Five Money Mistakes That Destroy Your Finances
Think for a second– what are your bad habits with money? Let’s be frank– everyone, including me, has made a mistake with money before (you can even read my about me to learn about just a few of the financial mistakes I’ve made). It’s perfectly okay and normal to make a misstep here and there on your financial journey, but the key to faster success is learning from them and fixing your habits. As John Maxwell once said, “A wise man learns from his mistakes, but a wiser man learns from the mistakes of others.” Here are five of the most common money mistakes to avoid:
1. Not living on a budget
Not living on a budget is like driving without a map. I mean, sure, you can get to where you need to be, but it will probably take a lot longer than expected, and you’ll most likely take several detours along the way. Similar to a map, a budget can help you reach your financial goals with the least stress possible. All it takes is a little bit of grit at the beginning to be honest with yourself and determine what expenses are necessary vs what is not, but after that it’s smooth sailing (for the most part).
2. Budget categories are too strict
Continuing with our map analogy, if your map doesn’t take into account unforeseen circumstances like road closure and traffic, you’ll likely get frustrated on the drive and have to take another route!
Not allocating money in your budget for recreational expenses, such as trips, entertainment, or quality time with friends and family, can often result in you getting burnt out and frustrated with your finances, which can also result in overindulging and splurging, and then suddenly you find yourself back at square one. Furthermore, leave a little wiggle room in your budget! Gas and food prices fluctuate all the time, so you might need to allocate a little extra money into those categories to account for unforeseen circumstances.
3. Giving up because your budget is not perfect
You’re going to make mistakes when you budget. Extenuating circumstances will arise and you’ll end up having to adjust accordingly. For example, helping my son move out of his college dorm this year cost a lot more than I thought it would. But I figured out how to bounce back by finding ways to adjust my budget so that I could make up for the unforeseen expenses.
Budgeting takes grit. It’s not an overnight skill, you will not get it in one try. The important thing is, bouncing back and being resilient is the key to perfecting your budget.
4. Not making savings a priority
In theory, a properly-functioning budget allocates every penny earned to a certain category, whether it be expenditures or savings. Sure, you know where every penny is going! But what sets aside an okay budget from a great one is when you allocate a proper amount of your income to savings.
Think of it this way: prioritizing saving a portion of your income is kind of like paying yourself first, before you pay anything else. You’re setting yourself up for financial success in the future, so that when big expenses (expected or unexpected) come up, you have already paid those dues in the past, when you saved for them!
A really great online bank I like to use is Ally Bank. Essentially, I save a portion of my paycheck and transfer it to my Ally Bank, where it stays untouched, until I reach a certain goal I set (for example, a $10,000 for a vacation, or $1,000 to spend on Christmas gifts) or until I need it for an extraordinary circumstantial expense.
5. Lifestyle creep
This mistake can be a dangerous habit to fall into. If you’re not familiar with lifestyle creep, essentially it’s when an increase in income leads to increased discretionary spending. Have you ever earned a promotion, raise, or picked up a side hustle, and then spent your hard-earned money on treating yourself to a new expensive hobby, gourmet food, or personal care? You get the idea. Spending money on things like streaming subscriptions, outrageously overpriced coffee, or the newest iPhone-Apple Watch-MacBook bundle can creep up on you (hence the name, lifestyle creep).
These things are not inherently bad. After all, my philosophy is that I’ve worked hard for this money, so why should I not reward myself for a job well done? But a smarter approach would be to plan for these expenses. For example, if I know I’m getting a $10k bonus, I need to make sure how much is the net income (after taxes) to make sure some of it goes to my savings so I can reach my goals. This way, I have a portion of my money saved, and a portion left to spend on something that I really value.