How many of these money mistakes are you making?
You may not realise this, but every single financial decision you make day-to-day has a butterfly effect on your financial future. It might not feel like it at the time, but your little money mistakes add up, and essentially rob you of your financial security in the future.
Think about it – our money is a finite amount. So every mis-managed dollar is one less dollar working for you long-term. And those can add up fast!
I have made almost every money mistake in the book. I’m human, I didn’t know better. It happens. And I’m still far from perfect, despite knowing better now!
However, my mindset has changed. I can see those tiny money mistakes for what they are – and I know the effect they will have on me (especially as the money mistakes I made 10 years ago are already affecting me today!)
Whether you’re already in the process of overhauling your finances, or whether you’re just starting out, I can almost guarantee that you’re making at least a few of these mistakes.
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Common Money Mistakes – and how to avoid them
Mistake 1: You’re not afraid of debt
If you can fit those fortnightly debt payments into your budget, what’s the problem, right?
Nobody is saying that debt isn’t affordable. Of course it is – that’s why so many people sign up for it. The problem with debt is that it’s not something quick and easy to shake – even when keeping up with the payments, you’re stuck with it. For years.
At one point in our marriage, we had $1,500 per fortnight going towards our debt. Half of that was our mortgage, but the other half was two different car loans, an interest-free store card, and a loan we took out to renovate our kitchen.
And it didn’t bother us. We were making alright money, and we had enough left for our living expenses and a tiny bit of savings each fortnight. Our debt was more than manageable.
But there were three big problems with our debt situation:
- We were paying a CRAP TON of interest. Instead of benefiting from every last dollar we earned, a bunch of it was simply lining our various financial institutions’ pockets. All because we hadn’t done the hard yards and saved for those big purchases.
- We didn’t have the wiggle room for our financial situation to change. Suddenly we were talking about having kids, and me staying at home, and we realised that our debt payments were no longer sustainable if we lost my income.
- There was NO quick way to get out of debt. As inconvenient as it was, that money had been spent, and all we could do was keep chipping away at it in manageable chunks.
A lot of people aren’t scared of debt. It’s just a normal part of life – an ongoing but manageable drip, drip, drip out of their bank account.
But avoiding debt is a key to financial stability. Because when you’re in debt, your money isn’t working for you. Your money is fixing a mistake you made, and all that interest is the (hefty) cost of it.
Mistake 2: You can always justify spending money on something if you really want it
The problem with earning a somewhat comfortable wage is that you often have a bit of wiggle room. You don’t have to scrimp in order to afford food for the fortnight. You aren’t concerned about your electricity being shut off. You can afford the petrol you’ll need in your car for the fortnight, no problem. Your basic expenses are being met with relative ease.
So the extras in life become extra tempting, because they’re affordable. Cheap flights to Hawaii – why not? Taylor Swift tickets – I mean, you have to, right? ASOS splurge – no problem.
If you want something badly enough, you will put your budget aside and justify making that purchase. You can afford it. But can future-you afford it?
There’s nothing wrong with an occasional splurge, but it becomes problematic when those splurges regularly get in the way of your savings, or boosting your emergency fund, or throwing extra money towards your debt. Those are the things that count hugely toward your financial future, and neglecting them has a very real impact in the long run, no matter how comfortable your day-to-day spending is now.
So exercise self-control, even when it doesn’t feel like a huge stretch to spend money on something. Your future self will be grateful!
Mistake 3: You don’t have an emergency fund
There’s a reason so many of the financial gurus out there recommend building an emergency fund before doing anything else when re-vamping your financial situation.
Emergencies come up. Non-budgeted but essential spends. It’s inevitable. And when you have an emergency fund, it hurts a little less. Because the alternative is taking out a loan or a credit card – going into debt – in order to get through a crisis.
Build an emergency fund before you begin to build your savings. Put any money you can find into it initially. Sell things on Facebook marketplace if you need to. Build that emergency fund… and then don’t touch it.
Our emergency fund is $2000, and we keep it in a separate account, with a different bank. This means it’s not instantly accessible for us, so there’s no temptation to transfer it onto our bank card and spend it. In fact, we don’t really think about it. It doesn’t feel like real money to us, because it’s just sitting there. But we know that when we need it, we’ve got it.
Eventually, the recommendation is to build up your emergency fund to about 3 months of living expenses, and then a year. But starting with that initial $2000 is all you need when you’re just starting the process of overhauling your finances.
Mistake 4: You don’t budget
Not having a budget is one of the biggest money mistakes you can make. If you’re not tracking which bills are due, and when, you can easily find yourself flailing with an empty bank account and no relief until your next pay.
Flying by the seat of your pants when paying your bills is a recipe for disaster. You might have a vague idea that your phone direct debit comes out around the start of the month, and your Netflix subscription comes out right before pay day, but there’s a very real danger that you’ll simply come up short if you’re not tracking every last dollar of your income and expenses.
I map out our budget at the start of every year. I write up a spreadsheet with a line for literally every day of the year. Then I pop in our regular expenses on the dates they’re due to come out. I have a column for our fortnightly income, and provided I have accounted for absolutely every regular expense, I always have a good idea of our financial situation. I can look ahead and see when we have a tight pay period coming up with a lot of bills coming out, and we can plan for it accordingly.
It was time consuming to set up, but we’ve been budgeting like this since 2014, and these days it’s quick and simple to work with. So find a budgeting system that works for you, and commit to it!
Mistake 5: You don’t budget in a “fun spending” allowance
As much as we’d like to think we’ll be really good this pay period, and strictly spend our money on bills, groceries and maybe one date night, inevitably life comes calling… and finds us short. A friend invites us out for coffee, our favourite stationery store has a clearance sale, or maybe we just need to grab lunch on the run on a particularly busy day. Suddenly we’re dipping into our emergency fund or even our savings for little incidentals… and when we’ve done it a couple of times, we tend to keep doing it.
“I’ll be better next pay,” you tell yourself as you transfer $20 out of savings for a fourth time in a 2-week period.
It’s not realistic to completely cut out fun spending. So be realistic and budget it in. With a set dollar amount in mind that you’re allowed to spend, you’re more likely to be a bit more discerning about what you spend it on.
Mistake 6: You only make minimum payments on your debt
You won’t be penalised for making minimum payments on a loan, but there are many disadvantages.
Paying above the minimum amount required (even by as little as $10 per payment) will:
- significantly reduce the amount of interest you pay over the life of the loan
- allow you to pay off the loan faster
- provide a cushion if you suddenly lose your income and are unable to make payments for a short period
A few paragraphs above, I wrote about our debt situation a few years ago, and how we realised it wasn’t sustainable for me to stop working in order for us to have kids. Yet that was the life we wanted. We wanted me to be at home raising our babies.
Fortunately, our comfortable double income meant that, by tightening a few things, we were able to throw a bit more cash at our debts. We heard about “snowballing” our debt payments, and we made it happen. We concentrated on throwing a bit of extra money at our smallest debt, that had about $10,000 owing on it. Once that was paid off (way ahead of schedule), we took the fortnightly amount we were spending on that, and added it to the payments on our next smallest debt, again paying that off ahead of schedule. Then we took the amount we were paying on that debt, and threw it at the next one.
By the time I was pregnant, our debt had reduced significantly, and we knew that we would be able to afford for me to stop working when our son was due. It was a HUGE relief, and a joyful moment for us. We were just grateful that we had started paying extra towards our debts when we did, as that was the ONE THING that made the difference for us.
Mistake 7: You increase your spending when your income increases
Everybody loves a decent pay rise, am I right? An opportunity to start buying better clothes, or more expensive skin care products. A chance to eat out more often, or finally upgrade that clunky old car.
More money = more opportunities to spend. And who doesn’t love to spend? And it’s deserved – you worked for that pay rise/better job. You should enjoy it. Frankly, it doesn’t feel like a money mistake at all.
BUT. What if you kept your spending at the same level, and instead put all that extra income onto a debt? Or straight into your savings account? What if you invested it?
In ten years time, which situation would make you more grateful – the fact that you put all that extra money into a high-interest savings account? Or that you finally bought your dream car (which is now 10 years old and probably starting to feel a little less than shiny)?
An increase in income is an opportunity. What you do with that opportunity will have a significant impact on your financial future.
Mistake 8: You’re not saving
Saving money can feel impossible when you’re living on a shoestring budget. It’s one of those things we often justify with “I’ll save money when I’m earning more of it.”
But it’s so important to have some savings! Save for a house deposit. Save for you next car, even if your current one is perfectly fine, so that when you need to replace it, you can do it without going into debt. Save for home improvements, or holidays, or special occasions. Save for the unknown.
If all you can scrape into a savings account is a few dollars at a time, that’s okay. While it might feel disheartening at first to have a savings account with $30 in it, commit to adding to it each time you get paid. If $5-$10 is all you can afford at a time, do that.
Regardless of how much you can afford to save, there are only two major guidelines when it comes to savings accounts:
- Continue making regular contributions
- Don’t touch it
Seriously. Because that $5-$10 per pay will add up. And seeing it grow will not only be satisfying, but it will also motivate you to try and do more things to see that number grow.
As soon as you get paid, transfer your allotted savings into your savings account, so you’re not tempted to spend that money. Make it a ritual that you look forward to.
Just save that money!
Mistake 9: You use your credit card for everyday expenses
For a lot of people, credit card money doesn’t feel like real money.
Sure, they realise that at the end of the month they have a big credit card bill to cover, and that’s never any fun. But that usually doesn’t deter them from whipping out the credit card to cover every little thing.
The credit card feels like a safety net – when you need to spend money, whether or not you actually have it in your bank account, it’s there. Sure, if you don’t pay it off that month, it starts accruing interest. But that still feels manageable – and that’s what credit cards are for, right?
Unfortunately, people tend to relax a bit when using their credit cards. They’re more likely to spend higher amounts, and less likely to pay close attention to their budget, knowing the money is always there for them.
I could wax poetic about the danger of credit cards until my face turns blue, but at the end of the day, credit cards ain’t nobody’s friend (except the banks issuing them, of course!)
And maybe you’re managing your credit card spending really well. Maybe you’ve got a fantastic system going, and you use it purely for the rewards.
All I know is, this is how the majority of people start out with their credit cards, until they begin to back slide. Until they miss a payment, or make a purchase they can’t pay off immediately, or an emergency comes up. And when that happens, credit cards are extremely unforgiving, every time.
There’s a reason thousands of people are entrenched in credit card debt. It happens to smart people, not just suckers.
You CAN get through life without a credit card. I have never had one, and neither has my husband. We have seen first-hand the devastation of a mis-managed credit card, and to us, it’s not worth it.
Want more info on giving up your credit card? This article over on The Balance offers some manageable tips for getting started.
Mistake 10: You don’t set financial goals
What does a financial goal look like to you?
Saving money for a house deposit? Putting money aside for retirement? Paying off debt? Building an emergency fund?
We all need to be working toward financial goals in our to future-proof our finances. You may be the queen of budgeting, but one of the greatest money mistakes you can make is to neglect setting goals for those carefully managed dollars.
What are you working towards? What steps are you taking to get there? The answers to these questions can’t be vague. The more specifically you plan, the more likely you are to smash those financial goals.
And it’s not a one-off thing. Our financial situation isn’t a stagnant, totally stable thing. Make it an annual habit to review those goals.
The Penny Hoarder has some fantastic advice for setting financial goals (as well as some great ideas of goals you can set).
Mistake 11: You justify tiny, seemingly insignificant spends
I read a meme this week that said this:
The “It’s only $5, why not buy it” mentality has probably cost me like $10,000 at this point in my life.
Does this hit close to home for you too!? I find when it comes to spending money on bigger items, I hesitate. Yet I can easily spend the same amount of money (more, even!) on coffees, chocolate bars at the petrol station, and Danish feta thrown in my shopping trolley on impulse.
Those smaller purchases don’t feel significant because I’ve often got coins in my purse to cover them. But added up, they end up wiping a very real dollar amount from our fortnightly budget.
I’ll never forget the day in my early twenties when my best friend told me she’d added up her weekday coffee purchases over a 1-year period. She realized she had been spending over $1,000 per year on barista-made coffees.
My jaw dropped – we were on such low incomes, it seemed insane that such a huge portion of our earnings were being slurped away out of habit. It was the first time the financial impact of those coffees had occurred to me. (Hey, I was living rent-free with my parents and my entire income was disposable – I had the financial understanding of a wet sock!)
Those small purchases add up – they are not your friends!
You only get one financial future – there are no do-overs.
Everything you do with your money today has a direct impact on your financial situation when you’re 40, 50, 60, 70, etc. But so many of us haven’t been taught a lick of financial sense – not in school, not from our families. It seems crazy that every single money-earning person in the world needs to know how to manage their finances, and yet very few have actually been taught the ropes.
There are a number of popular finance gurus you can turn to today when getting started.
Chris and I personally use the methods laid out by Scott Pape in his book, The Barefoot Investor. We seriously recommend this book to everyone because it has changed our financial lives! Some of the financial institutions mentioned in his book are specific to Australia, however, the principles he writes about can be applied anywhere in the world. Plus he’s a funny guy – he’s a finance guru but talks like an Aussie farmer – and his sense of humour in the book really appeals to us.
I also follow Dave Ramsey’s YouTube channel. His book, The Total Money Makeover has impacted thousands of everyday people and changed their financial lives, and is one of the most popular resources on personal finance. Seriously, just type “Dave Ramsey” into Pinterest and you’ll see for yourself!
But at the end of the day, you don’t NEED a book in order to start improving your finances.
You just need a commitment, a fresh perspective, and an interest in improving things for yourself.
So stop making those money mistakes, and start rocking your finances! Your future self will be pretty grateful.
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