Saving money is important because we cannot predict the future. Learning how to avoid the pitfalls of common money mistakes early on will help you understand how you can handle your finances and secure your future.
Everybody has their own reasons on why they save money, so to make it much easier for you, you need to have a clear purpose or goal.
Why you should save money
1. Emergency fund
You will never know what challenges life will give you. An emergency fund is your backup money in case you lose your job, need major repair in your home, encounter a medical emergency, or come across unplanned, but crucial expenses. According to money experts, emergency funds should be enough to cover three to six months of expenses.
People who are nearing the retirement age regret not saving for their retirement earlier. The earlier you start saving for retirement, the less you need to save for the future, and this is because of the compound interest.
3. College education
College education in the U.S. is expensive, and it’s only getting worse. The tuition fee keeps going up and has doubled since the late 80s. That is why it is important to consider saving for your or your child’s education early.
4. Financial independence
You need to save to get out of debt and invest a portion of your savings in becoming financially independent. When you are financially independent, you have enough income to support your living expenses without the need to become employed as you have a passive income.
5. House down payment
You need cash to pay for your down payment and to close a deal when buying a house. Even though you could borrow money from a lender, a portion of the cost will still come from you. Also, a reasonably large house down payment will help you reduce your subsequent monthly house payment.
Once you have prioritized your purpose and goals, you will know where and how to start saving. Saving starts with cutting your expenses and managing your spending habits. However, we’re only humans and we make mistakes in spending our money which makes saving look impossible to do. To keep you from committing those mistakes, here is a list of what you should avoid when spending your money in order to improve your financial health.
Common money mistakes you should avoid
1. Irrepressible use of credit card
Having your own credit card has its advantages:
- It is convenient because you do not need to carry cash, and most shops accept credit cards to make your purchase.
- It helps track your spending.
- You can make emergency purchases.
- You can build a credit history for reward points.
However, there are also some disadvantages, especially if you do not know how to manage your spending. These drawbacks are:
- Spending money on unnecessary things
- Dealing with high interest and fees
- Being at risk for fraudulent transactions since credit cards are in electronic form
- Mounting credit card debt
Simply do not purchase an item if you can’t afford to pay for it. You should also settle your credit card balance every month so that you won’t carry over any amount in the next month. Furthermore, you should avoid making cash advances using your credit card.
2. Purchasing a car hastily
Having your own car makes life easier and more comfortable. You don’t have to depend on public transportation and stand in line waiting for the bus just to get to work and go around places. There is no problem if you want to buy a brand new or used car as long as you know that you can pay for it. However, most people don’t focus too much on financing terms when buying a car. Instead, their main focus is on the price of the car and determining if the car of their choice meets their needs and budget. The common mistake that people make is purchasing a car they cannot afford.
3. Paying too much for a house
There are many good reasons why owning a house is important–one of those being that a house keeps us sheltered for safety and protects us from harm’s way, such as thieves, wild animals, and harsh weather. However, there are some of us who go overboard our needs and purchase a house that is too big or too grand for what we can only afford. A bigger house means higher taxes, maintenance, and utilities, which will give you a headache in the long run, especially if you are not earning enough.
4. Living from paycheck-to-paycheck
Do you often have trouble making ends meet and spend almost all of your salary before the month ends? Living from paycheck-to-paycheck will not give you an assurance of your future. There might be a time that you will be put into an unforeseen problem, which will be difficult for you to deal with because you are not prepared. The main reason is you are using your income to cover your monthly expenses, therefore, you won’t have enough or even any left for your savings. To avoid this, you should learn how to budget your income, cut back on your expenses or spending, save money, and get out of debt. Budgeting 101: A System That Works is an online course that can help you learn how you can improve your financial status by managing your personal finances and budgeting.
5. Not having a financial plan
“Failing to plan is planning to fail.” When you don’t plan on how to spend your money and how to grow your income, you won’t have direction and focus towards achieving your financial goals. A well-set of financial strategies is important in securing your future because you are able to determine your short-term and long-term goals. You can manage your income efficiently because you have a blueprint or a plan. You are also able to track your cash flow and monitor your spending patterns. Lastly, you will be guided to choose the right investment.