Managing money is not only about boosting earning potential or reducing spending. It is about building healthy financial habits over time. We often think of budgets as being restrictive, but the truth is that constructing budgets of our own creates a path to financial freedom. We must become familiar with our current financial state so we can make better decisions about our future.
These mistakes are lessons learned as we grow older and accrue wealth, build up an emergency fund, savings, and begin to invest. It’s never too late—or too early—to build your financial literacy. Below, we’ve compiled a list of some of the most common budgeting mistakes so you can take note and learn how to avoid them.
1. Staying in the Dark
It is tempting to ignore the reality of our finances, especially when we’re stressed. We anticipate the added levels of anxiety and dread conversations with our partners.
But avoiding our bank accounts or credit card statements for fear of what we might find only exacerbates the issue. In fact, it is impossible to work toward more lofty financial goals if you don’t first have a clear idea of the money you have and where it is going. Mobile banking and budgeting apps like MoneyTrack keep you in the know so you don’t have to worry about any unwelcome surprises.
2. Excessive Spending
It can be easy to rack up big bills when you’re not in tune with your spending habits—out of sight, out of mind. But the choices you make now will catch up to you sooner than you may think.
Although it may feel overwhelming at first, combing through your expenses online will give you an honest look at where you’re doing the most spending. You may even find the experience to be therapeutic as you clear out the clutter, metaphorically speaking. Pay close attention to your incidentals, transportation (e.g., Uber rides), and meals out. This analysis will help you to begin to strategize new habits.
3. Passive Spending
We often opt into recurring payments and subscriptions only to forget about the added monthly expense. Of course, that’s exactly what large companies are banking on. These types of payments can really add up quickly. If we want to manage our money well, we must cut back.
Take a close look at your gym membership, movie and TV subscriptions, and services like Amazon Prime. What do you really use the most? What could you do without? Look at grocery and meal delivery services as well. Highlight every expense you don’t remember signing up for as well as those you haven’t used in the past month. Trimming down these types of services can provide significant financial relief.
4. Avoiding Debt Payments
Crippling debt is one of the most nefarious actors affecting our financial health. Credit card debt, student loan payments, auto payments, and mortgages eat into our earnings each month and can prevent us from achieving true financial prosperity. At the same time, we run the risk of accruing interest at alarming rates.
The best way to combat your debt is to pay down your principal balance as quickly as possible so that hefty interest rates don't impede your progress toward financial goals. Using credit cards is an important part of building a line of credit, but only if you pay down the principal balance each month so you avoid paying unnecessary interest.
5. Depleting Your Emergency Savings
As soon as you land your post-grad job, your priority should be building a fund so you’re covered in the case of an emergency (e.g., unforeseen medical expenses or loss of employment). Most experts recommend a savings of 3-6 months of your income.
Resist the urge to tap into your emergency savings for non-emergency spending, even if you plan to pay it right back. Being without an emergency fund places you in a dangerous predicament. If you think you may be tempted to spend, consider placing it in a separate account so that you only have access in the case of a true emergency.
6. Not Investing in Your Future
At every stage of our lives, the decisions we make about our money now will impact the way we live in the future. Diversifying our streams of income through investing is one way to ensure a healthy financial future. Furthermore, the younger you are, the less financial risk is involved.
Between the ages of 18-25, you should be focused on building up a cash reserve by opening a savings account. Then, between the ages of 26-35, you can begin to increase your retirement fund and turn some of your savings into investments. From age 36 to age 60, you’re likely taking on increased financial responsibilities, such as a mortgage, a child’s college tuition, and other family responsibilities. Take this time to focus on high-yield investments. At retirement age, you should maintain a balanced retirement savings of IRAs, CDs, 501(k) savings, and 401(k) plans.
FSCB is here to help you take your first first big steps toward healthy budgeting habits and financial freedom. Speak to one of our advisors to learn more about your options today.