I've accepted over the years my finances aren't going to be perfect. I might miss a loan payment to afford rent, or throw car repairs and emergency expenses on a credit card when no other options seem possible.
I've known these aren't the best practices when it comes to handling money, but I've also convinced myself it's what's necessary to get by. But as I've started trying to take control over the financial future in the past month, local financial advisers have opened my eyes to how seemingly small regular money mistakes can add up to bigger consequences in the future.
Here are some of the common money mistakes that I, and a lot of other consumers, make. Plus, here's some advice on how to avoid them.
Not having a separate emergency fund
I've never been good at saving money. I'll throw $100 a month into a savings account, which often gets transferred back to my checking account when I need it. But one conversation with a financial adviser quickly changed that routine.
Meg and Ron Knapper, with Knapper Financial Coaching in Davenport, said the first step to financial security is maintaining an emergency fund of at least $1,000. That money stays there until you have a medical expense, car repair, lose a job, or have any other emergency. Once you get $1,000, they advise consumers to save three to six months' worth of expenses in the fund.
The emergency fund should be separate from other savings accounts. Along with the emergency fund, the Knappers encouraged me to start savings accounts for each goal I have, such as buying a car or saving up for a house.
Looking at the monthly payments, not the total cost
When it comes to big purchases, businesses tend to talk to us in terms of monthly payments, rather than the true cost, according to Brian Ramsay, with Ameriprise Financial Services in Davenport. And I'm guilty of this — when I look at cars I could potentially afford, I always ask myself what I could add to my monthly budget.
Ramsay said you have to know how much discretionary income you have to afford a big ticket item, such as a car, and then be able to pay that off in three to five years. He advises not extending the length of the loan to justify the monthly payment you want.
He said when making big ticket purchases, consumers should understand the total cost for the loan, and not just focus on the monthly amount. And, he recommends taking advantage of zero-interest financing when available for car purchases.
'Keeping up with the Joneses'
I often find myself looking at what other people have. That usually results in me wondering how they afforded that car, or asking myself how I can get one of those.
For Ramsay, making purchases for the sake of keeping up with appearances is one of his top pet peeves. And it can cause consumers to live beyond their means. Some warning signs that you aren't include putting basic purchases (like groceries) on a credit card, or not being able to pay off credit cards in full each month.
Borrowing from one source to pay off another
I've known tons of people who do this one. When it comes time for credit card interest rates to rise, or when the introductory period is ending, they take out another credit card to pay off the previous one.
Ramsay said he often sees consumers borrowing from one lender to pay off another, whether it be credit cards, home equity loans or car loans. But, that just transfers the problem somewhere else.
"People need to figure out an aggressive payment plan to eliminate their debt," he said. "Instead of robbing Peter to pay Paul, one should reduce their lifestyle and develop an aggressive payment plan to pay down those debts.”
Buy now; worry later
I'll be honest — I've always been addicted to shopping. It's stress relief; it's my alone time; it's a rush. But because I've developed the habit of regularly swiping my card without thinking about it, I've missed out on a lot of opportunities to grow my wealth.
"Impulsivity is a bad habit in behavioral finance that some people can’t get away from,” Ramsay said. "With impulsivity, it is a rush that causes consumers to feed that hunger and worry about the consequences at a later time. Typically, that is when they get the monthly bill or credit card statement.”
Ramsay said everything goes back to living within your means, planning out what you can actually afford, plus paying attention to your money behavior — including what causes you to go out and spend.