One thing that I’ve seen over the past few years is that while the concepts of personal finance aren’t always rocket science, people still quite often have a hard time grasping them – or they are just willfully ignorant of them.
People are very good at finding ways to screw up their finances. Whether it’s maxing out their credit cards, or not being able to make the payments on a car they can’t afford, they make the same mistakes over and over. It it any wonder that the average credit card debt per household with credit card debt is almost $16,000? (source)
The sad thing is that so many people aren’t in debt, bankruptcy or foreclosure because of things beyond their control. They’re making avoidable mistakes.
10 Ways To Screw Up Your Finances
Today I thought I’d put together a list of some of the most common personal finance mistakes that people make that can easily mess up their finances if they don’t stop making them.
- Don’t save… ever: While the last few years have seen an increase in personal savings as people tighten their belts in the midst of a recession, the savings rate in general has been on a downward trend since the early 80s. Far too many people have forgone saving up for the future, and instead just have a “cross that bridge when I come to it” mentality -where they never look further than a paycheck or two into the future.
- Spend more than you’re making: It seems like a simple idea – to spend less than you make. The problem is that in this day and age when credit cards and home equity loans are pushed like crazy, far too many people fall prey to advertising messages telling them to live in the moment and enjoy things now while they’re still young. The end result is a pile of debt and a negative net worth.
- Always finance big purchases: In the past people would save up and pay cash for big ticket items, even for a house in many cases. Today’s easy credit living allows people to finance just about everything from a new TV, to a car and a house. If people would instead save up and pay cash for most things they’d be in a much better place – and paying a lot less in interest.
- Never look into the future, live for today: Far too many people have an outlook that never seems to look past their next paycheck. They never have a plan to get ahead, and instead they just worry about making their next payday with money still in their bank account. Instead they should be trying to better themselves, get an education, and find a better path that allows them to get ahead.
- Always buy the newest and the best: Having the newest and the best has an allure – we all want to be on the cutting edge. Unfortunately being on that cutting edge can mean that you’re constantly financing new purchases, buying items that depreciate as soon as you get them, and you end up selling the item soon after when the newest one comes out. Instead, buy things used, fully research your purchases, and hold off on buying things until they come down in price – or have depreciated to a more affordable cost. (like a car)
- Living on borrowed money… and time: Far too often people end up getting behind on all their monthly obligations, and it starts a debt spiral where they’re paying for wants and needs on credit. A mountain of debt quickly starts piling up. You can only keep the game going so long before the house of cards comes down, and you’re filing bankruptcy. Instead pay cash, eschew debt and try to stay ahead of the game.
- Listen to your friends who know even less than you do: Quite often you’ll hear people taking advice from others who have even less financial expertise than they do. In some cases the advice is so bad that you wonder why they thought it was a good idea in the first place. Instead they should find a trusted financial advisor or mentor who can help them to make a financial plan.
- Working without a net: Too many people these days have been walking the financial high wire for far too long without a net. They don’t have any emergency fund, they have a mountain of monthly debt obligations and if one thing were to happen (like a job loss) they’d be plunging to their financial death. Instead they should be saving up an emergency fund of 3-6 month of expenses (at least), buying the necessary insurance and getting rid of as many debt obligations as they can. Minimize risk where you can.
- Never calculating total cost and value versus calculating payments: Too many people become monthly payment buyers, never actually calculating if they can afford something, but instead calculating if they have enough money during the month to make the payments. They do this with houses, cars and even TVs. Instead they should be figuring out what they actually need, calculating what the total cost is, and then proceeding to buy things they need that are a good value for their situation – even if it isn’t the nicest.
- Not creating a budget or tracking spending: Too many people just “wing it” when it comes to their finances, only occasionally checking their account balances or making the minimum payments on their credit cards. They never track their spending or make a family budget. Instead they should be tracking their spending (it can be eye opening), and then figuring out how much they need to spend, save and give – and then setting up a budget based on those values. Then follow through on the budget and actually follow it.
In this day and age there is really no excuse for not being able to figure out your finances. There are a thousand and one educational resources online that can help you to get a hold of your financial situation, and much of it is common sense.
We need to be educating our kids about money, and taking responsibility for our own financial futures, otherwise we’ll end up screwing it all up, and end up just another statistic.
What are some ways that you’ve seen people screw up their finances? Have you made some of these mistakes yourself? Tell us your thoughts in the comments!
There are so many good points. No longer should people live within their means, they have to live under their means. Saving is so important.
Good post. It’s so easy to fall into some of the simplest traps. Thanks!
John Deng Deng Kuol says
I have been struggling with my life for finding a job when I get a job then I should confuse and make plans before monthly payment. I start loan with interest and the end of contract I left with nothing. Due the following reasons:
Loans with interest
Buying things before monthly payment
I am grateful and blessed to be this class.
Eric J. Nisall says
I think one way to screw yourself up is to let emotions get in the way too. With investing, businesses, and pretty much any other area, emotions cause people to make poor decisions. Selling a stock at a loss because you got scared that it would free fall, not selling a piece of furniture or jewelry that you will never use and could save the house from foreclosure or set your kids up for any college they want (yeah, it saw that on Buried Treasure), throwing good money after bad on a sinking business because one can’t admit to failure.
Jenna, Adaptu Community Manager says
– Not thinking through an entire purchase.
– Not listening to your friends who know even more than you do.
I like the way you laid this out as a reverse psychology. You made very good points here! A very nice post.
I’m guilty with screwing up at least at least 4 out of the 10, but hopefully this list will be a reminder to help me get back on track with taking full control of my finances.
Chris Gagner says
I tend to struggle with #5. I see all those new electronics and I want it so bad!! As expensive as they are, they don’t seem to last very long before they’re being replaced by the next bigger, better deal!!!
Cherleen @ My Personal Finance Journey says
Very easy ways. I have seen a lot of people fall into these traps. Remembers, saving is very important.
I agree with most of this. I can relate to onlying thinking about affording the monthly payment on financed items. We’ve had our fair share of financial mistakes that we are still paying for, but things have improved dramatically since we started living on cash alone (reached our credit limit max and was forced). It was a slight adjustment, but it comes naturally now to save up the cash for purchases. Our credit card debt will be paid off in 3 years – thanks to a debt management plan, and one of my cars is nearly paid in full (6 year loan that we thought was only a 5 year loan – talk about being ignorant at loan signing!). We are slowing working toward reducing our monthly expenses and its fun to see progress.
Pretty much all of these boil down to “living in the moment” and “just winging it”. What ever happened to proper planning and looking to the future? The ability to plan ahead is literally part of what what separates humans from other animals, so the fact that so many people nowadays can’t even do it is just… sad. And kind of scary, actually.
Mela'n Greathouse says
Love this article Peter! Wish I’d read (and understood) the importance of these 10 principles back in my 20’s. But it’s not too late;I’m focusing on doing exactly what this article prescribes, and getting out of debt. From now on, if I can’t afford it, I’m not going to finance it. Amen?
Excellent article and so true. Instant gratification and entitlement are evident to see. Unfortunately this transfers to money habits.