There are some common mistakes that people of all income levels make which could be hurting their ability to manage their day-to-day finances and save for their longer term goals. Here are 7 money management mistakes we make presented by Erik Carter, financial contributor.
1. Having only a rough idea in your head of where your money goes. As they say, you can’t manage what you don’t measure. When I ask someone how much they’re spending, they usually list a few bills and other expenses off the top of their head. But once they actually start going through their bank and credit card bills, they’re almost always surprised to see where their money is really going. For this reason, you’ll want to do the same thing. One option is to go through at least 3 months worth of previous statements and record your expenses by category on an Excel spreadsheet. Another method is to use a site like Mint.com or Yodlee MoneyCenter to track your spending online for free. Both sites also have Apple and Android apps to help you manage your money on the go. Neither approach is necessarily better so just choose the one that you’re more likely to actually use.
2. Forgetting those non-monthly expenses . Some of the largest sources of credit card debt are holidays and vacations. You can easily turn them into monthly expenses by dividing the amount you typically spend each year by 12. You can then have those monthly amounts automatically set aside each month so the money will be there when you need it. While you won’t earn a whole lot at today’s interest rates, it still beats paying interest on credit card debt.
3. Spending more than you really need to. Once you know how much you’re spending and where your money is really going, think of ways to reduce some of those expenses. After all, regardless of how much you make, don’t forget that plenty of people are living on less so you can too. (There are even people who save as much as 75% of their income in order to retire in as little as 5 years.) Do you have subscriptions or memberships that you don’t really use? Have you comparison shopped for things like insurance policies, mortgages, cell phone plans, and groceries? Are the purchases you’re making for something you really need or just a status symbol? Can you think of lower cost ways of achieving the same result like bringing your own lunch and coffee instead of eating out and stopping at a coffee shop on the way to work each day? You may be surprised by how small changes can really add up over time.
4. Living paycheck to paycheck. That could be a big mistake, especially with the unemployment rate still high and people taking longer to find jobs. That’s why many financial experts are now recommending having 8-12 months of necessary living expenses rather than the traditional 3-6. If that sounds daunting, begin with a goal that’s feasible for you and build from there. You can build an emergency fund and save for retirement tax free at the same time. Just be sure to keep the money invested somewhere safe and accessible like a money market account or fund until you have adequate emergency savings elsewhere. At that point, you can invest in something more aggressive for retirement.
5. Thinking that you should never borrow from your retirement plan either. Like the last one, there certainly is some truth here. Most people think retirement plan loans are free since the interest just goes back into your account. However, there is a very real cost, which is the lost earnings in your account, and a very real risk, which is that any outstanding balance after 60 days of leaving your job could be considered a taxable distribution and subject to a 10% early withdrawal penalty. For those reasons, retirement plan loans should not be taken for frivolous purposes. If you use one to pay off high interest debt, make sure that it’s part of a long-term plan to stay debt free. The last thing you want is to run your credit card balance up after depleting your retirement savings.
6. Saving whatever is left at the end of the month. If you do that, don’t be surprised when there isn’t anything left to save. Instead, have your savings automatically set aside before you even have a chance to spend it. The easiest way to do that is in your employer’s retirement plan since it’s deducted right out of your paycheck.
7. Contributing just enough to your employer’s retirement plan to get the match. If it’s important to know how much to save for holidays and vacations, it’s even more important to know how to save for the ultimate holiday/vacation: your retirement. Contributing enough to get your employer’s match is a good start but that probably won’t be enough. To get an idea of how much you’ll need, take a look at your expenses and think about how each one of them might change in retirement to create a retirement budget . For example, your mortgage and other debts may be paid off but you could spend more on travel and health care. Then use a retirement calculator to see how much you need to save. If you can’t swing that much, see if your plan has a contribution rate escalator, which slowly increases your contribution rate over time until you hit your goal. After all, it’s a lot easier to save 1% more each year then to go from 6% to 15% all at once.