It’s a new year, and you’re probably one of the ‘New Year; New Me' geng who plan their lives at the beginning of each new year. You’ve made decisions concerning your finances, career development, mental health, relationship, etc., and can’t wait to live it through.
However, mistakes happen. The new year fever dies off sooner than later, and you find yourself slipping back to those old habits. We’ve all been there. And honestly, it hurts sometimes.
But, while we may not be in the best position to save you from career and relationship mistakes. We believe that learning from others' experiences is the best teacher. That is why we have compiled these common financial mistakes, so you don’t make them this year.
With that in mind, here are five financial mistakes you can easily avoid to improve your financial future.
8 Financial Mistakes You Shouldn’t Repeat This Year
A new year brings new opportunities to make financial progress. But it also brings new ways to make mistakes that can hold you back. Whether you're a financial beginner or an experienced pro, it's easy to lose sight of the basics and get off track. From budgeting, to spending, down to saving habits, the following examples are the most common financial mistakes that may hinder you from reaching your financial goals if you don’t avoid them this year. They include:
1. Not Making Budgets
This is the most common mistake people make, and it’s one of the reasons so many people live from paycheck to paycheck. A budget is the most important part of planning your finances; if you don't create one, you'll never know how much you will spend. It’s almost impossible to get ahead of your financial goals if you don’t know how much inflow and outflow you make every month and where it goes.
Thankfully, there are lots of applications that can help you budget your spending. Some Traditional and mobile banks also provide these features in their mobile applications. You can draw your financial budgets with a spreadsheet or pen and notebook. This will help you cut down on unnecessary expenses. However, the key is to budget and follow it judiciously.
2. Not Having Emergency Funds
Imagine spending all you earn without saving for emergencies, only for an unplanned event to hit you below the belt? It could be a job loss, accident, repairs, medical bills, or anything that could demand a huge chunk of money - which you don’t have. You risk racking up more debts without an emergency fund when something unexpected happens. This is why it is important to save for rainy days to avoid taking high-interest loans that could have been avoided.
You may want to start cutting down your expenses on frivolities and impulse buying or avoid paying too many bills that you don’t need. You can also save part of your monthly income for emergencies, so it doesn’t weigh you down. This way, you would be ready or nearly ready for unforeseen circumstances before getting hit.
3. No Savings Plan
The truth is, gaining financial freedom starts with saving more than you earn or spend. Whether it's for emergency funds or saving extra to cover future bills or expenses. It may be hard not to live from paycheck to paycheck or even fall back to square one if you don't have multiple savings.
Also, it's easy to spend all of your earnings on bills and expenses without having extra savings for the future. However, you can set up automatic withdrawals from your main account into your savings account every payday. That way, you won't feel the brunt of having to cut down your expenses later. In addition, you'll earn extra interest on your savings balance over time. You should also consider putting aside money for big purchases like houses, cars, home gadgets, insurance, etc.
4. Not Tracking Your Expenses
Budgeting is only half the battle; you can make the best budget in the world, but your budget may be useless if you don't track your expenses. That's why it's so important that you track all of your expenses for a few months before creating a budget. This way, you'll be able to see exactly how much you're spending on groceries, bills, clothing, food, etc., and budget accordingly.
Once you've tracked your expenses for a few months, it will be easy to create a realistic budget. This will help you stay on top of your bills, cut unnecessary purchases and improve your savings. Like budgeting apps, you can also find applications that help you track your expenses on mobile play stores or the internet.
5. Impulse Buying
One of the most common financial mistakes is impulse buying. This happens when you purchase things without planning or budgeting. Impulse buying is the opposite of planning and budgeting, which helps you make smart purchases that align with your financial goals. Whether it's splurging on new clothes and shoes during sales or buying discounted fancy jewelry in the mall, buying items on impulse can eat deep into your financial plans, especially when you have a tight budget. Even though the item may seem like a good bargain, it could cost you more than you budgeted, thereby leading to buyer's remorse.
Existing studies show that most impulse buyers regret their purchases later on. Sadly, this regret can lead to more impulse spending to make themselves feel better thereby creating a vicious cycle. Generally, Impulse buying can lead to more debts (high-interest loans and uncontrolled borrowing) which can seriously hurt your financial health in the long run.
6. Frequent Loans/Borrowing
A little bit of borrowing here and there, is normal. But when you're hooked on debt, it can cause some problems down the road. Whether you're borrowing from friends, family, banks, or loan companies, borrowing should be done sparingly. It's easy to get sucked into the idea of borrowing every time you need money for expenses or emergencies. However, it eventually piles up to a large debt.
Borrowing tends to make life more expensive; you need to pay interests that add up over time, making you less financially secure. It's easier to reach your financial and life goals when you're not paying off debt simultaneously. In addition, some people borrow money or take loans with no clear repayment schedule or plan in place, making them liabilities or even bankrupt should legal actions be taken against them.
7. Neglecting Investments
Investments are a sure way of accruing wealth or making more money over time. There are various forms of investments that could help you crush your financial goals - depending on your risk appetite and financial capacity. To be safe, you could start with low-risk investments in agriculture, stocks, company shares, or the more recent cryptocurrency, etc. However, low-risk investments also yield low returns. If you have more money, you could also try real estate as its value appreciates over time.
The truth is, buying shares and stocks or trusting your savings alone may not be advisable; inflation, deflation, or bankruptcy could affect your liquid assets. Therefore, a more tangible investment asset is a better way to create financial freedom.
8. No Retirement Plan
It's easy to dismiss retirement plans when you're just starting in your career, but that's typically a huge mistake. The trust is that saving small parts of your earnings can grow into much bigger sums in the future, thanks to the power of compounding. You can save for retirement through investments, setting up a small or medium business, opening multiple income streams to earn passive income, life insurance, opening a pension account, etc.
Also, avoid borrowing (excessively) from your retirement savings accounts. This can be tempting when funds are tight and you're struggling to pay bills, but it may not be worth it in the long run.
Finally, Don’t Overlook Last Year’s Financial Mistakes
You've probably heard the phrase, "if you fail to plan, you plan to fail." Financial mistakes can be costly, and It's easy to get caught up on the web. Also, it's often difficult to know what will be a bad decision. Whether you're spending above your means or not saving for the rainy days, people tend to repeat bad financial habits year after year - like a broken record.
For a fresh start, you can look back on your previous year's money mistakes to avoid repeating them again and again, this year. This will help you review your finances, plan better, and help you save more to achieve financial success. The tips above can also guide you to stay ahead of your financial goals this year.