13 Big Money Mistakes People Make—and How to Avoid Them
Money Mistake #4: Not having a budget
If you want to take control of your money, you need to know where it’s going and plan in advance how to spend it. Bottom line: You need a budget that works for you. This may sound daunting, but it’s easy if you follow the 50/20/30 Rule, which is flexible enough to fit any situation. Basically, the rule says that from your take-home pay, you should allocate:
- 50% to Essential Expenses, which include housing, transportation, utilities and groceries
- 20% to Financial Priorities, which are retirement, savings and debt (in that order)
- 30% to Lifestyle Choices, which are gifts, travel, dining out, shopping and everything else
Then track your spending to make sure that you’re sticking with your budget. You can do this through a myriad number of ways, including pen and paper. But using an automated system will ensure that you don’t miss any expenses, and you’ll see trends in your spending.
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Money Mistake #5: Living paycheck to paycheck
While it’s great to know where every dollar will go, the reality is that you can’t predict everything. For this reason, when you create your budget, include a small “slush fund” that could cover that $100 unexpected car repair or surprise doctor’s bill. It’s a little cushion that will also prevent you from overdrawing on your checking account, and paying unnecessary financial fees.
Money Mistake #6: Not having enough in emergency savings
We’ve extolled the virtues of emergency funds before, but it turns out that a lot of people still only keep $1,000 or $2,000 aside for “emergency money.” This may help you with a last-minute plane ticket, but it won’t tide you over if you get really sick. And if you have what sounds like a lot more–say, $25,000–consider whether that makes sense for your income. After all, if you’re making $100,000 a year, that’s not going to last long if you lose your job.
- Accumulate six months’ worth of income in your emergency savings
- Only use it for true emergencies
- When your income or expenses change (especially if they go up), make sure to increase your fund proportionately
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Money Mistake #7: Not understanding the importance of your credit score and credit report
One of the toughest things about personal finance: getting your situation exactly to your liking takes time. And that is especially true of your credit score and credit report. These two items are essentially a record of how you’ve handled your finances over time–and they’ll determine whether or not you’ll be eligible for thousands (even hundreds of thousands) in savings when you go to make your biggest purchases, such as a car or a house.
Develop these habits now, so you’re ready when that big day arrives:
- Pay your credit cards and other debt payments on time every month
- Use just 10% to 30% of the credit available to you
- Check your credit score and credit report three times a year
- Dispute any mistakes on your report