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How to Avoid Financial Mistakes
July 10, 2017
Many Americans have no clue where to begin when making financial decisions. There were no high school or college courses teaching us how to establish a solid financial plan. And let's face it, often our parents didn't have a solid financial plan either. Most Americans learn the dos and don'ts of financial decision making through mistakes made along the way.
Here are 7 Common Financial Mistakes Americans Make That You Need To Avoid:
#1 Don't Use Your Savings To Pay Off Debt
Many Americans look their high interest rates that their credit cards have and the lower interest rate that their retirement account is earning and think that using the retirement money now is the right way to get out of debt quick. However, it is difficult to pay back that retirement account. They need to keep their retirement in tact and find ways to pay down debt without dipping into their retirement.
#2 Not Having A Budget
Over 61% of Americans live without a plan! If you do not use a budget to manage your finances, you are spending your hard earned money without a plan. In order to have financial stability, you need to have a plan for how you spend the money. Without a budget, most Americans overspend and do not know where their money went. Budgeting the money you make and the expenses you have will establish a financial plan for future.
#3 Buying a New Car
Very few Americans can afford to buy a brand new car with cash. Most Americans feel that if they can afford the car payment, then they can afford the car. This is not the case! If you are borrowing money to purchase the car, you are paying interest on a depreciating asset! Some Americans purchase a new car every few years by trading in their car which magnifies the loss of money every time. You should only buy a new car if you can pay for it in cash.
#4 Purchasing More House Than You Need
Too many Americans feel like bigger is better, but that is not always the case. If you have a large family, a big house may be exactly what you need. However, purchasing a 4,000 square foot home for a family of 3 or 4 will only lead to higher taxes, costly maintenance, and expensive utilities. Also, keep in mind that if you purchase a home that is too big, it will not only impact a high mortgage payment, it will also impact higher budget expenses. It is a very long-term purchase so make sure that big home is exactly what you need.
#5 Living Paycheck To Paycheck
Almost ⅓ of Americans live paycheck to paycheck. They spend every dollar they make as they make it. While it may be easy to budget where your money is going, the reality is that you can't predict everything. Therefore, when you create your budget, you need to include at least a small fund that can be your cushion. Start small with $100 that could cover some unexpected expenses and build a cushion as you do not need it. Even $25 per pay is a good start.
#6: Not Having An Emergency Savings
Most Americans only have an emergency savings of $1,000 or $2,000. If you do not set aside enough "emergency money," then it won't tide you over if your family has a financial downfall.In order to have a real “emergency savings” that will help you in this time of financial instability, you need to have a minimum of 6 months of your monthly expenses in a savings account. This will provide for you family if you lose your job, get sick, etc.
#7 Over-Withholding On Taxes
Another mistake Americans make is over-withholding on their taxes in order to get a lump sum of money. However, most of the time this money is spent on a big purchase such as a family vacation, home, etc. In fact, some even use this refund to pay off debts or start a savings account which is not a bad idea, but still not the best option. As interest rates begin to rise back to more reasonable levels again, why have the IRS earn interest on your money? You should adjust your withholdings to try to break even on your taxes. You should then take the increase in your paycheck and have it automatically deposited to an online savings account if you are trying to build a savings account. If you are paying off debts, take the extra and pay down your debts.
Whatever you do financial, take the time to research it. Americans have tons of information available to them. You can research how to better spend their money or save their money by reading articles online. If you are still confused by how to best spend your money, seek out a financial advisor. They will provide you a financial plan that will help you avoid many of the mistakes that Americans make financially.