5 Financial Mistakes to Avoid

5 Financial Mistakes to Avoid May 10, 2013

When it comes to money and financial success, most of us tend to focus on having a solid plan that will move us forward. But it’s at least as important to avoid financial mistakes as it is to have plans to improve your finances. In a way, you win by default simply by avoiding mistakes.

Here are five of the biggest financial mistakes to avoid.

1. Adopting a rich lifestyle early in life.

Probably the biggest obstacle to financial success in life is lifestyle itself. The standard of living that you adopt early in life will have a tremendous effect on the outcome of your financial position in the years to come.

If you are able to live on a shoestring – especially when you are in your 20s – you will both avoid debt, and have money available for savings and investments. If on the other hand, you get caught up on the treadmill of consumption that so many people do, you will probably do a little more than run in place for most of your life.

If you have not learned the fine art of frugal living early, now is an excellent time to begin. The sooner that you do, the sooner that you’ll get control of your income and begin to make the long-term improvements that are necessary to find financial success.

No other financial plan you can hatch will have as significant an impact as learning to live on less money than you earn.

2. Flipping major assets too frequently.

This mistake is an outgrowth of the last one, except that the numbers – and the financial impact – are usually much greater. This involves flipping – or trading up – on major assets every few years. The typical assets involved are houses and cars, and the practice has major downsides with both.

Many people flip their cars every five years or so, in part to avoid the expense of heavy repair bills, but also to make sure that they are driving the latest vehicle at any given time. Cars can be an addiction, and if you are buying a new one every few years, you are simply giving in to that addiction. Not only will you be in debt forever, but since the price of cars rises steadily, you are guaranteed that you will always have an outsized portion of your money parked in your driveway.

The impact is even greater when it comes to houses. Once again, many people trade up every few years as a way of going from a starter home to the biggest McMansion they can afford. But each time they make the transition, they are incurring many thousands of dollars in transaction fees. In addition, each trade-up brings a higher mortgage payment, which means less money is finding its way into savings and investments.

Housing and cars are consumer goods, not investments. For this reason, you should seek to minimize the amount of money that you commit to either.

3. Letting your credit card balances accumulate.

Credit cards can be extremely convenient ways to transact business – as long as you pay off the balance in full at the end of each month. Millions of people don’t however, and allow the balances to roll forward into the next month and to accumulate. Once you have several months worth of charges sitting on your credit cards, they become legitimate burdens. And each month your payment is a little bit higher.

It’s important to recognize that credit cards are a financial treadmill. Once you get on and start moving forward, it’s very difficult to get off. The best way to deal with this dilemma is to not ever get involved in it in the first place. But if you already have, make a commitment to putting a stop to it as soon as possible.

Carrying credit card balances is the practice of using credit as an additional source of income. But it isn’t long before they go from supplementing your income to reducing it.

4. Not having – or regularly restocking – an emergency fund.

It’s very easy to get about the business of your life and to do so without the benefit of having a savings cushion. (Which is another reason why credit cards are so attractive!) But having an emergency fund is fundamental to financial success and independence.

The more that you have in savings, the less dependent you are on credit. We can think of an emergency fund as being an anti-credit account – as long as we have one, and it’s well-stocked, we have little need for credit.

If you don’t have an emergency fund, get one started as soon as you can. If you have one, but you’ve allowed it to run a little dry, rearrange your budget so that you will be making regular contributions to restock it. You’ll want to have money available anytime an emergency presents itself.

5. Not maximizing your retirement contributions.

Since retirement is so far off into the future, we often prefer to deal with financial fires that are more immediate. While this is a natural practice, the problem is that these concerns go on year after year, and before you know it you’ve wasted decades of retirement investing and earnings.

If you started saving for retirement late in the game, or have not been entirely committed to it so far, you should work to begin maximizing your contributions from this point forward. Though you will not be able to make up for the contributions that were not made early in life, you can greatly improve your retirement prospects by saving as much money as possible from now on.

Are there other financial mistakes that you think are important to avoid? Leave a comment!

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  • Tom

    The five you mentioned are crucial to making it in this day and age. So many people try to live above their means. It just takes time to see what’s coming in and what’s going out.

    • PEDRO MENDOZA

      Excellent advice! Even though I am a little late…(56)They are very important things to focus financially…

  • Even if I’d have a lot of money, I’d still probably try maintain the same lifestyle. It’s already a habit so I’m not sure if I’d change that much. With the rest, these are important things to avoid in order to secure one’s future.

  • Blessmore

    that are useful points. there other factors that need to be understood. many pple they can not distinguish between an asset and which is not. asset brings cash inside the pocket while anything that takes cash out of the pocket is a liability. all cars bought for personal use are liabilities

  • I’m guilty of all the mistakes mentioned above. And the biggest contributor of all my debts is my credit card! Oh my glorious credit card, I wish I can get rid of you sooner!