The 7 Most Common Financial Mistakes You Can Make
Managing finance is a headache. And we are not all experts at managing our own finances. But we need to learn how to do it so as not to ruin the financial situation. So we must first begin to know common mistakes so we don’t run out of money in your bank account.
What are these financial mistakes?
Our finances go hand in hand with the goals we want to achieve.
Typical goals are to buy a house, a car, travel, pay for college. All of this involves important outlays of money in our lives that we have to sustain. That’s why it’s important to know how to use the money we make, no matter how we do the latter.
This post will not talk about ways to get more income, or how to generate money, but about the complementary part of this task: managing wealth.
For that, we’ve listed 7 financial mistakes that most people make and a practical solution to learn how to avoid them.
Following these steps won’t make you organized overnight, but it will put you on a path closer to achieving your goals. Ideally, you should start in order of importance: start with step 1 and follow the order until you reach the end.
7 Common Financial Mistakes and How You Can Avoid Them
1. Not keeping expenses under control
The basis for managing your finances, before anything else comes to mind, is knowing how much money you are putting into your pockets, versus how much goes out.
In this simple way, you will be able to identify the items in which you are overspending and be able to make a distribution of the money that is most beneficial to your personal goals.
To do this, the essential thing you have to do is keep a record of how much you spend and on what, so that at the end of the month, you can define what you will do for the next with that money. In this way, a chain is formed in which you observe what you are spending on and you can cut back the spending of that item to put it in a more important one.
As an example, you might stop paying for coffee in the morning and spend that amount you spent last month buying coffee in the corner on buying a coffee machine the following month. And this brings us to the next financial mistake.
2. Not saving
Many times our “dreams” are directly tied to money, be it the holidays you’ve always wanted, the car you’ve always wanted to drive, the house to live in, among other things.
That’s why, once you know what you spend on, you’ll also be able to define how much you’re able to save each month.
In this way, you control your expenses and start saving money for that goal you set for yourself and want to achieve.
There are many ways to save (some more effective than others), from having a piggy bank in your home, to automated savings charged to your payroll.
These are very different forms of savings. But both serve the final function which is to separate money that you might well have spent on something else. And make sure it’s put to work to meet your goals.
The problem with saving under the mattress or on a piggy is that, money will lose value over time, which you can mitigate by avoiding the financial error of the next point.
3. Not investing
All the money you keep for a long time, even if you don’t perceive it, is losing value. The value you lose is dictated by inflation, which, depending on the country you live, will vary, just as it will vary by the time it is being calculated.
To combat inflation, the best idea is to invest money, so that it generates more money while you are not taking care of it.
For beginners, there are low-risk assets such as funds that invest in government debt (which will usually give you the same amount as a bank’s reference rate or, in other words, the equivalent of inflation).
If you have more experience, you can venture into financial instruments such as mutual funds, opting for commodities such as gold, silver and oil, stock market shares or even crypto currencies.
The assets and terms you choose must be aligned with your goals for the investment to be effective.
4. Putting all your eggs in the same basket
One of the basic rules in investing is not to put all your eggs in the same basket, which is just a graphic way of saying that you shouldn’t put all your money in one asset.
Regardless of whether we are talking about gold, crypto currencies or stocks, all these assets carry a cycle in which, after a price increase, it has a “correction”, which means price will go down and then rise again.
It sounds simple in theory, but in practice you don’t know exactly how much it will go down and how much it will go up. So even if it goes down, you will never know if it will reach the same point at which you first bought.
Eventually it will touch that price again, only it can take years or even decades for that to happen.
One way to mitigate the wave effect of assets is to invest in a varied portfolio in which you can counteract the declines of some assets, with increase in others.
For example, when stock market shares go up, treasury funds go down. Because people are more confident in the economy and venture into riskier investments (because treasury funds have a certain value).
Therefore, when it is said that an economic recession is looming in the country, people take their money out of the stock market and put it into safer assets such as treasury funds.
If you don’t have the time and dedication to be able to control the ups and downs of all the assets you invest in, you’d better diversify so that your investment remains stable despite the movements.
Sometimes you’ll earn more than you invested, sometimes you’ll lose, and sometimes you’ll stay the same. The idea is to be able to maintain your purchasing power and beat inflation.
When you gain more experience, you will be able to experiment with different assets that will make you gain more and more.
5. Having liabilities
Another common misconception is having liabilities instead of assets.
Assets are everything that generates money for you. E.g. if you owned a franchise, a local business or an e-commerce store, all this is something that generates money for you.
Although you can spend money on advertising or some other items that require maintenance, these are expenses you make to grow your investment and in the end you will see a return on that investment.
On the other hand there are liabilities, which are objects or things you buy that are not generating money, for example a television, clothes and other items.
Among the objects that are commonly confused as assets when they are actually passive are computers, cars and bikes, which are even subject to devaluation.
Let’s take an example: if you use your computer to work, it is an asset, since this tool helps you generate income.
However, if you buy a car and use it to go to work, the same good is not generating money because you could occupy another means of transport to get there, and as you do not depend on the car to generate income, it is a liability.
A house, on the other hand, although it increases in value with time, does not mean that it represents an asset, since as long as you do not rent it (or it generates income in another way), it is also a liability.
The best and most recommended solution is to get rid of all those liabilities to start buying assets. That is, sell everything that does not generate money for you and invest in something that does.
You can sell your car so you can make the down payment on a house. If you rent that house, it will become an asset for you and the car will cease to be a liability in your life.
Nowadays there are many ways to get rid of your liabilities. Such as, for example, the Facebook market where you can sell second-hand things easily, such as computers or other electronics.
In the case of car, there are already online platforms that can buy your car safely and quickly.
This way, you can sell everything without much complications, start investing in your assets and create cash flow.
6. Not separating business accounts and self payment
Closely linked to the previous point is the separation of business account with own’s salary. Many use, same account to pay personal and business expenses, which often causes an imbalance between what is spent and what is earned.
Business owners forget that they have to pay themselves a salary, because they assume that the profit of the business is entirely theirs and can dispose of it at will.
However, it is a risky practice since you spend without control. When end of the month arrives and it turns out that the business ended up with negative numbers because you went too far with one expense here and another there.
Maybe in a specific month it won’t affect you so much because you will be able to pay everything with ease. But imagine that you have to pay for the supplies that your business depends on to keep running and you would have already spent that money.
The first thing you have to do is define your own salary according to your needs and the running the company. In this way, you will be able to keep the company’s income and expenses separate from your own. And you will be able to better plan both your finances and those of your own business.
7. Not having an emergency fund
Last but not least is having an emergency fund.
It may be that you have already planned your entire financial structure and you have controlled how much you spend based on your income, and even have your savings. But if an emergency arises you would have to resort to the money that you have been collecting to get out of any unforeseen event in the future. And this would affect the goals you had already set.
There are serious emergencies on which your life depends, such as paying for a doctor or an operation after an accident, which are usually very expensive and we cannot get rid of. Or they can be simple things, like the fridge broke down, and if you don’t buy one soon, all the food in it will go to waste.
If you don’t have an emergency fund, that money will come out of your savings fund. And since it may be easy to replenish that sum the other month, you may run out completely or even have to borrow money.
To avoid all of this, it’s important to designate a savings plan that isn’t designed for any specific goal, but is limited to cover emergencies.
To do this, it is advisable to spend about 6 months of your monthly expenses. You should keep this money in a bank account in which you have immediate liquidity so that you can have it whenever you need it without any kind of penalty for taking it out before a defined period.
In this way, following all the above 7 previous steps, you will be armoring your financial health so that you can reach all your objectives and set higher and higher goals. Mastering each of the steps will be a process that will take time and effort, however, it is not impossible.
You will have to apply each one of these steps as you feel it is appropriate, since everything is a balance in which all these recommendations come together in an integral way. Some points will take more effort than others, but now you know the basis for starting to take control of your financial life.