Personal Finance

7 Common Financial Mistakes You Want To Avoid

December 23, 2022
5 min

Money makes the world go ‘round. It facilitates corporate transactions and defines the world’s power balance through economic growth. 

You’ll need money to do just about anything on an individual scale.

Everything in this world comes at an expense — from schooling to raising a family and home construction. Without an infinite money supply, you must budget, invest, and spend your money wisely.

Here are the seven money mistakes you must avoid:

The 7 Most Common Money Mistakes To Avoid

Financial planning is technically difficult and simple at the same time. The core principle is always thinking long-term and putting overall well-being at the center.

1. Not Having A Financial Plan

Keeping personal accountability is essential. A financial plan involves a basic understanding of your money and where it is going. You could start your planning by taking stock of your current monthly income and liquid assets; you subtract necessary monthly expenses to come up with your remaining budget.

Miscellaneous Budget = Monthly Income + Liquid Assets - Necessary Monthly Expenses.

From here, ask yourself these questions:

  • Is the money enough to cope with unforeseen events? 
  • If not, how much can you set aside to cope with them now and in the coming months? 
  • Having done this, how can you make the best use of what remains?

Having a large sum in your miscellaneous budget is not a green light to spend frivolously. Consider what you may need long-term and start working towards those goals.

 

2. Not Valuing Your Money

I want you to imagine that 20-dollar dinner you had last night or the new phone and laptop you bought to celebrate your promotion. These expenses might seem small, but their medium to long term impact is sizable enough to make a dent in your financial position. 

Over time, these expenses could add up to thousands of dollars annually and tens of thousands over a decade. 

We’re not suggesting you never leave the house – we’re simply preaching discipline. Understand that each dollar or euro you have has inherent value, and in frivolous spending, you’re losing out on the opportunity to invest and grow your money for the long term. We urge you to be more aware and, where possible, not to spend more than you can avoid.

Stick to your financial plan.

3. Not Considering The TRUE Cost Of Your Purchases

Thinking of moving houses or purchasing a new car? While you could probably afford the outright purchase of the product, you have to consider all the costs involved, including taxes, expenses, insurance, and maintenance. 

Do these added costs fit into your spending plan? Do you have an additional budget for miscellaneous expenses should anything go wrong?

This thinking also holds for smaller purchases, such as household appliances or a new dress. Buying cheap might seem advantageous – but the product lifespan, maintenance costs, and electrical consumption also play major roles in purchasing.

4. Not Following A Healthy Lifestyle

Wait!

Is an unhealthy lifestyle a financial mistake?

Yes, if you’re able to put it in perspective: a lifestyle that demands more from your mind and body can become an increasing financial burden in the medium or long term.

Medicines, therapy, surgery, insurance, burnouts, missed opportunities, and unproductive recovery could stack up expenses quickly. Never leave your health unchecked for your physical well-being and financial peace. 

5. Not Investing In Your Professional Growth

The world is fast-paced and rapidly changing.

The skills you had yesterday may not be relevant tomorrow. It is, therefore, your responsibility to constantly adapt and improve. By investing time and resources to improve skills and receive accolades, you grant yourself leverage to negotiate higher pay, move the corporate ladder upward, and maybe even start your venture.

 

6. Underestimating Addictions

We’re not just talking about gambling, drugs, and alcoholism – though these addictions can quickly grow your bill. Vices like smoking, compulsive eating, or emotional spending can cost you a lot immediately and in the future. 

The basic idea of marketing is to create a product or value proposition so enticing that it repeatedly satisfies the buyer’s needs. The constant dopamine hits that these addictions prove detrimental to both mental health and the wallet. 

Don’t underestimate the signs of addiction and, if necessary, consult a professional.

7. Not Investing

Our final financial mistake is failing to invest in your future. 

Do you remember the formula for a miscellaneous budget we mentioned earlier? Well, a part of that budget should go into investments and liquid emergency funds. 

We’re not talking about becoming a professional trader or moving millions of dollars worth of capital like Warren Buffett.

We’re simply talking about having a set amount of money invested each month. Building your capital will make you one step closer to debt-free, self-reliant, and less vulnerable to chance. 

The best part is that the earlier you invest, the more interest you can accumulate and build. This concept is known as compound interest. The core idea is that when stock prices appreciate or dividends are given; you invest earnings back into the market. In doing so, your capital pool increases and begins to accumulate profit at a quicker pace. 

Imagine you contribute $1,000 to an investment that earns a hypothetical 6% yearly. The first year would earn $60, leaving your total investment at $1,060. The second year would take this $1,060 and increase it by 6%, leaving you with $1,123.60 after the 2nd year. 

As you can see, your yearly earnings increase so long as you consistently reinvest your profits from the preceding period. With each passing year, your compound interest grows exponentially. If you start earlier, you allow the market to work its magic over the long run.

Here's why you should start investing as early as possible. Read more on: The 8 Steps to Become a Smart Investor.

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