If you are bringing lunch to work, paying your credit cards on time and putting away savings each paycheck, you are pretty on top of your finances. Unfortunately, many people are not. We know what we should be doing to be financially fit, but sometimes we fall short.
Read on for key money mistakes you want to avoid so that you make better financial decisions for the future.
We can come up with plenty of excuses as to why we aren't saving for retirement. But in the end, there is always a way. If you are employed, you should be putting money towards your retirement. Part of every dollar you earn should be going to funding your retirement years. If you are with a company that does not offer a 401k or any other retirement saving program, open an IRA. Check out this great retirement money flow chart for how to best allocate your money for retirement.
Not understanding how important your credit score and credit report are
Both your credit score and credit report are essential parts of your financial picture. They are a snapshot of how you have handled your finances and they will determine your eligibility for getting loans for everything from credit cards, to cars and a house. It is crucial to develop healthy money habits now so that you are ready when the time comes for those larger purchases. Some key habits to put in place are:
Not having a plan for getting out of debt
Carrying credit card debt is not where you want to be. Even if it's not a lot. Whether it is $500 or $5000, you need a plan for how you are going to pay down your debt and stick to it.
The key 3 things you should be thinking about are:
Taking out student loans without doing the math
If you have a child who will be entering college or you are thinking about grad school, beware. Student loans are a huge pitfall for people because many do not figure out what their monthly payments will be upon graduation. Just to give you a figure, if you take out a $100k loan with an almost 7% interest rate, you are looking at a monthly payment of about $1k. That is a sobering thought once you start crunching the numbers. This is especially true for those attending grad school with the promise of higher salaries after graduation. If you are in a field where you know it will be worth it, go for it. Whatever situation you are in, take the time to learn all about the best student loans for 2017.
Not having a budget in place
In order to feel like you have control over your money, it is essential that you have mapped out where your money is going and how your are going to spend it. This is where a budget comes in. It can seem overwhelming, but if you stick to the 50/20/30 rule, you should be good. The basics of this rule state that from your net pay, you should allocate 50% to essentials (housing, groceries, utilities etc), 20% to savings (retirement, savings and debt) and 30% to personal spending (shopping, dining, travel etc). Be sure to track spending to ensure you are sticking to your budget. You can do this with good old fashioned pen and paper or there are many smartphone apps for budgeting that are very helpful as well.
Not having enough in emergency savings
Having emergency savings is key to financial stability. With that being said, many people do not have nearly enough saved. This may be helpful for some small unexpected expenses but it will not be enough if you become sick or otherwise unable to work. In order to determine the magic number you need, factor in your salary. If you are making 6 figures, $25k or so may sound like a lot, but it's not enough to cover you for long. The key takeaway here is to gather at least 6 months worth of income as emergency savings. You should only touch it for true emergencies and if your income happens to go up or down, adjust it accordingly.
Getting more car than you can afford
When it comes to getting a car, there is a lot of eye candy out there. Many people get seduced by this and end up taking on car payments that they really cannot afford. They soon realize a $400-$500 car payment leads to limited choices for other wants and goals. Furthermore, people often tend to forget about factoring in gas and insurance. Before they know it, they are squandering their budget.
If you are in this situation, it is not too late. You can always trade in your car for something less expensive. Websites like www.carmax.com and www.swapmywhip.com are just a few of the the websites out there that do car trade-ins.
Not having a will if you have young children
If you have children, one of the first things on your to do list should be a will. This will name who the guardians of your children will be in the event that something happens to you. Websites like LegalZoom and Nolo offer wills and other legal documents for purchase online.
Not having long-term disability insurance
Aside from having an emergency fund, having disability insurance is just as crucial. It will be a huge help should you fall ill for the long term. It will give you around 60% of your salary and could potentially help you to stay in your home.
Prior to going out and searching for an individual disability insurance policy, be sure to check with your employer to see if they offer long-term disability insurance. If so, you will get the benefit of being part of a group policy which means it will be less expensive.
Not having life insurance
Life Insurance is another must have if you have children. In the event that something happens to you, life insurance will provide your family with the ability to cover things like funeral costs as well as long term ones like mortgage payments. Purchasing the right life insurance policy will give you peace of mind that your family will be well protected.
Having a plan in place for your finances is key to having financial success at any level. The money habits you form now will follow you throughout the rest of your life. Now is the time to educate yourself about personal finance so that you avoid any costly mistakes down the line.