How to Prevent Three Common Disastrous Personal Financial Mistakes

That doesn't look too goodA financial advisor told me recently that the thing that really made him upset was that nearly every new client he spoke to was making the same disastrous personal finance mistakes. When I asked what the most common mistakes were, his answer didn’t surprise me. Why? Because I had been guilty of many of them myself, not that long ago. We don’t intentionally make mistakes but sometimes we cannot see any way out of our current position. That was me, at any rate.

So let’s look at the most common personal finance mistakes and what you can do to prevent or fix them. On their own, they may not seem too major but if you are guilty of more than one, you are seriously affecting your financial security.

Lack of An Emergency Fund 

One of the most common disastrous finance mistakes is not having any sort of financial back-up for emergencies. How long could you manage if you were out of work, based on your current financial situation? Experts recommend an emergency fund of at least six month’s salary as essential, especially if you are struggling to make ends meet. If you are finding it hard financially now, imagine what would happen if you lost your job or couldn’t work for an extended period? Set up a savings account linked to your checking account and automatically transfer a set amount every payday. Even if you can only manage $5 or $10 a week, at least you will have something to fall back on if the worst happens. Put every spare dollar into this account, as a matter of urgency, until you have saved six months of wages. Remember, this account is for emergencies, not to make up the shortfall at the end of the month.

Living Paycheck To Paycheck 

This situation is very common in the current financial climate but could spell disaster when some unexpected expense comes up. I was an expert at this; I spent every dollar I earned and juggled multiple credit cards to pay bills and buy whatever I thought I had the money for. Of course, by using credit cards for purchases and bills, I was spending money I didn’t have and probably wouldn’t have any time soon.

The best way to get out from under this disastrous situation is to create a budget and plan what to spend your money on. Once you’ve added up your regular financial commitments, you’ll know how much is left over for everything else, including food, transport and entertainment. Most people find they need to cut their spending when they first draw up a budget, so you need to be prepared to bite the bullet to get your finances under control. Make an allowance for a small amount of savings, in addition to your emergency fund. Even just $10 a week, saved in an interest-earning account, will mean you have $520 at the end of the year. In addition your money will have earned a bit of interest, between $5 and $10. Not a bad buffer for difficult times!

 Minimum Payments On Credit Cards

We mentioned credit cards; their misuse is another major financial mistake. If you only ever make the minimum repayment, you know you are in trouble. If you use one credit card to make a payment on another, you are in even deeper. By misusing credit cards in this way, you will pay at least three times what each item originally cost because of the huge amounts of interest you end up paying. Wouldn’t you rather have that money to save or spend?

Make getting rid of your credit card balances a top priority, even at the expense of savings. I like the snowball effect method of debt reduction because it worked for me. Take your smallest balance and continue to make the minimum repayments on it and all your other cards. At the same time, use every spare dollar you can lay your hands on to make additional payments but do not use the card for purchases. Making weekly payments will save interest. You’ll need to make some spending cuts to make this happen but it will be worth it to eliminate this expensive debt. Anyway, keep throwing as much money as you can at this lowest balance until it is paid off. The next step is crucial – cut up the card and close the account. Do not accept any offer the company will throw at you to keep you as a customer. Then, use the money you were paying against that balance and pay it off the next smallest balance in exactly the same manner. Continue like this until all balances are cleared. Look for the credit card with the lowest interest rate and keep it at home. Always pay off the full amount and only use it for emergencies.

There’s other major personal finance mistakes of course, including not starting a retirement plan in your twenties; not taking advantage of employer contributions and life insurance in retirement plans; not having a financial plan for the future. If you attend to the three disastrous mistakes I described here, you will be well on your way to a bright future, free from financial stress.

So, have you made any of these mistakes? What did you do to get out of them?


Comments

How to Prevent Three Common Disastrous Personal Financial Mistakes — 24 Comments

  1. Good post Miss T. It really does not surprise me as I’ve seen pretty much the same thing. I used to be in the same situation myself years ago when I was in credit card debt. It took someone being honest with me and pushing me towards getting out from under it. I’ve never looked back and am thankful to be on a better path now.

  2. The only one of these I have ever done is live without an emergency fund. The only reason for that was it was right after I graduated from college. Now my wife have a nice sized fund.

  3. No, I’ve generally been pretty good – but I know plenty of people who do live that way. My mistakes are not watching where money is going, and investing without knowing all the facts!

  4. Great stuff! It’s always necessary to make the right decisions when it comes to our finances. It may be quite difficult to do so at the start but you’ll eventually be able to develop the good habit of doing so.

  5. These are definitely the top three mistakes (I think I’d also add not saving for retirement). I’ve been guilty of these myself and each year vow to do better. Baby steps, baby steps…I’m getting there slowly. 😉

  6. Great post! In the past, I make every one of these mistakes–consistently. Thankfully, I had a financial awakening of sorts and kicked my own butt into gear. It really was nothing more than hard work and determination that got me where I am today.

  7. It amazes me with some much information on paying off credit card debt, minimum payment is still on the list. Although, it doesn’t surprise me.

  8. I am guilty of mistakes #1 and #2. Luckily never had CC debt. Due to various misfortunes, our emergency fund is much lower than what I started 2012 with and well below my comfort level. So that will be the first financial goal for us this year. We are planning on starting a family and buying a house, so we most certainly need a healthy emergency fund.

    Happy New Year, Miss T!

  9. I was definitely living paycheck to paycheck when I first graduated from college. It was a terrible feeling and took my many months to finally start being able to save. Once I got an emergency fund saved up I felt a million times better.

  10. Luckily, I’ve never made those mistakes. But plenty of people do, or they just don’t have much starting out and find themselves in that position. What I find hard to understand is when people make a good salary, yet still do those things. In those cases, the lack of financial education probably gets them…and they might not even realize it.

  11. Most people who have cc debt also do not have an emergency fund. MOST Americans have some sort of cc debt and more attention should be given to debt strategies because when you live paycheck to paycheck (I have never lived any other way), you almost always have cc debt and never have savings. People who try to buckle down and fix their debt are the people who are reading your blog. Besides the bloggers who are debt free 🙂

  12. At one point or another I have made all these mistakes. Right now I’m actually pulling from my emergency savings (around 4900) to pay my high interest cc (480) so that I only have one with currently no interest (1100). I don’t want to LOSE money by paying interest. I do need to earn more as a freelancer though…that would help things for sure!

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