Money is perhaps the most measurable, quantifiable aspect of our lives. The stress and anxiety that comes with managing a budget are enough to drive anyone mad. As a result, from millennials to baby boomers, we’ve all made financial mistakes in our lifetime. That being said, some of these financial mistake are more costly than others. If you’re reading this, you’ve likely made a few financial slip-ups in your past. Don’t worry; you aren’t alone! There are plenty of resources to help get your finances back on track. Here are some common money mistakes that cost people dearly.
Going Without a Plan (or a Budget)
Creating a budget is one of the most important things you can do for your finances. While it’s easy to say that you’ll only spend say maybe Kshs 5000 per month on groceries, it’s much more difficult to follow through on this goal. Unless you’ve got a fool proof system in place, it’s easy to overspend because you aren’t tracking your finances. Budgets come in all shapes and sizes, but they all have one thing in common: they are designed to help you spend less than you make.
You could create a spreadsheet on Google Sheets, or use an online budgeting tool like You Need a Budget. A budget can be as simple as a piece of paper or as complex as a spreadsheet. It all depends on you and your personal preferences.
Not Having An Emergency Fund
If 2020 taught us anything about our finances, it’s the importance of having an emergency fund to tap into when unexpected events arise such as a job loss, unplanned medical bills, or even a pandemic like COVID-19.
When you don’t have any extra cash set aside, you’re forced to use expensive ways to finance your life. This can include racking up high-interest debt, taking out a cash advance or relying on payday loans. Accessing many of these financing options will also be tied to what kind of credit score you have. Your credit score helps lenders decide how much credit to give you and what interest rate to charge you. If you have a low score, you might not get the best rates.
If you’re just beginning to build up an emergency fund, we suggest starting small.
Spending more than you can afford
Spending excessively is one of the most significant financial mistakes you can make. The amount you spend annually on food or clothes that you don’t require doesn’t seem like a big deal if you spend a few more thousand every week; but, multiplying this amount by 52 reveals how much you waste annually! Saving half of this and adding it to your savings will help you create a nest egg for future emergencies. It is imperative to have a monthly budget, or you will overspend. Furthermore, credit cards are more accessible than ever, and they have made it easier to spend more than we can afford; therefore, refrain from swiping your card as much as possible.
Rushing to buy a home or car
When it comes to buying a house or car, bigger is not necessarily better. Owning a car or home is a huge milestone, but it’s also a major financial commitment. Depending on the type of car you buy or the cost of the house you buy, you could be making payments for years. However, if you don’t have any cash saved up for a down payment, you’ll likely need to get car financing or a home loan. Whether you get a car loan or a home loan, you’ll be responsible for paying interest.
If you rush into buying a home or a car without having saved up for a down payment, you could risk paying interest on a loan for years. If you’re in the market for a home or a car, you’ll want to consider how much you can afford to spend. Remember, it’s not just the initial price tag you have to consider, you’ll also have to factor in insurance, maintenance, and other costs associated with owning a car or a home.
Paying off debt with your savings
While you may be eager to knock out that credit card debt as fast as possible, it’s a bad idea to tap into your savings to do so. Your savings account is meant to be used to cover emergencies, like a car or medical bills. If you’ve got a large balance on your credit card, it’s tempting to just knock the debt out as quickly as possible. If you take out money from your savings account, you will lose interest earned by compounding as well as incur a penalty for taking out money from your fixed deposit or retirement fund.
It is ideal to pay off the debt as and when you have some extra cash, rather than withdrawing your fixed deposit prematurely or taking out money from your retirement fund. Unfortunately, paying off debt with your savings account will only cause your debt to grow. Credit card companies will tack on a hefty fee for paying off your balance early, and you’ll likely be charged interest on the remainder of your balance. If you’ve got a large balance on your credit card, it’s best to get on a payment plan.
Ignoring your credit score
A good credit score can help you save a lot of money on interest rates. A good credit score will help you secure a lower interest rate for loans and may even allow you to skip a deposit when renting a new apartment. A bad credit score, on the other hand, can cause your insurance rates to go up, lower your chances of getting a home loan, and make it difficult to secure a car lease or a car loan. While you don’t have control over the information in your credit report, you do have control over the information in your credit report.
Your credit score is a number that is calculated based on your credit report.
Now that you know what mistakes you should avoid, you can make sure you don’t make them again! With the right discipline, you can make sure that your finances are in tip-top shape. From tracking your spending to saving for retirement, there are many ways to ensure your financial situation is in good standing. Keep these mistakes in mind and you’ll be on your way to financial success!