When it comes to money, the simple things are usually the best. In fact, if something is complicated, you’re probably doing it wrong.
We talk a lot here about the importance of planning so you can fund your dream life. Alongside that there will always be pitfalls that can get you if you aren’t prepared for them. So in this article I’m outlining 5 financial pitfalls that you can pretty easily avoid if you’re aware of them.
This is basic, but be aware of them and dig into the details so you can make sure they don’t sneak up on you.
1. Having no plan for your money
You MUST have a plan for your money if you are ever going to succeed at your goals. Successful people plan their time out very well, so they are productive and the same should go for your money.
One way to do this is to establish a zero-based budget. That means you are spending on paper (or app) BEFORE the month begins exactly how much you are allocating to each category. For example, if you need $600 for groceries, budget that line item and don’t go over it. If you need to go over, you have to take that money from another category.
The goal is for you to spend every single dollar you have coming into your home so none of it is wasted. You get to prioritize the expenditures and make it behave. That doesn’t mean you spend it all externally, it could (and should) mean that you are “spending” some to savings, some to giving, retirement funds etc. The point is to allocate it ahead of time.
Now there is a sort of sub-pitfall within this you need to be aware of. You can do a budget and spend it all on paper properly and your pitfall may be that your budget is a theory. You MUST stick to the budget! Overall, you can’t spend more than you bring in. This is called living within your means. And this is where so many people botch a hard-worked budget.
Having no plan for your money is a major pitfall, but not sticking to that plan is a problem within itself. You’ll end up wasting not only money, but time doing a budget you aren’t using.
2. Not properly transferring risk
This comes in the form of insurance mostly. Lots of people think of health, auto and home insurance. But many have improper levels of those or minimum coverage that can be detrimental to your financial life if something were to happen.
Before I go further, I want to note that insurance is a pain and it’s costly. But the point isn’t to save you money, it’s to protect your assets and your future. Insurance is simply transferring as much risk as possible to the company so you aren’t liable for it if/when something drastic happens.
Make sure you have proper levels of each type of insurance. Don’t take your agent’s word for it, do your research and find out what is best to cover you properly.
A few other types of insurance you need to be aware of are ID theft, long-term disability, long-term care (for those over 60) and term life insurance. Again, research them and find out which you need and for what reasons.
3. Not saving for the unexpected
Everyone knows they should have enough money set aside to pay for their upcoming rent, car payment and groceries for the month. However, it is also essential that you save for the unexpected. Life can throw you a curveball and you may not have enough saved up! This curveball could come in the form of a medical issue, expensive car problems, or loss of a job.
It is important that you have a safety net if anything unexpected arises. It is recommended to have at least three months worth expenses saved up. Mobile banking apps like Chime have an automatic savings feature which can make it easy to set aside a portion from each paycheck.
Tallying up the amounts that go over your regular monthly payments is a perfect place to start. For example, if on average you spend $3,500 a year on unforeseen expenses, you can account for that in your budget. If you are paid bi-weekly, you would need to set aside around $135 per paycheck (26 paychecks). This is a great way to ensure you have an emergency fund for those unexpected expenses.
4. Letting your credit card catch your mistakes
Some people will turn to their credit cards when they have not saved enough money for the things they want or need. This could end up snowballing you into a mountain of debt. I never recommend using a credit card simply because you do not enough money to pay for the item. If you have a credit card balance make a plan to start paying it off.
I suggest that you try to pay off the smallest balance first to get that mental “win!” Forbes also states that completely paying off the smaller balances is great way to build confidence. The best way to truly evade debt is to avoid it all together. Simply get rid of your credit cards so you aren’t tempted to go into debt.
If you know there is something large you want to pay for, make sure to plan for that in your budget. You can slowly start setting aside money for that purchase and avoid going to debt to obtain it.
5. Not communicating with your spouse
Many people don’t see this as a financial pitfall, but it could very well be. Financial infidelity is a real thing and it’s usually fueled by lack of communication and paying attention to the accounts. It’s important to work together with your spouse and always be aware of what each person is spending money on.
This is where the budget plan can be really useful once again. If you have a plan, it should be with your spouse or an accountability partner. Make sure you both agree and know what is going on and will keep each other in check. It’s important for your future and for your goals!
I trust these tips will help you avoid some pitfalls. I also have a great resource called 15 ways you might be on the brink of a financial disaster. I trust it will be of great use to you. Make sure you share with your network as well to help them out in a time of need.