When it comes to money and finances, sometimes what you do not do matters even more than what you do. Bad financial habits can literally destroy your life and leave you deep in debt, but breaking those habits now could help you turn things around. Here are 5 financial blunders that you could be making right now.
#1. Trying to Keep Up With Your Friends
If you want to go broke, just spend like your wealthier friends and relatives. The surest way to end up in debt is to try to keep up with the Joneses, and you should avoid that temptation at all costs.
Instead of trying to keep up with your spendthrift friends, look for creative and less expensive ways to have a good time. Rent a movie, pop some popcorn and have a movie night at home instead of dropping $100 at the local multiplex. Buy a good but inexpensive bottle of wine and invite your friends over for a dinner party. There are plenty of ways to enjoy yourself without going broke.
#2. Charging Things that Lose Value
Borrowing money to buy items that lose value is a sure path to ruin. You may have no choice but to take out a loan to buy a car, but borrowing money to buy a big screen TV, smartphone or anything else that is sure to lose value is just crazy.
If you can pay off the bill at the end of the month, feel free to put those items on your credit card. If not, save up slowly over time and pay cash for those indulgences.
#3. Ignoring Your Workplace Retirement Plan
If you are not contributing to your company 401(k) or other retirement plan, you are literally putting your future at risk. A workplace retirement plan is the single most generous, and most flexible way to save for life after work, yet an astonishing number of workers fail to take advantage of it.
If you cannot afford to save the maximum amount the plan allows, that’s fine. You can start with as little as 1% of your pay and increase it over time. At the very least you should be saving enough to get the company match – which is essentially free money.
#4. Not Having an Emergency Fund
If you do not have an emergency fund in place, you could be one missed paycheck or one car repair away from financial ruin. Even if it means cutting back on current expenses, you NEED to have money you can tap if times get tough. See our article on the most common trap young professionals fall into when prioritizing their funds.
Financial experts recommend building an emergency fund equal to at least three to six months of living expenses. That may seem like a lot, but you do not have to fund it all at once. Simply putting a few dollars away from every paycheck can get you started toward your goal.
Most importantly, do not use these funds for any travel, luxury, or lifestyle expenses. It is ONLY for emergencies and always prioritized to be funded up to the 3-6 month water mark.
#5. Turning an Occasional Indulgence into a Regular Thing
There is nothing wrong with an occasional indulgence to make yourself feel better. Having your nails done, splurging on a fancy gourmet meal and treating yourself to a day at the spa are all wonderful things to do once in awhile.
The problem arises when these occasional indulgences become regular habits. Spending $5 on a fancy cup of coffee once a week may be no big deal. Indulging your gourmet coffee habit on a daily basis means spending more than $1,800 a year – money that would be better used to build your emergency fund or beef up your retirement savings.
Knowing what not to do is important when it comes to your finances. Identifying bad habits and leaving them behind is the single best way to avoid these mistakes and make the most of your money.