Whether you are a pro or a beginner, common financial mistakes can happen to anyone. These mistakes can cost you and prevent you from achieving your financial goals. Hence, it is essential to be aware of mistakes and avoid them for a smooth financial life ahead.
Common Financial Mistakes: How to Avoid?
Here, we list top financial mistakes to avoid.
1. Not Having a Budget
One of the basic financial mistakes people make is to neglect to set a budget. Having a budget is important for robust financial planning. This plan helps you know how much you can afford to spend on necessities and luxuries. It also ensures that you save for short- or long-term goals like buying a home, paying debts, etc. However, having a budget only serves no purpose! It is important to adhere to it. Keep tracking your income and expenses, and make adjustments whenever necessary.
As a thumb rule, spend half of your income to fulfill your essential needs like paying bills, loans or EMIs, food, rent, etc. Keep thirty percent for ‘wants’ or entertainment purposes. Lastly, save twenty percent for making investments, clearing off debt, creating retirement funds, etc. If you can allocate more funds for savings, it will be better for you in the long term. Use a budgeting app for smooth planning and calculation.
2. Not Contributing to Emergency Fund
Having enough funds to cover your emergency needs, like urgent home renovation, heavy medical bills, car repair, etc., is essential. In the unfortunate event of job loss, it is important to have emergency savings to manage your regular expenses rather than borrowing from family or paying using a high-interest rate credit card.
To form and maintain an emergency fund, we suggest you contribute a fixed amount to it regularly. Avoid the temptation to spend the funds on fulfilling your luxury needs. Consider your three to six months household expenditures to know how much you need to save. Have enough money that cover your basic expenses during tough times.
3. Overusing Credit Cards
Though a credit card adds convenience to our financial lives in many ways, we cannot ignore that living on a credit card can be detrimental. Having a high credit limit should not encourage you to use it all and live beyond your means. It is vital to use the card responsibly and avoid increasing the credit utilization rate. Also, be wary that paying the minimum dues will only mean covering interest. Carrying a huge credit card balance might make it challenging for you to repay the amount!
4. Not Checking Credit Report
One of the most common financial problems is not checking your credit report at least twice a year. The credit report is an important determinant when you apply for a loan or a credit card. The lenders check the report to determine whether they should extend the loan to you, and on what terms. If your credit score is not good or there is an error in your report, it can impact your financial life. You might have to face loan rejection or pay high interest rates on your credit card.
Get a free credit report from Due Factory. Check whether the report is correct. If there are errors on your report, dispute the same by contacting the credit bureau at the earliest.
5. Not Paying Monthly Dues Timely
If you have a habit of falling behind on monthly bills, then it is critical to work on it urgently. It is a no-brainer that making the loan or credit card repayments timely indicates efficient money management and good credit behavior. When you don’t pay your loan EMIs and credit card balances before the due date, it blemishes your credit report and lowers your credit score. Your interest rate on future borrowings may increase and you may not get attractive rewards on your credit card.
6. Not Having a Debt Management Plan
If you have accumulated debt, you should make an effective debt management plan. For example, you can consider paying the high-interest rate debt first (debt avalanche method) or paying the debts with a smaller amount first (debt snowball method). You can also go for debt consolidation by taking a personal loan and clearing off all the debts using the loan amount. Combining multiple debts into a single loan can provide more convenience.
7. Not Considering Inflation
When you save for the future or make investments, you should factor in inflation. Inflation lowers the value of your savings and investment in the coming years. To beat inflation, you should consider putting your money in investments that offer inflation-beating returns, like mutual funds, stocks, etc. Not factoring inflation into your investments may prevent you from accomplishing your financial objectives.
Wrapping Up
Managing your finances will become more seamless when you know the basics. If you have made any of these common financial mistakes, then you can turn it around by following the tips listed above.
FAQs
Q1.What are the top financial mistakes to avoid?
Ans. The common mistakes to avoid include not making a budget, not saving for emergencies, not having a debt management plan, not considering inflation, not checking credit reports, completely relying on credit cards, etc.
Q2. Why is it important to check your credit report?
Ans. You should check your credit score regularly to find errors and know your credit score from time to time. If you have a good credit score, you will get many financial benefits like easy loan approval, low interest rates, credit card rewards, better loan terms, etc.
Q3. How should I plan my budget?
Ans. One of the common financial mistakes is not doing financial planning. Spend half of your income to fulfill your essential needs like paying bills, loans or EMIs, food, rent, etc. Keep thirty percent for ‘wants’ or entertainment purposes. Lastly, save twenty percent for making investments, paying debts, creating an emergency fund, etc.
Q4. How much should I keep in the emergency fund?
Ans. An emergency fund should be able to cover at least three to six months of your necessary household expenditures like utility bills, grocery, rent, etc.