13 Big Money Mistakes People Make—and How to Avoid Them

Laura Shin
Posted

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.

RELATED: Budgeting 101

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.

So …

  1. Accumulate six months’ worth of income in your emergency savings
  2. Only use it for true emergencies
  3. When your income or expenses change (especially if they go up), make sure to increase your fund proportionately

RELATED: I Want to Build Up Savings

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

RELATED: 10 Things You’re Embarrassed to Ask About Credit

  • Ana

    In tip #6, “Accumulate six months’ worth of income in your emergency savings.” I’ve always heard “living expenses” not income. If you save a lot of your income off the top, it doesn’t make sense (to me) to factor that into your emergency fund, cause you could do without that money without it impacting your living expenses. 

    • AldenWicker

      Hi Ana, 

      We generally recommend six months of net income or take-home pay–that’s the amount that hits your checking account each month. However this number can vary based on a lot of things: How much you save, if you’re part of a one-income or two-income household, if you have a mortgage, if you are self employed, etc. That’s why a personalized financial plan is so important. This a general guideline, but you can work closely with a planner to find the amount that’s right for you based on your situation. 

      Hope that helps!
      Alden

  • Sondra

    The link to “Wills and Trusts 101″ is broken.

    • laurashin

      Hi Sondra,

      It should work now. Enjoy! 
      Laura

      • higarner

        I want to meet with a financial planner that helps me determine the cost of a mortgage I can realistically take on and ideas for how I can best budget. I do not want anyone who has a vested interest in selling me anything. How can I find an impartial , knowledgeable financial planner?

  • http://cagirlindc.blogspot.com/ CutMyTeethOnKleypas

    “After all, if you’re making $100,000 a year” – BAHAHAHAHAHAHA, Oh LearnVest, you kill me. :)

  • Debhayward

    would be great to have check marks next to these numbers for solutions to add to our goals list.

  • www.yoursmartmoneymoves.com

    Not understanding the real power of tax deferral.  Many young Gen X/Y clients simply do not understand this even when college educated.

  • Teddy

    I’d also like to add getting a high-maintenance pet, like a dog, when you can’t afford one.  I’ve seen people nearly ruined financially because of this.

  • Dkayrobinson

    Tip #12 LTD Insurance – you will be required to tap any state provided disability programs first which is fair. However, they will put you through the ringer to actually collect under your LTD contract. After 1 1/2 battle with cancer, where I could not work in any occupation as I was going through stem cell transplant, chemo etc. UNOM wanted me to work as a door to door salesman in order to collect under a plan I had paid $1000′s into over an eight year period. These policies aren’t worth the paper they are printed on. They will harass you and not pay. A little online research shows this is rampant across multiple carriers not just UNOM.