4 Common Mistakes People Make with their Finances
Strategies for Sustainable Finances
Tiffany gave two basic principles for building wealth:
- Establish good money habits.
- Provide security for yourself and your family.
What holds people back from building wealth? These four common mistakes are the main culprits:
Mistake 1. Not saving for emergencies
So, how do you prepare? Ensure you have some liquid available cash. That means that you don’t need to sell anything to come up with the cash you need.
What can you do to build this emergency fund?
Even though this goes against common wisdom, Tiffany advised not to start saving via a 401(k) plan until you’ve already built up your emergency fund. Not having cash at hand for emergencies can make you go into credit card or personal loan debt, which has a higher interest rate than the gains you can get from your 401(k).
Having an emergency fund allows you to stay outside the credit card debt cycle.
Mistake 2. Not having enough saved in case you lose your job
This security blanket should not be in the form of something risky, like stocks. It should be in liquid savings.
Tiffany uses the concept of “4 Walls” to define the basic needs you should cover:
Everyone has a number that will allow them to run their life while unemployed. What’s your number?
Mistake 3. Not having a clear strategy to pay debt
It’s worth making sacrifices for a short time, she noted, to get financially healthy in the long run.
Mistake 4. Not planning for the future
In the U.S., instead of saving for retirement we tend to go into debt, doing things like tapping our retirement funds to send our kids to college. That generates extra penalties and loss of income. Tiffany advised that it’s better to take out student loans, which have a lower interest rate, than to spend all your retirement savings, which will be more difficult to replace.
A rule of thumb is to save 15% of your income for retirement. Saving is only part of the picture, though. Tiffany cautioned that there’s an opportunity cost in saving versus investing. The good news is that thanks to compounding interest, it’s never too late to start building up your finances, even if you don’t have a lot to start with.
How do you avoid these mistakes?
To do this, list all your expenses by checking your credit card and bank statements. (Also ensure you’ve accounted for all your income.) This will help you see where your money is going.
You may realize you’re spending $300 a month on Starbucks, and $2,000 eating out. Can you save part of that instead?
Give every dollar a job. Understanding your spending and creating a clear spending plan is the most important step, said Tiffany, in reaching your financial goals.
- Reframe bad habits, but don’t judge yourself for the past.
- Be careful about making emotional decisions — don’t go into scarcity mode.
- Pick your priorities. What is it that you want to afford?
- Have a plan in place.
- Lock down your credit if you want to avoid identity theft, and if you know you won’t be taking out a loan in the near future.
- If your income fluctuates, use the peaks to cover for the valleys.
What will you do to achieve financial health?