Life’s lessons come at a price. Mistakes are unavoidable but what we learn from them can be invaluable. Growing up I often heard my mother say: “experience is the best teacher but by far the most expensive.” Tune in and you just might find yourself on a better path tomorrow than the one you’re on today.
“What can be added to the happiness of a man who is in health, out of debt, and has clear conscience?”Adam Smith
Learning from other peoples’ mistakes can save you a lot of pain and so, in that spirit, here are some of the biggest financial mistakes I see and suggestions on how to avoid them.
Tip # 1 – Stop Living paycheck to paycheck
Most working Americans don’t have any money in savings. According to CareerBuilder, nearly 80% of Americans live paycheck to paycheck. And lest you think this applies only to those who are in low-wage positions, nearly one in ten workers who earn over $100,000 or more are in the same boat.
The recent government shutdown shined a spotlight on this sad truth. During the closure, we were treated to a healthy dose of news stories about federal employees running out of money after missing one or two paychecks. Even though these folks were guaranteed back pay and were offered plenty of assistance from banks and credit unions, many food banks and community-based programs were operating a max capacity.
I’m not trying to minimize their pain or frustration, but just imagine what could happen during an even longer shutdown?
The moral of this story is simple: start saving now and no amount is too little. Skip a Starbucks or a Big Mac and save a few bucks.
Start with your next paycheck. Pay yourself first and stash away any amount you can and do it every time you get paid. Eventually, shoot for three months of household income in and emergency fund.
Make saving automatic. Have money transferred directly from your checking or bill pay account and sent directly to a savings account or money market fund. Ally and Capital One are good options for this and pay a decent interest rate.
A financial house in disarray is the leading cause of family stress. Even a small amount of money in savings can reduce stress and help your marriage.
Tip # 2 – Have A Spending Plan
Without a spending plan to track where your money goes, you may wonder why your money runs out before the end of every month. Grab your cell phone and download Mint. It’s a free app from Intuit, the same folks that provide QuickBooks, and it will track every dime you spend once you link your accounts.
Sign up and start tracking your spending. The odds are good you will learn a lot about where your money goes. After you begin to get the big picture, focus on paying off debt. After you get your debt under control, focus on goals like creating an emergency fund, saving for retirement and don’t forget the fun stuff like vacations, hobbies and dining out.
Tip # 3 – Start Saving in Your 401(k)
My oldest daughter graduated from college, got a job with a tech company and began investing in her 401(k) immediately. Even a small amount of savings can compound to a huge sum down the road. I wish I had her smarts and access to a 401(k) when I was 22. Many employers offer a “match” on your payroll deferrals providing an immediate return on the money you save.
We all know earlier is better due to the magic of compounding. Deposits made in your 20s and 30s have a lifetime to grow.
Don’t squander the chance to start saving now.
Tip # 4 – Credit Cards are Dangerous
“The borrower is slave to the lender” is as true today as it was in the time of King Solomon.
Credit cards are convenient yet have the power to destroy your financial life. Don’t end up in bondage to monthly payments buying things you really can’t afford. If you don’t pay your credit cards off monthly, you’re living beyond your means and mortgaging your future. It’s okay to collect points or rebates but make sure to get to a place where you can pay your cards off every month.
Tip # 5 – Don’t Buy Stupid Stuff
Ready to lease that new car, buy a big screen TV or a fancy new watch? Think again.
The new car smell wears within a few weeks, the TV will cost less next year, and you can buy a decent watch for less than a pair of sneakers.
Before you make any purchase, stop, think, and ask yourself “is this really worth it?” Can I really afford this item, or would I be better off adding to my emergency fund, 401(k) or maybe even paying down a student loan, sending in an extra car payment, or perhaps throwing a few extra bucks at the mortgage?
The truth is nearly everyone starts from scratch and we all encounter financial challenges at some point in our lives.
Get control of your money or it will get control of you. Think before you spend, don’t pay ridiculous interest rates on credit cards, start an automatic savings plan ASAP, and pay off your debts as quickly as possible.
Small steps have a huge impact and the time to get started is right now. As our friends at Nike would say: Just do it!