A 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?