It’s never a bad time to take your financial pulse, but the final quarter of the year is a particularly good one to sit down and review your spending and saving habits. Committing to financial health isn’t easy and involves a long-term commitment, as does kicking bad financial habits like overspending, putting items on credit, and unnecessarily taking out loans for nonessential consumer items.
In this blog post, we’re sharing five common financial mistakes that you – and thousands of other Americans – have probably already made this year…and how to get yourself back on track before the New Year rolls around.
#1: Overusing your credit cards
Putting items on credit when you don’t have the money to pay for them is one of the biggest contributors to debt issues. While using credit cards is not inherently negative – in fact, they are immensely helpful when it comes to building up credit – using them irresponsibly can not only blemish your credit history but also land you in a pit of high-interest debt from which it is very difficult to escape. Further, paying only the minimum amount due on your credit card balances can result in your paying double or even triple what you owe as your interest rates continually increase and compound.
If you struggle consistently to say NO to putting things on credit, ask a trusted friend or family member to hold onto your cards for you when you feel temptation rising. If there is a purchase you absolutely cannot resist, start separate savings account for it. Once you’ve collected the cash to fund it, purchase it. You can use your card if you’d like to accrue points and build up credit but pay the balance immediately.
#2: Buying something you can’t afford
Along the same lines, making purchases you simply cannot afford is a surefire way to land yourself in a challenging financial situation – particularly when these items are luxury items or simply consumerist nonessentials. Putting a big-ticket item on credit when you don’t have the funds to pay it down immediately can result in stifling monthly payments with up to 20 or even 25% interest, and failing to make your monthly payments in a timely manner can result in your paying many times more what you initially owed. Even if you do have the cash to make a purchase – but it depletes your savings account – you will find yourself in a pickle should an emergency arise, like a medical condition. Instead of pouring your savings into a home improvement project, new TV, or new car, leave three to six months of living expenses in your bank account to prepare for contingencies and emergencies.
If you’re tempted to make a big-ticket purchase and you simply cannot stop thinking about the item you want, stalk the item (or service) for sales or other discount offerings. Start a side account to save for it and contribute to it each month, so in time, you can make the purchase guilt-free (while leaving both your credit and your savings intact).
#3: Failing to budget
A budget is a fantastic way to track your savings, expenses, and expenditures. But failing to put one in place can easily lead you to bury your head in the sand and pay no mind to your financial situations – which can, in turn, yield irresponsible spending. By not setting up a budget, you’re already setting yourself up for failure.
There are numerous free (and some paid) tools available to track your budget. Some popular ones include Every Dollar, Mint, and You Need a Budget. Many of these tools sync with your bank account so that you can easily slide expenditures into categories and analyze how – and where – you spend the most. You may also use an old-fashioned pen and paper or a spreadsheet: whichever tool best enables you to keep yourself honest and accountable.
#4: Putting off your retirement savings
Failing to save for retirement as early as possible is like shooting yourself in the foot financially. By starting your retirement fund early – and contributing to it each month – you reap the benefit of long-term market fluctuations that will multiply your money and prepare you to enjoy a safe, healthy retirement. You simply cannot afford to put this off, as you will lose more and more opportunities to save the more time you allow to elapse.
Even if your employer does not provide you with a match 401k, setting up a traditional IRA or a Roth IRA has never been easier. Contact a financial planner or accountant to help you get set up and ask them to recommend a percentage of your income that you should contribute each month. Set this money to auto-draft from your account so that you never see it and thus, never miss it (thus avoiding any temptation to pocket it and to spend it on something nonessential instead).
#5: Keeping up with the Joneses
The mythical “Joneses” are your worst enemy. Just because your friend, colleague, or next-door neighbor just upgraded his car or home does not mean that it is now time for you to do the same. Millions of Americans land themselves in troubled financial waters by making purchases simply to “keep up” with what their peers are doing – especially when it comes to material acquisitions.
Remind yourself that you never fully know someone else’s financial situation. If your neighbor just sunk $100,000 into a home renovation or purchased a late-model luxury car, perhaps he had the cash to do so because of inherited money – OR, he might be dangerously living on credit and fighting mounting piles of debt. Don’t let the financial decisions of others guide your own. Make your purchases based on 1) what you absolutely NEED (not want), and 2) what you can afford – not what you think you should be buying based on what others are doing.
Self-Awareness: The Key to Financial Health
By reviewing these common mistakes and being honest with yourself about whether you’ve made them, you’ve already placed yourself miles ahead of many Americans. Knowing your mistakes is the first essential step in correcting them, so in this final quarter of the year, commit to taking a good hard look at how you’ve been spending and saving.