Financial mistakes can pave a way to large debts, overdraft fees, bad credit, etc. Don’t worry if you have committed some of those mistakes in the past. Start making smart financial decisions that help you become financially successful. Avoiding certain financial mistakes will not only help you grow your wealth but also ensure you have a better quality of life down the lane.
1. Spending More Than You Make
A very common mistake people make is to spend more than they make. Don’t try to live beyond your means trying to live a lifestyle you can’t afford or match your friends’ lifestyle. It is critical to know how to budget and have self-control. Two simple ways to live within your means include:
- Ensuring your rent is a third or less than the home monthly income
- Avoiding spending on things that have no return
Start by changing your mindset and attitude about money and developing habits that put you in the path to financial success.
2. Having Just One Stream of Income
Warren Buffet famously said, ‘NEVER DEPEND ON SINGLE INCOME, MAKE INVESTMENT TO CREATE A SECOND SOURCE’. Some of the most successful people have several streams of incomes either on a monthly or weekly basis. When you have multiple streams of income, you minimize the chances of running out of money and increase the chances of building wealth.
Focusing on just your full-time job might give you a good life but if you want to build your wealth, you need to monetize your passions. There are innumerable opportunities these days which allow you to generate passive income, even while sitting at home!
3. Wasting Money on Bank Fees
Understand how your bank works. Be aware of the overdraft fees and monthly fees that your bank charges. Know about all the auto drafts coming out of your account every month, from smallest to largest, as it all adds up. You must know your bank statement thoroughly and be able to recognize every transaction. Finally, remember that credit card debt can be a huge reason of why you won’t be able to build wealth. Pay the bill in full and on time every single month. Make the money work for you and always focus on gaining a return.
4. Ignoring Your Employer’s 401(k) Match
If you are not claiming every single penny that your boss will deposit into your retirement account or 401(k), you would be literally throwing away free money. Don’t turn down the employer contribution to your 401(k). You are permitted to pay as much as $18,500 per year into a tax-deferred retirement plan such as a 401(k). If you are over 50 years, you can earn an extra $6,000 in catch-up contributions.
5. Having No Emergency Fund
Not having emergency funds means you are risking your wealth. Save cash for emergencies; you’ll need to cover your net take-home pay for about 8 months. Contribute to the emergency fund every month and put the funds in an account that is harder for you to get, like a savings account or an account that you don’t use regularly. Don’t stop saving even if you have entirely funded your emergency account; you can put the residual cash toward debt or save for college or business.
6. Depleting Your Retirement Savings
A huge part of retirement planning includes not touching the retirement savings until you retire. The 401(k) money can tempt you in case of emergencies or when you are short on cash, but raiding your retirement savings will cause you trouble after you retire.
Borrow from the 401(k) for a critical short-term liquidity need, however, the capital you withdraw won’t be increasing in your account. If you can’t repay that money on time, the money you took out becomes taxable. If you leave behind your job to manage your business full-time, don’t cash out the account as you will have to pay a penalty and taxes. Instead, ask your HR department for assistance in transferring your savings into a new tax-deferred account.
Lastly, surround yourself with the right people who support you and help grow your money. Don’t hesitate to go to the experts like accountants, financial counselors and financial advisors to help you along the way.
