Personal finance is all about making the right choices for your own situation, though this concept is often much easier said than done. How much should you save and where? What will you need for retirement? And how do you really know if you’re on the right track?
Though there’s no short or easy answer to those questions, you can learn the basic concepts of personal finance that will help guide your choices. We’ll highlight some of the most common financial mistakes people make without having to go through them yourself. Do yourself a favor, and avoid these three common financial missteps.
1. Not Using Credit Cards Wisely
Credit cards are useful tools when used responsibly, but you can quickly accumulate debt if you don’t understand how they work or get behind on payments. When you don’t pay off your credit card balance in full for each billing cycle, you actually accrue daily rather than monthly interest.1 This means that your interest is recalculated every day you carry a balance rather than every month. Even if you don’t use your card again, your balance will increase until you pay it down.
This problem can quickly escalate when you carry over a balance from month to month. If you can’t afford to pay off your balance in full or are just making the minimum monthly payments, you can end up paying significantly more for your purchases than you would have if you paid in cash.
That doesn’t mean that you should stop using credit cards altogether; in fact, they can help you build a positive credit history, provide fraud protection and even include perks like cash back or other bonuses. And if you close a credit card account, it can actually lower your FICO score by a few points; when your score is already low, that can make a more significant difference. Don’t think of your credit limit as free money; instead, aim to use credit cards just like you use cash. In case you can’t pay off a credit card purchase immediately, try to wait to make it in the first place.
If you simply want to build or improve your credit score, it doesn’t matter how small your card purchases may be. You can prove yourself responsible to banks and lenders and improve your credit score with small purchases as long as you’re paying your balance on time and in full each month.
2. Comparing Yourself to Others
It’s easy to get into the mindset that you need to somehow financially match your friends and family, regardless of income or background. But when you compare your lifestyle, possessions or home to those of your peers, you can lose sight of your budget and what you can realistically afford for yourself. It can also lead to feelings of jealousy and resentment since you might feel like you deserve more than what you currently have. However, there will always be factors at play that you can’t see or won’t understand. Personal finance is not a competition.
Instead, try to focus on benchmarks that you set for yourself; your own situation can always improve. If you have debt to pay off or need an emergency fund for rainy days, work on those first. When you set personal goals, you’re more motivated to actually reach them.
3. Not Prioritizing Savings
As Warren Buffett suggests, “Pay yourself first.” It sounds like a pretty solid concept. However, this doesn’t mean that you should splurge on a new purchase before you cut a check to your landlord; it’s actually a reverse budgeting technique that can help you live within your means while you put money aside for the future. Reverse budgeting prioritizes your savings goals over your fixed and discretionary expenses.
Savings automation can help you reach your goals faster and get you more comfortable living on a tighter budget. When you don’t have to manually make a transfer, drive to the bank or even see the funds that you put aside, you might forget that you’ve done it in the first place. You can also ask your employer to deposit your paycheck directly into a higher interest savings account rather than your checking account. Then, set up repeating transfers to your checking account to cover your minimum monthly expenses. Because your fixed expenses are constant and you’ve already saved for the future, whatever leftover money in your checking account is for your discretionary (or non-essential) everyday expenses.
If you’re like most Americans, you probably didn’t have a personal finance course in school, though it could’ve saved you some headaches along the way. Regardless of your age, income or goals, there’s no time like now to start forming smarter financial habits.
1Woodruff, M. (April 13, 2012). Watch out for this ‘invisible’ daily interest charge on your credit card bills. Retrieved September 10, 2019 from https://www.businessinsider.com/credit-card-companies-charge-daily-interest-rates-2012-4
The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.