The Most Common Pitfalls of Poor Money Management
Money is such a contentious issue in our modern culture that most people often find it difficult even to discuss the subject. This is part of what makes it easy for a lot of people to fall into financial traps that can easily be avoided with the right knowledge. Click Here To Go Straight To Our Online Tutorial
If you want to avoid or get out of financial hardship, then steer clear of the following money management mistakes:
One of the biggest financial mistakes that people make is overspending on little items that seem inconsequential at the time, but which can really add up if you’re not paying attention. The truth is that expensive glass of wine or that new top you got on sale, or even that pack of cigarettes you grabbed on your way home can all add up to a pretty hefty amount at the end of the month. In fact, if you were to look at the compounded effects of all your frivolous spending, you’d find that avoiding needless expenses could’ve enabled you to pay an extra car payment or save a little more towards your child’s education. And if you’re already in financial trouble, then it’s even more important to be careful your spending habits than ever.
Look into your recurring payments and ask yourself if they’re all really that necessary? Do you really need that gym membership or do you actually prefer working out at home? You might have cable TV and yet not even watch that much television. Or you might even have a Netflix subscription, and you don’t even know what their latest shows are because you don’t have time to watch anything. So, look into your recurrent payments and see if you can scale down and eliminate a few of them. Sometimes a simpler lifestyle is better anyway, and in the long run, you’ll find that you never needed all those extra services to begin with.
Living on Borrowed Money
Whipping out your credit card to pay for stuff might have given you a rush or made you feel cool when you initially got it, but is it really necessary to use it to pay for everything? Keep in mind that every time you pay for something using your credit card, you will end up paying for added interest as well. Not only that but having your credit card with you while shopping will most likely tempt you into making purchases that you really don’t need, which makes them a liability at the end of the day.
Buying a New Car
The car industry continues to grow, and as each brand releases new models each year, most consumers are only too eager to lap up whatever’s new, while making little to no consideration to whether or not they can actually afford a new car in the first place.
Unfortunately, a car is a depreciating asset, and as most of your car payments go towards paying off the interest from your car loan, you end up paying way more than the initial value of the vehicle. In most instances, you can end up paying as much as 3x the original value of a car!
Then you have to take into account the insurance and maintenance costs of the car as well, keeping in mind that larger vehicles literally guzzle up gas like there’s no tomorrow. So it really doesn’t make any financial sense to purchase a large vehicle unless you’re planning on hauling your off-road bicycle or boat with it every week.
Otherwise, rather go with a modest car that will take you from point A to point B comfortably without costing you an arm and a leg every month.
Spending Too Much on Your House
Once again, some people purchase large homes as status symbols, even if they don’t really need the extra room. All this leaves you with a huge mortgage and tax bill, not to mention the utilities and maintenance expenses that come with owning a large home. So, unless you’re planning on having a big family or you already have one, there’s really no need to be splurging on a large home. Rather put some of your money away as an investment to help you retire comfortably or purchase two properties instead; one for you to live in and another to rent out.
Treating Your Home Equity Like a Piggy Bank
Your home is your sanctuary, and you should treat it that way, and not just as another possession to discard when you feel like it. Refinancing your home to get cash for something else only serves to separate you further from your goal of actually owning your home outright. Rather do the right thing and work on building equity instead.
Living Paycheck to Paycheck
Recent stats show that American households only save just over 3% of their total income, while most simply live from paycheck to paycheck. The danger of living this way is that it places you in a precarious position of extreme unpreparedness should something happen to stop your income for even a single month.
This is why financial planners always advise keeping a separate savings account which has three months’ worth of living expenses in it, so that if anything changes in your financial situation, you’re not left out in the cold.
Investing is the key to true financial freedom. When you invest your money in the stock market, real estate, in a business or some other income generating vehicle, you’re able to generate passive income, which gives you something to fall back on should you decide to quit your job and follow your passion one day or something like that.
Plus, putting money away in investment will ensure that you enjoy a comfortable retirement, and you have plenty of options at your disposal to choose from, including employer-sponsored retirement plans or tax-deferred retirement accounts – which are even better! However, before you start looking at investment options, consult with a financial advisor to get guidance on which investment vehicle to pursue to reach your financial goals in a way that coincides with your risk tolerance.
Paying Off Debt With Savings
Taking money out of your savings to pay off debt is one of the worst things you can do. You’ll no longer be able to enjoy the benefits of compounding on your investment, and you might have to pay expensive fees too.
Not only that but replacing the money you’ve borrowed from your retirement account is nearly impossible for most people to do. So your best bet would be to scale down and make some sacrifices to pay off your debt, and then make a commitment to live simpler so that you don’t find yourself in the same situation again.
Not Having a Plan
As the old saying goes, “if you fail to plan then you plan to fail,” and the same can be said about your finances. If you don’t take the time to plan for your financial future on a regular basis, you’ll most likely end up engaging in self-sabotaging behavior that makes you waste money simply because you have no plan for it.
Unexpected Effects of Poor Money Management
According to recent research, there’s a strong connection between most of our modern health problems and stress levels. The more time and energy you put into the things that stress you out (i.e., money troubles) the less energy your body will have to strengthen your immune system and the result is always the same; a significant decline in overall health.
Unfortunately, financial woes are the biggest cause of stress in modern America and in other cultures as well. That’s why it’s so important to manage your finances well today so that you can avoid making stressful financial mess-ups tomorrow.
How It Affects Your Health
When people find themselves in a financial bind, health care is usually the first to be affected. In fact, an APA report shows that almost 10% of U.S. citizens are so worried about the financial implications of their healthcare that they literally consider neglecting it altogether.
Not only that but stress has been shown to affect other aspects of health and wellbeing such as mood, appetite, focus and blood pressure levels. We see evidence of this in individuals with high-stress jobs like CEOs and executives who tend to suffer from heart attacks and strokes more often than the folks they manage. So it’s not an exaggeration to say that stress might actually kill you.
How It Affects Your Career
Poor money management affects all aspects of your life from your health to your social relationships and even your professional career. Constantly stressing about how you’re going to make the rent, pay the utility bill, or your car payment can really affect your focus when you’re in the workplace. Not only that but the lack of appetite and health repercussions associated with stress can also affect your productivity and your ability to perform well at work, and that can really place your career in jeopardy.
Furthermore, even if you are able to put aside your money woes and focus on your work to minimize its impact on your career, there are other ways that poor money management can affect you. For example, poor financial management can jeopardize your chances of getting a promotion and advancing your career because most employers perform credit checks on all prospective employees before they hire them.
Once a prospective employer sees a low credit score on your credit statement due to late payments or excessive amounts of debt, then you can kiss that promotion or new job goodbye. After all, no employer wants to hire an irresponsible and unreliable person on their team, and that’s exactly how you’ll come across if you don’t clean up your credit record. Better yet, improve it by practicing financial discipline, living below your means and taking a proactive approach to managing your finances. That way, you’ll appear as a reliable and organized adult who can be counted on to handle greater work responsibilities and finances.
Good Financial Management in Business
If you want to have a thriving business, then one of the first principles you need to master is that of proper financial management. This includes proper planning and bookkeeping as well as meticulous cash flow management. One of the easiest ways to achieve financial discipline in business is to develop strict payment terms for your clients and divide your expenditure evenly throughout the year.
Cash Flow Issues and Invoice Financing
When it comes to dealing with clients, you may ask for full upfront payment or a deposit first and the rest upon completion, depending on how things work in your particular industry. The general rule of thumb is that customers should pay an invoice within 30 days of receiving it unless stated otherwise in your agreement. Also, don’t hesitate to charge additional interest if your customers do pay late for whatever reason.
If your business is already in a financial bind and has difficulty generating cash flow, then invoice financing might be the right solution. Invoice financing refers to the process of getting a loan against unpaid invoices, which in turn helps to stimulate cash flow when a business is going through a tough time.
Financial projection and planning are at the foundation of sound financial management. This involves having a fair sense of sensibility when it comes to capital expenses and weighing the financial benefits of a new purchase before you make it. At the end of the day, you should only make large purchases if they will be able to generate an income for you or contribute towards your ability to do so.
Also, try to keep the overall expenses as low as possible. You can do this by using efficient energy sources, buying your supplies in bulk or negotiating better prices with your suppliers. When making your financial projections, don’t forget to factor in taxes and a “rainy day” fund to prepare for unexpected expenses that don’t necessarily fit into your insurance fund.
Better Managing Your Money
To avoid poor money management, you need to cultivate enough discipline to avoid needless small expenses, as they tend to add up too much larger amounts later. Also, don’t be quick to add new debt, and unless you can afford to buy something in cash, rather avoid it altogether. Lastly, invest in your financial life by finding time to plan your finances frequently, and make sure to put away a little something each month religiously.