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How confident are you in your financial knowledge and skills? According to a survey by the Commission for Financial Capability, only 22% of New Zealanders feel fully confident in making financial decisions. This lack of confidence can lead to poor financial behavior, such as overspending, under-saving, borrowing too much, or investing too little.
These financial mistakes can have serious consequences for your financial goals and security, such as not being able to afford a home, pay off debt, or retire comfortably. In this post, I will share with you some of the most common financial mistakes that people make and how to avoid them or fix them.
Whether you are a student, an employee, an entrepreneur, or a retiree, you will find some useful tips and insights that can help you improve your financial literacy and confidence.
One of the most common financial mistakes is spending more than you earn or spending on things that you don’t need or value. This can lead to living paycheck to paycheck, accumulating debt, and having no savings for emergencies or goals.
To avoid this mistake, you need to track your income and expenses, create a realistic budget, and stick to it. You also need to prioritize your spending based on your needs and wants, and avoid impulse purchases or emotional spending. A good rule of thumb is to save at least 10% of your income every month and invest it for the long term.
Another common financial mistake is signing up for never-ending payments, such as subscriptions, memberships, or instalment plans. These payments may seem small and affordable at first, but they can add up quickly and eat into your cash flow and savings. They can also lock you into long-term contracts that are hard to cancel or change.
To avoid this mistake, you need to review your recurring payments regularly and cancel or downgrade any that you don’t use or need. You also need to be careful about taking on new payments and compare the total cost of ownership versus paying upfront.
Living on borrowed money means relying on credit cards, overdrafts, personal loans, or payday loans to fund your lifestyle. This can be a dangerous habit that can trap you in a cycle of debt, high interest rates, and fees. It can also damage your credit score and limit your borrowing options in the future.
To avoid this mistake, you need to pay off your existing debt as soon as possible, starting with the highest interest rate first. You also need to stop using credit cards for everyday expenses and only borrow money for essential or productive purposes, such as buying a home or starting a business.
Buying a new car may seem like a good idea, but it can be a costly financial mistake. Cars depreciate rapidly in value, especially in the first few years of ownership. They also incur ongoing costs such as fuel, maintenance, insurance, and registration. According to AA New Zealand, the average annual running cost of a new car in 2021 was $9,500.
To avoid this mistake, you need to consider whether you really need a car or if you can use public transport, cycling, or car-sharing instead. If you do need a car, you may be better off buying a reliable used car that suits your needs and budget.
Not saving enough money means not having enough funds for emergencies, retirement, or other goals. This can leave you vulnerable to unexpected events such as job loss, illness, or natural disasters. It can also prevent you from achieving your dreams such as travelling, buying a home, or starting a business.
To avoid this mistake, you need to save regularly and consistently, even if it’s a small amount at first. You also need to have a clear goal and a plan for how much you need to save and how long it will take. A good way to boost your savings is to automate them through direct debits or payroll deductions.
Not investing early enough means missing out on the power of compound interest and the potential growth of your money over time. Investing early can help you build wealth faster and reach your financial goals sooner. It can also help you beat inflation and preserve the purchasing power of your money.
To avoid this mistake, you need to start investing as soon as possible, even if it’s a small amount at first. You also need to choose an appropriate asset allocation based on your risk tolerance and time horizon. A good way to start investing is through low-cost index funds or exchange-traded funds (ETFs) that track the performance of the market.
Carrying too much debt means having more liabilities than assets or more debt than you can comfortably repay. This can put a strain on your cash flow and savings, limit your borrowing options, and increase your financial stress. It can also affect your mental health and well-being.
To avoid this mistake, you need to reduce your debt as much as possible by paying more than the minimum amount each month or using strategies such as debt consolidation or debt snowballing. You also need to avoid taking on new debt unless it’s absolutely necessary or beneficial.
Not having an emergency fund means not having enough money set aside for unexpected expenses or income loss. This can force you to use credit cards, loans, or your retirement savings to cover the shortfall, which can worsen your financial situation. It can also prevent you from taking advantage of opportunities or coping with challenges.
To avoid this mistake, you need to build an emergency fund that can cover at least three to six months of your essential living expenses. You also need to keep this money in a separate and accessible account, such as a high-interest savings account or a term deposit.
Falling for lifestyle creep means increasing your spending as your income increases, without saving or investing more. This can lead to living beyond your means, accumulating debt, and having no financial cushion or security. It can also prevent you from achieving your long-term financial goals or retiring comfortably.
To avoid this mistake, you need to resist the temptation to upgrade your lifestyle every time you get a raise, a bonus, or a windfall. You also need to live below your means and follow the 50/30/20 rule, which suggests spending 50% of your income on needs, 30% on wants, and 20% on savings and investments.
Lacking financial education means not having enough knowledge or skills to manage your money effectively and make sound financial decisions. This can lead to making financial mistakes, missing opportunities, and falling victim to scams or fraud. It can also affect your confidence and motivation to improve your financial situation.
To avoid this mistake, you need to educate yourself on the basics of personal finance, such as budgeting, saving, investing, debt management, and retirement planning. You also need to seek reliable sources of information and advice, such as books, podcasts, blogs, courses, or professionals.
In this post, I have shared with you some of the most common financial mistakes that people make and how to avoid them or fix them. These mistakes can have serious consequences for your financial goals and security, such as not being able to afford a home, pay off debt, or retire comfortably. By following the tips and insights I have provided, you can improve your financial literacy and confidence, and make better financial decisions for yourself and your future.
If you found this post helpful, you can contact me for a free consultation on how I can help you achieve your financial goals. And if you have any financial mistakes or tips of your own to share, please send me a message. I would love to hear from you.
Thank you for reading and have a great day!