It’s easy to make mistakes when you aren’t paying a lot of attention to your financial planning, and some some errors are more costly than others. Here’s a look at some of the common financial missteps and how to avoid them.
A budget is your most important personal finance tool: It’s a spending plan based on a list of expenditures against your income, which helps you avoid overspending and going into debt. A budget gives you control over your cash flow, making it easier to put away money for an emergency fund or other long-term financial goals, like buying a house. By sticking with a budget you’ll pay off debt faster, avoid the stress of unknown expenses and be able to splurge guilt-free.
Missed or late credit card payments can result in even higher interest rates, late fees, or even the loss of your credit card. Missed payments also damage your credit score, which is crucial for securing loans or credit cards, especially those with lower interest rates (35% of your score is determined by your payment history). Your credit score is also used by landlords, employers, insurance companies to determine your reliability. Save yourself a lot of bother and automate your payments.
A cornerstone of financial planning is minimizing risk, and that includes protecting the assets that you already own. Fortunately, with insurance you don’t have to worry about unexpected events or natural disasters damaging or destroying your property or affecting your future earnings. Many people pass on insurance to save money. Skipping on insurance is a terrible idea, however. A wrecked car, stolen property or a lifelong disability can be much more expensive than the smaller monthly costs of your insurance premiums.
Regular monthly and daily expenses are easy to track—the phone bill, rent and car payments are regularly scheduled and hard to miss, especially if you’ve signed up for automatic withdrawals. One-off expenses, on the other hand—birthdays, the holidays, vacations—can sneak up on you and put you into debt. When budgeting, look back at your previous expenses and list all recurring expenses that have irregular intervals, like on a quarterly or yearly basis, and incorporate them into your budget.
Retirement savings are typically protected in bankruptcy, but they lose those protections if already withdrawn. And there are penalties for early withdrawal. Withdrawing money from a 401(k) early, for example, comes with a 10% penalty; you have to pay taxes on whatever you withdraw, and the IRS withholds taxes from that sum automatically based on your current tax bracket (typically your tax rate is lower when you stop working and retire). Most importantly, you also lose out on the compound interest of your long-term investment, which severely limits how much money you’ll be able to withdraw when you retire. Whatever you do, don’t withdraw your retirement savings without seeking out debt relief first.