No one plans to fail at their finances, right? I certainly didn’t, but I made some pretty big financial mistakes in my life.
In high school and after graduating, we all think we know it all – we take Consumer Finance in school and figure we’ve got it covered.
Most of us don’t know, though, and unfortunately, we find out the hard way. However, mistakes are only bad if you don’t learn from them. I’ve learned from mine, and it’s time that you learned from yours.
Here are the worst mistakes I’ve seen people make with their finances.
5 Devastating Financial Mistakes People Make
Pay Even One Bill Late
It seems so innocent. You pay one bill late, thinking you’ll catch up next month. Only next month, you have the standard bill plus late fees and interest that accrued. If you can’t afford that payment, then you end up in this vicious cycle, and it’s impossible to get out of it.
Don’t pay your bills late. If you absolutely can’t pay it, contact the creditor right away and get on a payment plan. Don’t let the late fees and interest accrue. If your creditor won’t do anything, consider starting a side gig like Shipt vs Instacart or taking a part-time job to get current.
Rack up Credit Card Debt
Oh, the joy of swiping plastic and buying whatever you want is so satisfying, but that joy ends quickly when you get the bill.
Reality hits you real quick when you see how much you owe after a month of nonstop shopping. Even one purchase can be too much if it’s over your budget.
Sure, minimum credit card payments seem enticing. You can charge a few hundred dollars and only owe $20 a month. That’s fantastic until you realize what the purchase turns into month after month as you don’t pay the balance in full.
Do whatever you can to pay the balance off fast. Find ways to get money now so you can pay the bill and then vow never to use your credit cards again.
Buy a New Car
I know the joy of buying a new car. Nothing beats that new car smell. That is until you realize you lose 15 to 20 percent of the car’s value just driving it off the lot.
If you borrowed money to pay the car, you just borrowed on a depreciating asset. In other words, you aren’t making your money back. It’s not like a mortgage where you’ll earn equity in the home and eventually walk away with a profit (in most cases).
If you need a car and don’t have the cash to buy it outright, buy a used car, and keep it as cheap as possible. Borrowing money for a depreciating asset is like throwing money out the window.
Use Your Home’s Equity to Spend
It’s so exciting to learn that you have equity in your home. That means you paid the loan balance down enough that you own a part of the house. For example, if your home is worth $150,000 and you owe $100,000, you have $50,000 in equity.
With a home equity loan or cash-out refinance, you can turn that equity into cash.
First, it costs money to get to your equity because you’ll pay closing costs and other fees. Second, you pay interest on the money you take out, so you aren’t gaining equity. You’re lining a bank’s pockets with your money.
Operate Without a Budget
Don’t assume you have it all together and can pay your bills on time. Everyone needs a budget – even rich people.
Your money needs a plan – it needs you to tell it where to go. Without a budget, you don’t know what bills you can pay, how much money you can spend, or how you’ll save for emergencies (they always happen).
Trust me, save an emergency fund (three to six months of expenses) and always know where to get coins for those times when plastic won’t do. It’s a life skill I’ve learned, and you should too.
Take Your Finances Seriously
You probably think you take your finances seriously, and you know what you’re doing. I did too, and I didn’t realize until it was too late what I was doing wrong.
I wish I knew then what I know now, but no one can go back in time. Instead, I’ve put my newfound knowledge to good use and turned my finances around – making my money work for me rather than it hurting me.
It’s a wonderful feeling, and I want you to have it too! If you’ve made some of the mistakes listed here, don’t fret. There’s plenty of time to turn things around. The first step is realizing what you need to do and then putting the steps in place. Are you ready to turn your financial life around?
Sam is the co-owner of How To FIRE, a blog that discusses financial independence and early retirement. She uses her BS in Finance and MBA to help others get control of their finances through budgeting, saving, investing, side hustles, and travel hacking. Due to following the FIRE Movement’s principles, she was able to quit her high-stress job in the financial services industry in July 2019 to pursue her side hustles full-time. When not working, she enjoys spending time with her dog “Simba” and traveling with her husband, John.