We can all agree that proper financial planning is a skill that not everybody possesses. I mean, we have all witnessed that jackpot winner who became broke again within weeks and that low wage employee who managed to save her way to purchasing a house. Nonetheless, we can all agree that discipline and commitment is the key to achieving a sound financial breakthrough, both at home and in business. Spending money is all too easy yet making it is hard. There are some major money mistakes that many people make and these include:
1. Not budgeting
We all agree that having a sound budget is the biggest pillar of financial planning. In order to budget, a comparative analysis of capital inflows versus expenditures needs to be made. Then the discipline and the commitment to stick to it is what matters. In addition to having a budget, it is also necessary to track one’s spending to see whether they are matching with the budget or not. If possible, download a budgeting app on your phone to aid you do your budgeting.
2. Spending every cent
This is one of the biggest money mistakes that most people make. Spending all the money that one makes puts one in a very vulnerable situation and is very risky. Moreover, it becomes impossible to save if one spends all the money that they make; and we all know that saving is the primary way of achieving most financial goals in life. It is important to have a target and a goal for each step in life; this is the best motivation to start saving. For example, having a goal to purchase a new car in two years will make it easier to start saving towards the realization of this objective. As agreed by most financial advisors, it is important to have a 50/15/5 rule of spending and saving; 50% for general expenditures, 15% for retirement savings and 5% for normal savings.
3. Failing to save for retirement
This is one big mistake that many young and working people make during their working years. This arises from a procrastination mentality where many people postpone saving as a far-off idea. It is important to save for retirement when earning a stable flow of income because during retirement there is no stable source of income. Some employees depend on their company’s retirement plan. However, without close monitoring, this may actually not be enough. Another obstacle is that many people feel that they do not have enough money. However, this is not true, since saving little by little eventually does make a big difference.
4. Depending on one source of income
This is a big mistake especially for youths as it limits the amount of funds available for investment. It is necessary to diversify sources of income in case on stream of income fails. Furthermore for young people who have a lot of time and energy resources, getting an extra job or starting one’s one business will be an additional benefit. Spending a lot of money on housing; this is a mistake that city dwellers are more likely to make. Renting an accommodation in big cities is very expensive. Therefore, it is not wise to spend more than 30% of one’s income on housing. For a young person who is still in school or has just graduated, choosing to live with parents or older relatives is a great way to save money, before attaining financial stability. Once living on your own, please take great care to ensure that housing costs do not impede other long-term financial goals and objectives.
5. Trying to keep up with recent trends and fashions
Keeping up with the Joneses is certainly not a good idea. This is because apart from being the money killer that it is, it could also get one into deep debt; and possibly a lot of trouble with the law. When we try to keep up with the current trends, we are usually not matching our lifestyles and this could mean living beyond our means. Furthermore, getting that latest i-phone won’t make you any happier than getting your own home would.
6. Failing to define the difference between want and need
This is a big mistake because it would mean you cannot recognize when to spend and when to avoid spending. It is important to have a clear-cut distinction between needs (essentials that one cannot live without) and wants (which are just exaggerated needs.)
7. Failing to make a proper plan for student loans debt
This includes failing to consult financial advisers and experts on student loans debts to enlighten you about the various terms of service like the interest rates. Also, one should have a clear-cut mechanism of how they intend to pay the loan. If possible, avoid taking loans from exorbitant money lenders, if possible. For example, by applying for grants and scholarships or taking up a day job to cover the costs of fees.
8. Failure to plan life events
Getting into a strong commitment such as marriage, is only best done when financially stable. Having a child on the other hand, is an enormous responsibility that is not wise to undertake without a proper financial ground. For example, when you chose to get a child while still in college without a job is not a very wise idea. It would also slow down one’s wealth accumulation process because most funds would get directed towards the new child. Planning or arranging for a wedding without proper financial ground is also a bad idea. Therefore, it is important to save for these important life events.
9. Replacement of items such as furniture and electronic appliances if they are not broken
Choosing to change your sofa sets every year may not be a very wise idea, especially if you have limited finances that could be better spent elsewhere. Choosing to upgrade to the latest electronic device such as a TV may impede your wealth accumulation process and stop you from doing other things which are more important, like saving for a house or retirement.
All in all, it is indeed very possible to attain financial independence and live a worry-free life; devoid of any financial burdens and pressures. We just need to plan and stick to our plans. Then we can achieve all our dreams!