Anyone who has ever handled money has probably made a mistake with it, whether it was a $5 purchase they later regretted or a $50,000 investment that went south. That’s the thing about mistakes — we all make them, regardless of our income.
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However, some financial mistakes are more common (and costly) than others. Here’s a look at some of the most prevalent money mistakes — and how to avoid them.
Mistake 1: Not Taking Advantage of Free Financial Tools
One of the most common financial mistakes is not seeking help to manage your money — even though there are tons of free options available with a few clicks of your keyboard. One resource is Empower, which offers a lineup of financial, investment, wealth management and retirement solutions, including a free suite of tools, including:
- Retirement Planner: This tool is designed to help put you on the right track toward retirement by letting you run different retirement scenarios, anticipate big expenses, create a spending plan and add potential sources of income.
- Net Worth Calculator: Empower’s online net worth calculator can give you a quick estimate of your true net worth in real time. After downloading the calculator, you can link your bank accounts, investments, retirement accounts and other assets.
- Budget Planner: With the budget planner you can keep your finances in check by tracking spending, setting savings goals and staying on budget.
- Investment Checkup: This tool lets you assess your portfolio risk, analyze past investment performances and model individualized asset allocations. In addition, the tool can identify if you’re ahead or behind in any one sector and see how well you’re diversified.
- Financial Calculators: Empower offers a variety of free financial calculators for different purposes, including budgeting, building an emergency fund, setting up college savings and determining the best life insurance strategies.
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Mistake 2: Spending Money You Don’t Have
This is maybe the most common mistake people make, and one that’s easily avoided by setting up a budget and sticking to it. Rather than spend money on things you might want but don’t necessarily need (and can’t really afford), put that money into savings or debt reduction. Doing this will help ensure that someday you will have the money to afford those things.
Mistake 3: Carrying Bad Debt
Debt comes in two forms: bad and good. Bad debt includes credit cards and personal loans with high interest rates. High interest can make it especially hard to get out of debt and ultimately delays the process of building wealth, according to Jamilah N. McCluney, financial specialist at Black Wealth Financial.
The solution is to create a plan to quickly, completely and permanently eliminate bad debt. McCluney recommends using a few strategic approaches, such as delaying immediate impulse spending and creating a realistic shopping fund.
Mistake 4: Paying the Minimum on Credit Cards
Speaking of bad debt: Another common mistake is carrying a credit card balance from one statement cycle to the next and only paying the minimum every month. This is a bad habit that perpetuates, and even increases, the interest you pay. Whenever possible, pay off the entire balance each month to avoid interest charges.
Mistake 5: Buying More House Than You Can Afford
You might have heard the phrase, “house rich and cash poor.” This is what happens when you tap out your savings on a home you can’t afford. As Fidelity noted in a blog, the rule is that you shouldn’t spend more than 30% of your pretax income on housing.
Even that might be too much, though, depending on other debts you need to pay. The best policy is to buy less house than you can afford. Begin by figuring out how much you can afford to spend on a down payment and monthly mortgage payment, and then find a house that comes in below those amounts.
Mistake 6: Blowing Your Tax Refund
Getting a large refund at tax time is like getting a work bonus. Suddenly you have a lot more money than you did yesterday. It’s understandable that you might want to blow it on a vacation or new wardrobe. However, you’re better off investing the money, putting it in savings or paying down credit card debt. Resisting the temptation to spend it now means you’ll be able to enjoy even more of it later.
Mistake 7: Panicking When Stocks Go Down
It’s easy to stay in the stock market when share prices are rising, but many people make a quick exit when things move in the other direction. One of the most common mistakes is pulling out of the market at the first sign of a downturn.
Rather than look at a slumping market as a risk, view it as an opportunity to buy more stocks at discount prices. If nothing else, remind yourself that historically the stock market has always rebounded from even the worst downturns.
Mistake 8: Failing to Build an Emergency Fund
More than one-third (37%) of U.S. families would struggle to cover an emergency expense of only $400, according to Federal Reserve data. Failing to build an emergency fund is a common mistake that could lead to financial catastrophe in the event of a sudden job loss or major expense such as an unexpected medical procedure or house repair.
Most financial experts recommend padding your emergency fund with three to six months’ worth of living expenses. That’s not always easy when you’re on a tight budget — especially when six months’ worth of expenses could total tens of thousands of dollars. Begin by saving $1,000 to cover the most important expenses, but keep adding to the fund even when you hit the $1,000 target.
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This article originally appeared on GOBankingRates.com: Are You Making One of These 8 Extremely Common Financial Mistakes?
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
