12 money mistakes people make over and over
It takes commitment to overcome these errors.
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
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.
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
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
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
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
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
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
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