I have seen a lot of people over the years make simple mistakes with their money. The following is a list of the most common mistakes. Take a look at the list and see if there is something you can do to improve yourself and your finances this year.
People Spend Too Much. It may sound simplistic but the number one reason people are financially successful is that they live on less than they make. There are many millionaires around, but you would never know some of them were wealthy unless you could look at their investments. That’s because even though they may have a very modest income they spend less than they make – and probably have for many years. They don’t live in the nicest houses, drive the nicest cars or go on spectacular vacations, but they do have financial security. I have observed that some people spend too much money trying to keep up with their neighbors. They just focus on the short term and how they can get more things now because they feel they deserve it.
Don’t Have a Budget. Most Americans do not have a budget and don’t know how much they spend. They feel that if they can afford the payment they can buy whatever they want. What people don’t want to think about is that once you get a debt payment it is hard to get rid of. If you don’t have a budget you can’t keep track of those little expenses that add up to a large amount of money each month. I know from years of financial planning that many people who look like they are doing well are really just living on borrowed money, which leads us to the next mistake.
Have Credit Card Debt. If you are using credit cards for everyday expenses and not paying the cards off every month you are (or are shortly going to be) in trouble. Paying double digit interest rates makes groceries and gas and other everyday items really expensive. Keeping a credit card balance is not a good way to make money. No one ever got ahead by borrowing money at 12 to 28 percent interest.
Spend Too Much on Cars. Being able to afford car payments is not the same as being able to afford a car. A car is a depreciating asset and a new car depreciates the fastest. Most new vehicles depreciate 10% or more as soon as you buy them, and may depreciate 20% or more in the first year. I know I am sounding ridiculous by saying this but if you can’t afford to pay cash for a car you shouldn’t buy it. Instead, look at used cars you can afford. No one needs a new car. And don’t look at more car than you need. Contrary to popular belief, having car payments your whole life is not a necessity.
Buy Too Much House. The bigger house you buy the more you will spend on payments and expenses like taxes, utilities and maintenance. You are building a large monthly payment into your long term budget. Carefully consider how much house you can really afford. I use the 20/30 rule. If you cannot pay a 20% down payment and if your house payments (including taxes and insurance) are going to be more than 30% of your income you can’t afford a house. These may sound like conservative numbers but if you are saving for your children’s education and your own retirement along with all of the other expenses you have they are very reasonable.
Have No Plan. People spend hours and hours watching TV and playing with their computer but can’t seem to find time to look at their finances. Your financial future depends on what you do now. Planning for the future and learning will help you make good decisions and become financially independent. Many people who work hard their whole lives end up with very little because they didn’t have a plan.
Delay investing. Don’t delay investing until you “have money”. If you do other priorities will always come first. Financial goals like retirement are up to you. No one else is going to make sure you have enough money for retirement. Social Security will make up part of your retirement income but if you want to have more than that it’s all up to you. The sooner you start the less money you will have to put in to reach your goal. Time is your friend if you start early. If you delay too long time becomes your enemy. The amount you start investing with is not as important as beginning early. Once you see that money can work for you it will motivate you to increase the amount you save.
Bill Oldfather is a fee-only financial planner and investment advisor. Oldfather Financial Services, LLC is an SEC Registered Investment Advisor based in Kearney NE. Email to [email protected]