one.
10) Not Buying Insurance
Finally, insurance is essential to protecting your financial wellbeing. You likely already know that you have to have insurance for your car. You should have it on your home and other major assets too. Don’t let the unexpected cost you your financial future.
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