12 money mistakes people make over and over

This post comes from Trent Hamm at partner blog The Simple Dollar.

I get tons of e-mail from people describing the personal-finance problems in their lives. Not only that, but as The Simple Dollar has become more popular, I've had more opportunities to talk about personal finance with people face to face.

What amazes me is that the same problems pop up time and time again. Sure, the specifics of the stories change, as does the severity of the situations, but the same items come up.

I'm not immune to them, either. At the time of my own financial meltdown, I was guilty of a majority of these things. It was only due to a commitment to fixing my financial situation that I was able to overcome these mistakes and set them right.

Here they are, the 12 biggest mistakes I hear about time and time again.

Concern rarely extends beyond the next paycheck or two. These are the people who live from paycheck to paycheck. Their next paycheck or two will cover the immediate bills. If there happens to be some money left over, it's spent on frivolous things. These people are constantly hitting the ATM to check their debit card balance so they know how much they have to spend, or are juggling maxed-out credit cards. The only thing that matters is the next paycheck and the brief breathing room it provides.

Solution: Set up an automatic savings plan to scrape a small amount of money out of the  checking account each week and put it somewhere safe. The point isn't so much to build up savings (although that's very valuable), but to slowly wean yourself from spending everything you bring in.

• Bing: More on automatic savings plans
  

Only one person in the family knows where the money goes. Most families have one person who's in control of managing the money -- and that's fine. It can be very useful to have a family "accountant" -- particularly if one person in a family is detail-oriented.

The problem occurs when this leads to financial atrophy in the family, where no one but the person running the checkbook knows where the money goes or is involved in the decision-making process. While it can be very easy to let just one person run things, it can be very dangerous, too. That person might not be saving appropriately for family goals or might be leveraging credit card use in order to allow everyone to keep spending as they are.

Solution: Partners can have monthly meetings about their financial situation. Go through the checkbook registry and bills together and make sure everyone is aware of where the money is going and why. Then, if there are problems, they can be discussed and handled appropriately. Doing this goes a long way to ensure that nasty surprises like hidden credit card bills don't crop up.

Partners don't talk about their shared goals. When my wife and I were first married, we rarely talked about our shared goals, and when we did, we were bumping heads because our goals weren't in alignment.

It wasn't until we started sitting down and talking about our shared goals that things began to click into place. I began to realize that some of my dreams didn't match hers, and vice versa. I also began to understand that when we talked about our different dreams, figured out the areas where they lined up, and came up with clear and specific goals that we both shared, it engaged both of us to make it happen.

Rather than fighting through gentle resistance to get what I wanted, I found a cheerleader who pushed me onward to get what we wanted. The best part? What I wanted and what we wanted really weren't all that far apart.

Solution: Sit down with your partner and talk about where you want to be in five years, in 10 years and 25 years. Figure out what each of you wants individually, then look at the areas where they overlap. Compromise and come up with detailed plans for things that you're both willing to work toward.

There is no budget or spending limit, particularly for nonessential items. Many people  don't bother to keep track of their spending on nonessential things, and they're often shocked at how much money has been frivolously spent when the credit card bill comes due. Then they pay it and forget about it again. It's more important to keep up with the Joneses.

My wife and I did this for several years. We kept our spending separate and didn't worry about how much we were spending. This often would result in a mess, where there were bills to be paid and we'd both spent more than we should.

Solution: Put everyone on a spending allowance. Seriously. Each person gets a certain amount to spend per week or month. This requires honesty and commitment from both sides, so the best way to do it is to regularly talk about it. Agree to a spending cap for each of you and then discuss any spending beyond that.

Family members and friends loan each other money without thinking about the consequences. Many people talk about the guilt, anger and mistrust they feel when it comes to debts with their family. They either feel bad about an inability to pay back a family debt, upset because of the expectations others have about borrowing money, or anger and mistrust when people don't pay them back.

Solution: Don't mix lending with family. If you want to help a family member, make it a no-strings-attached gift and forget about it. If you lend money, you've changed a caring relationship into a business relationship. Are you close with your mortgage lender?

There is no emergency fund. Many people are blindsided by unexpected expenses. It's a disaster if their car breaks down or they lose their job -- immediate panic mode.

I was once in this situation. A truck breakdown in 2005 was extremely costly, as was the need for new glasses in that timeframe. I had to worry and plan and move money around in order to deal with both situations.

Solution: Start an automatic savings plan and don't touch that money unless there's a need. Having flexible cash on hand makes emergencies easier to handle. Plus, an emergency fund can be the beginning of a bigger savings goal like a house down payment.

There is no plan for the unexpected death or disability of a wage earner. Ask people  what they'd do if the primary wage earner in their home suddenly passed away or became severely disabled and you often see a panicked "deer in the headlights" look.

Solution: It's not that hard to protect yourself against both of those events. A healthy emergency fund helps in the short term, and a long-term disability insurance policy and solid life insurance policy will take care of future needs. If you're young and in reasonable health, both types of policies can be quite cheap. A long-term care policy can also be useful.

Children are kept away from money concepts. Many children, even through the teen years, have only a minimal understanding of money. They view it as a way to get stuff they want, not as a way to translate your hard work into a home, food on the table, clothing, electricity, future plans and a few pleasures.

Instead, many children get an allowance not based on any effort and are allowed to spend it entirely on their wants. The money has little meaning, and the situation is made even worse when parents step in with more money all the time.

Solution: Have your children earn money in exchange for tasks done, and direct them toward small-scale entrepreneurship. When they earn money, have them set aside some for giving to others and for long-term savings goals.

There is a pervasive anti-frugality, pro-consumerism attitude. Many people eschew frugality. They buy into the idea that "you only live once" and that "settling" for the best buy or the least expensive option is foolish. People who believe this are often under peer pressure to spend and often put pressure on others to do the same. You can't live cheaply if you're going to be one of the boys, right? You gotta have all the toys.

I used to do this all the time. I'd buy expensive golf clubs and gadgets and always had a strong collection of Magic: The Gathering cards. What a fool I was.

Solution: If you're bombarded with the sense that you need to spend money to fit in with a social group, find another social group. Engage in activities that appeal to you and don't revolve around spending money, and seek others who are interested in those things. If you find you need to spend to feel good about yourself, seek out low-cost alternatives. For example, hit the library if you're a book or music nut. You may also want to seek some degree of counseling if your self-worth has actually become tied to the stuff you have.

Employee benefits aren't well understood or utilized. Most employers offer a lot of nice benefits that are underutilized by employees. At my previous job, I discovered employee benefits that we were entitled to -- and my co-workers were often amazed at the free stuff I found: sports tickets, car usage, prescription benefits and medical reimbursement accounts, meals, lectures, books and other reading materials, investment advice and counseling. All you have to do is look.

Solution: Read your employee handbook. Pay attention to e-mails and memos from human resources. If you're not sure about something, ask for help. And don't hesitate to sign up for stuff -- it's there for you.

Major purchases are financed by debt and often bought impulsively. A friend of mine needed to replace his old college-era Honda, so he watched a couple TV commercials, went to a local dealership less than a week later, and came home with a vehicle -- and a hefty debt as well. He'd known that he needed a car for a while, but did no advance planning.

The end result? A poor choice of a car that doesn't excel in reliability or gas mileage.

Solution: If you know you're going to buy a car in the near future (three years or less), start making payments now by putting that money into a savings account each month. Then, as the time gets closer, figure out what you actually need and research cars at the library or online. Find a model that fits your needs and wants, is reliable and has good gas mileage, then figure out what the car should cost. You can do this in an hour or two at the library. Buy the car with a large down payment or outright cash, and you'll have a great car for a very nice price.

You can apply the same logic to other purchases.

Investments (particularly those for retirement) aren't diversified. People are panicked by the downturn in the stock market and have watched their retirement savings lose 20% or more of their value over the last year. This is especially true for people who are reaching retirement age. Losing 25% of your retirement in the years just before retirement means that you're going to be working a while longer.

Solution: Diversify and watch your asset allocation, especially as you get closer to retirement. If you don't know what you're doing, put your money in a target retirement option that's automatically diversified for you. Do not hold more than 10% of your retirement savings in a single stock.

Other articles of interest at The Simple Dollar:

• Learning about money 'the hard way'
• Personal Finance 101: What is a credit score and why is it important?
• The road to financial Armageddon No. 1: The earliest mistakes