Learning to manage your money and live within your means can be difficult, even for the most disciplined. Everyone overspends and makes other personal finance mistakes from time-to-time, especially when feeling stressed and overwhelmed. Of course, spending too much and taking on more debt makes you feel more stressed and more overwhelmed—and the cycle continues.
If you feel like you’re on this spending and stressing treadmill, come into your local branch, open a personal savings account right away, and talk to one of our member service specialists about other ways you can improve your financial well-being this year. We want to see all of our members thrive and make smart financial decisions, and we can help you get started.
In the meantime, read up on seven of the most common personal finance mistakes that people make—and learn how to stop making them yourself.
How to Avoid Living Paycheck to Paycheck Forever
Are you making any of these top seven most common personal finance mistakes? If so, it’s likely that you’re living paycheck to paycheck, are in too much debt, or feel overwhelmed on a weekly basis. Fortunately, none of these mistakes is irrecoverable, and changing your habits in even one of these areas will add up and improve your financial life.
Living on Credit Cards
A low-interest credit card is a fantastic tool to have at your disposal for emergencies and to improve and stabilize your credit. There’s nothing wrong with putting a large purchase on a credit card and paying it off within the introductory period or using a credit card to splurge once in awhile and paying it off within the grace period. In fact, we write a lot about how to use credit cards responsibly.
Unfortunately, most people who have revolving lines of credit use them monthly, as a way to live beyond their means. In fact, in 2016, the average credit card debt per household was $8,377 and, in 2017, it’s on track to top $9,000 per household. The best way to avoid putting too much on your credit card is to trim spending wherever you can.
Buying Too Much Car
It’s nearly impossible to save and get ahead if you’re paying too much for necessities such as food and transportation. Unfortunately, many people make the mistake of spending too much on their car, especially when they’re young. Even worse, many pay too much for their auto financing by getting funding for their new car purchase at the dealership.
If you’re still shopping for a car, be sure to check out our Car Loan Center before you buy to learn how to get the best rates, check your credit score, find out how much your car is worth, and more. If you’ve already bought your car and are trapped in a high-interest car loan, come by your local branch to talk to a specialist about auto loan refinancing.
Buying Too Much House
There’s a term for this phenomenon. House poor. Buying a house that is bigger than you need, and more than you can really afford, is one of the fastest ways to end up financially unstable. It’s also an incredibly common mistake. Did you know that the average home today is over 1,000-square-feet larger than the average home in 1973—and that living space per person has doubled?
Of course, buying too much house isn’t only about your mortgage payment. Even if you get a great deal on a house that is too large for your needs, you still have to consider the associated costs. Taxes, utilities, maintenance, and stuff to fill the house all take a toll on your budget. It’s no wonder there’s a tiny house movement afoot. Our suggestion: stick to the middle. Buy a moderate house in the safest, best neighborhood you can afford, build equity, and use your savings to launch a career, pay down other debt, or spend time traveling. If you’re already house poor, there’s never been a better time to sell and downsize or to refinance your home.
Tapping Into Home Equity Unnecessarily
Taking out a low-interest home equity loan or home equity line of credit can be a smart money move—if you’re consolidating debt, using it as a low-interest emergency fund, or even using the money to make home improvements that will increase your home value in a seller’s market. For example, housing prices in Greenville, SC and surrounding areas are steadily rising and the market is strong, so taking out a home equity line to make improvements before putting your home up for sale could increase your sales price significantly.
However, if you’re using your home equity as your own personal piggy bank, you need to break that habit immediately. Not only are you putting your most valuable asset at risk, you’re also paying interest on things you don’t need and virtually ensuring that you won’t recoup the full value of your home when it’s time to sell.
Failing to Save—and Failing to Start Young Enough
According to recent surveys, most Americans save less than 5% of each paycheck, and over 50% of households have less than $1,000 in savings. A lack of emergency funds can increase the chance you will be living paycheck to paycheck.
To start saving today, try one of the many new apps that rounds up each debit card purchase or invests a small, set amount with each purchase. Whatever savings method you choose, the important principle to remember is to pay yourself first and make saving and investing automatic, if at all possible.
Taking on Too Much
We live in a very convenient, inter-connected time. While it may make sense to sign up for certain activities, keep your kids busy, or put your life on autopilot using subscriptions, these costs can add up quickly. If you’re feeling the pinch in your budget or running out of money before you run out of month, take a second look at your activities and subscriptions.
How many extracurriculars do the kids really need to be in? Perhaps they’re feeling just as stressed as you are and could use more downtime. If you or your child don’t want to cut back on an activity, is there a less expensive or even free version that would provide the same benefits? What money is being auto-drafted from your account every month? Take a good look at your cable bill, your cell phone bill, and your internet. Goods and services subscriptions are adept at getting people to sign up for recurring costs and fees—that leave customers in debt and owning nothing after paying for years.
Taking on Too Little
Tackling your personal finance mistakes isn’t only about cutting extras. Getting out of the paycheck to paycheck cycle may actually require you to take on a bit more debt at first—or take on more responsibility.
Just like taking on too much can feel overwhelming, taking on too little can cause you to miss golden opportunities and short-change yourself. Not all debt is bad. In general, we advise taking on a reasonable amount of debt that enables you to finish your education, live in a safe home, or launch your business. In other words, don’t be afraid to invest enough in your own personal growth and development.
Overall, most personal finance mistakes boil down to one thing: ignoring the cumulative effects of seemingly small, everyday decisions. While there are a couple of large purchasing decisions on this list, such as which house or car you buy, the rest of these common mistakes are much more subtle.