Top 10 Most Common Financial Mistakes (From Investopedia) [6 Articles)
~ Monday, August 21, 2023 Blog Post ~
By Emily Norris, June 14, 2022
Here we’ll take a look at some of the most common financial mistakes that often lead people to major economic hardship. Even if you’re already facing financial difficulties, steering clear of these mistakes could be the key to survival.
1. Excessive and Frivolous Spending
Great fortunes are often lost one dollar at a time. It may not seem like a big deal when you pick up that double-mocha cappuccino or have dinner out or order that pay-per-view movie, but every little item adds up.
Just $25 per week spent on dining out costs you $1,300 per year, which could go toward an extra credit card or auto payment or several extra payments. If you’re enduring financial hardship, avoiding this mistake really matters — after all, if you’re only a few dollars away from foreclosure or bankruptcy, every dollar will count more than ever.
2. Never-Ending Payments
Ask yourself if you really need items that keep you paying every month, year after year. Things like cable television, music services, or high-end gym memberships can force you to pay unceasingly but leave you owning nothing. When money is tight, or you just want to save more, creating a leaner lifestyle can go a long way to fattening your savings and cushioning yourself from financial hardship.
3. Living on Borrowed Money
Using credit cards to buy essentials has become somewhat commonplace. But even if an ever-increasing number of consumers are willing to pay double-digit interest rates on gasoline, groceries, and a host of other items that are gone long before the bill is paid in full, it’s not wise financial advice to do so. Credit card interest rates make the price of the charged items a great deal more expensive. In some cases, using credit can also mean you’ll spend more than you earn.
4. Buying a New Car
Millions of new cars are sold each year, although few buyers can afford to pay for them in cash. However, the inability to pay cash for a new car can also mean an inability to afford the car. After all, being able to afford the payment is not the same as being able to afford the car.
Furthermore, by borrowing money to buy a car, the consumer pays interest on a depreciating asset, which amplifies the difference between the value of the car and the price paid for it. Worse yet, many people trade in their cars every two or three years and lose money on every trade.
Sometimes a person has no choice but to take out a loan to buy a car, but how many consumers really need a large SUV? Such vehicles are expensive to buy, insure, and fuel. Unless you tow a boat or trailer or need an SUV to earn a living, it can be disadvantageous to purchase one.
If you need to buy a car and/or borrow money to do so, consider buying one that uses less gas and costs less to insure and maintain. Cars are expensive, and if you’re buying more of a car than you need, you might be burning through money that could have been saved or used to pay off debt.
5. Spending Too Much on Your House
When it comes to buying a house, bigger is not necessarily better. Unless you have a large family, choosing a 6,000-square-foot home will only mean more expensive taxes, maintenance, and utilities. Do you really want to put such a significant, long-term dent in your monthly budget?
6. Using Home Equity Like a Piggy Bank
Refinancing and taking cash out of your home means giving away ownership to someone else. In some cases, refinancing might make sense If you can lower your rate or if you can refinance and pay off higher-interest debt.
However, the other alternative is to open a home equity line of credit (HELOC). This allows you to effectively use the equity in your home like a credit card. This could mean paying unnecessary interest for the sake of using your home equity line of credit.1
7. Living Paycheck to Paycheck
In June 2021, the U.S. household personal savings rate was 9.4%.2 Many households may live paycheck to paycheck, and an unforeseen problem can easily become a disaster if you are not prepared.
The cumulative result of overspending puts people into a precarious position — one in which they need every dime they earn and one missed paycheck would be disastrous. This is not the position you want to find yourself in when an economic recession hits. If this happens, you’ll have very few options.
Many financial planners will tell you to keep three months’ worth of expenses in an account where you can access it quickly. Loss of employment or changes in the economy could drain your savings and place you in a cycle of debt paying for debt. A three-month buffer could be the difference between keeping or losing your house.
8. Not Investing in Retirement
If you do not get your money working for you in the markets or through other income-producing investments, you may never be able to stop working. Making monthly contributions to designated retirement accounts is essential for a comfortable retirement.
Take advantage of tax-deferred retirement accounts and/or your employer-sponsored plan. Understand the time your investments will have to grow and how much risk you can tolerate. Consult a qualified financial advisor to match this with your goals if possible.
9. Paying Off Debt With Savings
You may be thinking that if your debt is costing 19% and your retirement account is making 7%, swapping the retirement for the debt means you will be pocketing the difference. But it’s not that simple.
In addition to losing the power of compounding, it’s very hard to pay back those retirement funds, and you could be hit with hefty fees. With the right mindset, borrowing from your retirement account can be a viable option, but even the most disciplined planners have a tough time placing money aside to rebuild these accounts.
When the debt gets paid off, the urgency to pay it back usually goes away. It will be very tempting to continue spending at the same pace, which means you could go back into debt again. If you are going to pay off debt with savings, you have to live like you still have a debt to pay — to your retirement fund.
10. Not Having a Plan
Your financial future depends on what is going on right now. People spend countless hours watching TV or scrolling through their social media feeds, but setting aside two hours a week for their finances is out of the question. You need to know where you are going. Make spending some time planning your finances a priority.
The Bottom Line
To steer yourself away from the dangers of overspending, start by monitoring the little expenses that add up quickly, then move on to monitoring the big expenses. Think carefully before adding new debts to your list of payments, and keep in mind that being able to make a payment isn’t the same as being able to afford the purchase. Finally, make saving some of what you earn a monthly priority, along with spending time developing a sound financial plan.
Source:
https://www.investopedia.com/personal-finance/most-common-financial-mistakes/
Article #2: 9 Middle-Class Money Traps That Keep You From Being Wealthy (From GoBankingRates.com)
By Angela Mae, August 15, 2023
According to the Pew Research Center, approximately half of all American households are considered to be part of the middle class. This equates to roughly 165 million people.
Typically, people in the middle class have some kind of college education, some disposable income, and may even be planning for retirement. But that doesn’t mean they’re financially stable.
In fact, middle class households usually have some kind of debt — like a mortgage, auto loan or credit cards — that they need to pay off. Along with this, these individuals are also still subject to many common financial pitfalls, or money traps, that keep them from achieving true wealth.
If you’re in the middle class and want to become financially independent or wealthy, here are some financial decisions or behaviors that might be keeping you from achieving this goal.
Trying To Keep Up With the Joneses
The “middle-class money trap is being on the hamster wheel of life,” said Sebastian Jania, owner of Manitoba Property Buyers. “This is doing things such as buying cars that depreciate over time, taking on student debt for a degree that doesn’t have a solid financial future, or buying a property that one simply shouldn’t be buying because it’s too expensive. This is all commonly referred to ‘keeping up with the Joneses.’”
Societal influence and pressure are very real concerns for many people, ones that often lead to extravagant purchases just to keep up appearances. The problem with this is that it can lead to a cycle of debt and overspending. When this happens, it can be harder to achieve long-term financial goals, invest in the future or build wealth.
Spending Without Saving or Investing
“A common middle class money trap is spending all or more than your income without saving anything that will allow you to make investments that generate wealth, such as a home,” said John Bodrozic, co-founder of HomeZada.
“For the middle class who are homeowners,” Bodrozic added, “the money trap is neglecting maintenance, repairs, and obvious remodeling and improvement opportunities, or mismanaging your home from a financial perspective, that will prevent you from growing your investment and may even lower home values and your equity.”
Settling for the Status Quo
When people start making more money, they often become comfortable and settle where they are. This can keep them from achieving true wealth.
“The middle class money trap occurs when an individual settles for the status quo after they start earning middle-class income,” said Dr. Enoch Omololu, a personal finance expert and founder of Savvy New Canadians and Dollar Financials. “This is because they now see themselves as being, at the very least, as financially secure as their neighbors and better off than many other Americans. They lose their competitive spirit, which limits their ability to grow their net worth even further.”
Relying on Yourself for Everything
“Another thing the middle class does that the rich do not is that they think that they need to do everything themselves,” said Jania. “For the middle class, it is often not desired to hire things out or ask for help. However, the rich delegate as much as possible and work in partnerships to rapidly accumulate income and wealth.”
To break out of the middle class and gain true wealth, it’s often a good idea to get a financial team together. This could mean working with a financial advisor, financial coach, certified financial planner or other experts who can make a comprehensive plan to help achieve your goals.
Failing To Take Advantage of Investing
Learning how to invest and actually doing it are also key to moving up from the middle class and building wealth.
“The idea of putting money into the stock market can seem intimidating or even scary after what happened in 2008,” said James Allen, CPA, CFP, CFEI, founder of Billpin.com. “But not investing means your money isn’t working as hard for you. Even putting away a little each month can compound into something significant over time.”
Some middle class individuals don’t invest because they don’t know how to go about it. Or they invest only in one or two things rather than diversifying their portfolios. This can be extremely limiting financially.
“Poor investment knowledge also results in people having limited diversification for their investment portfolios,” said Omololu. “For example, they may have all their net worth invested in a larger-than-necessary home instead of spreading their holding across real estate, stocks, bonds and other assets.”
The issue with only investing in a couple of assets is that if one investment drops, it could significantly impact your overall wealth. But if you have a diversified portfolio, the other assets can help make up for any temporary or current deficits.
Relying on Credit Cards or Other Expensive Debt
Another common middle class behavior is to rely on debt to afford their lifestyle. This includes high-interest credit cards, auto loans and mortgage loans. While this can make it easier to keep up appearances, it can also very quickly erode any wealth you’ve created.
“You can’t become wealthy when saddled with debt and interest,” said Angela Johnson, founder and senior advisor at Worthen Financial Advisors. “When you are paying back loans and credit card debt, you’re making those companies wealthy instead of making yourself wealthy.”
Renting Instead of Buying
While renting has its merits, such as flexibility, it can also quickly become a trap that keeps you spending rather than building wealth.
“If someone in the middle class is renting, the rent they pay is entirely an expense and contributes nothing to personal wealth. Buying a home is an investment in residential real estate that has a long track record of generating wealth,” said Bodrozic. “Not recognizing the impact of real estate investment and management on wealth creation, and failing to monitor your home equity, can be major obstacles to the middle class moving up.”
As with any investment, it’s important to consider the possible returns on any property before purchase. This is because not all real estate appreciates equally.
Thinking You Need a High Salary
Many people in the middle class tie their wealth or worth to their salary. “You don’t need to have a high salary to become wealthy,” said Johnson. “You just have to spend less than you make.”
She continued, “If everyone walked around with their net worth on their foreheads, you’d be a lot less impressed with your friends’ expensive handbag or car. Wealthy people don’t care about brand names and aren’t willing to trade the opportunity cost of saving that money versus spending it on an expensive brand name item.”
Having No Long-Term Plan
Regardless of how much you’re making, having a long-term plan — and sticking with it — is essential to getting out of the middle class and becoming wealthy.
“It’s much easier to save for the future instead of spend frivolously now when you have defined financial goals you are working towards,” said Johnson.
Source:
Article #3: The American dream of the middle class isn’t what it used to be (From CNBC)
By Juhohn Lee, February 9, 2022
The middle class was once a symbol of the American dream. It meant financial security and an opportunity for a better future. But that portrait is quite different today. Watch the full video here: https://cnb.cx/3GBbxOz
https://www.cnbc.com/video/2022/02/09/why-the-middle-class-feels-so-squeezed.html
KEY POINTS
- The assumptions and expectations that come with being middle class have shattered over the last 10 to 15 years.
- Some middle-income households and experts believe a lack of supporting policies might be to blame.
- “There is no help whatsoever,” said Chantal Jacob, a middle-income parent from suburban Texas. “There’s no policy in place to assist people.”
The middle class was once a symbol of the American dream, representing financial security and opportunity for a better future. But that portrait of the American middle class is quite different today.
“It was at least a secure category,” said Alissa Quart, author of ‘Squeezed: Why Our Families Can’t Afford America,’ [but] there are certain kinds of assumptions around being a middle-class person” that have “shattered” over the past 10 to 15 years.
Some middle-income households and experts believe a lack of supporting policies might be to blame for the drastic changes.
“There is no help whatsoever,” according to Chantal Jacob, a middle-income parent from suburban Texas. “There’s no policy in place to assist people. And I feel like as soon as you get a job, as soon as you’re working, they’re just like, ‘That’s all you need, a job. You got it, go forth and have at it.’ ”
Lawrence Mishel, a distinguished fellow at the Economic Policy Institute, shares that sentiment. “It’s not that the economy got worse, it was that there were policy decisions made so that the economic growth did not filter down to the vast majority.”
The Biden administration has been pushing for several bills aimed at supporting middle-income households, including the $1 trillion bipartisan infrastructure legislation passed in November 2021 and the Build Back Better Act currently stalled in Congress. But observers say it might not be enough to save the middle class from economic hardship now and in the future.
“My friends that were struggling are still struggling,” said Jacob. “I’m still budgeting down to every dollar trying to get things done. So I just feel like if the changes are happening, they’re not trickling down fast enough for us to see the effects of it.”
Watch the video to find out more about why the middle class is feeling squeezed in America today.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.
Sources:
https://www.cnbc.com/2022/02/09/why-there-arent-enough-policies-to-help-the-middle-class.html
https://twitter.com/CNBC/status/1693390200880193889
Article #4: Raising financial awareness: Americans still not saving enough (From Fox Business)
By Ken Martin, August 20, 2023
Some people were raised on how to save but not taught ways to make money grow.
With the summer winding down and students going back to school, it’s a good time to look at how Americans are handling money, gauging their financial responsibility and stability.
It seems people are still falling into the old trap of overspending and not saving enough.
“When you look across the country, people are still living paycheck to paycheck, says Tammy Trenta, founder and CEO of the asset management firm Family Financial. “About 67% live paycheck to paycheck. They’re not saving.”
A segment of the population are savers, but they don’t know enough about their finances and may not know what to do with those savings.
“There’s a need to raise awareness. Especially in this day and age where there are so many tools to help empower themselves,” Trenta said. “If I had my choice, I’d have financial literacy taught in every elementary school, high school and college and make it mandatory”.
The COVID-19 pandemic is being blamed for some of the choices people are making. Young people often think they can have fun now and save later, and the pandemic may have changed people’s philosophy about living for today because tomorrow isn’t guaranteed.
People are now spending and traveling.
“During COVID, an incredible amount of money was injected into the economy to keep it afloat,” said Trenta. “During that time, there was a surplus of savings, which led people to spend. And, keep in mind, people were stuck at home, which increased online purchases. And when things opened up, we’re now seeing revenge traveling.”
Remote work is also credited with helping people with their spending.
“They weren’t commuting to an office,” Trenta said. “They weren’t spending money on gas, clothes or makeup. People may have become more efficient and have extra time for maybe a side gig. Overall, people have had more money.”
Some people are born into families that save, and they teach their kids how to budget. Once they get a full-time job, the options open up for savings and investing.
Even for someone like Trenta, who is a financial planner, it was something she had to learn the hard way.
“I learned later in life when my parents filed for bankruptcy. It was a matter of survival. I needed to learn a skill,’ she said. “You must prioritize your savings first. It is the most important thing you can do. If you are not in a position to do that, you either have to make more money or cut your spending. You should try to save 25% of the money you make, or at least 10% at the minimum.”
High inflation and rising interest rates have made it tougher for people to be economically responsible.
“Inflation increased so much in such a short period. The biggest impact has been in groceries. You’re getting less,” said Trenta. “Travel has also become more expensive.”
Inflation has eased, although it still has a way to go to reach the Federal Reserve’s target of 2%. The recent reading on consumer prices came in at 3.2%, better than expected, but slightly higher than the prior month.
Inflation has also impacted the housing market.
“A recent article said your same housing payment can cost 2½ times more than a year ago. People are buying less house than they can afford,” said Trenta. “Housing still remains strong, but where is the tipping point?
“Realtors and lenders say to get a mortgage now and when rates come down refinance, but there is no guarantee. Six percent could be a new normal. Real estate could take a hit in the next two years, but probably not as bad as 2008.”
As far as the U.S. economy making a soft landing, Trenta says it is natural to have a recession.
“A recession is two consecutive quarters of negative growth, and we had that in 2022,” she said. “Will the next one be a Fed-induced recession? The Fed has been very committed to controlling inflation. The metrics they are using are different today than those of 20 years ago. We’ve seen job losses, but not enough to raise fears. We now have a gig economy, a side hustle. Some people won’t work for an employer anymore. That fact isn’t being measured.
“An increase in the minimum wage affects small business. And, to combat it, a small business is going to use virtual assistants and will outsource more. GDP also doesn’t reflect services, only production. These indicators are not telling the entire story.”
When it comes to investing, Trenta encourages people to do research.
“There are people on TikTok giving financial advice with no credentials. Everybody has a social media platform where they give advice, and you have no idea if they are right or wrong.”
That advice goes double for people looking at cryptocurrencies as an investment.
“I have clients that already have crypto. It is something that is becoming mainstream and is being adopted by business and will be adopted more sometime in the future. But it is speculative and has no intrinsic value. Don’t invest unless you can afford to lose it. It’s unregulated.”
The way people work has forever changed since COVID.
“Remote work is here to stay. Employees are looking for either a hybrid or to stay home. That may force employers to pay a premium to get that employee. The downside to remote work is that it can be isolating. Companies want to foster a connection and community.”
Sources:
https://twitter.com/FoxBusiness/status/1693390483190349859
Article #5: Form follows finance: NYC’s pencil towers for the ultrawealthy (From Archinect)
By Alexander Walter, February 7, 2019
Any visitor to New York over the past few years will have witnessed this curious new breed of pencil-thin tower. Poking up above the Manhattan skyline like etiolated beanpoles, they seem to defy the laws of both gravity and commercial sense. They stand like naked elevator shafts awaiting their floors, raw extrusions of capital piled up until it hits the clouds. — The Guardian
In his latest long-form piece, The Guardian architecture critic Oliver Wainwright shows how the advent of the new ‘pencil tower’ building type is rapidly transforming New York City’s skyline, digs in the history of zoning laws, and explains how “air rights” allow (an abundance of) cash to buy a piece of the Manhattan sky.
“Like leggy plants given too much fertiliser, these buildings are a symptom of a city irrigated with too much money,” writes Wainwright. “The world’s population of ultra-high-net-worth individuals, a super-elite with assets of at least $30m, has now mushroomed beyond 250,000 people, all in need of somewhere to store their wealth. More than a third of them are based in North America, while those from riskier economic climes favour New York real estate as one of the safest places to park their cash.”
Source:
Article #6: Rachel Cruze Says You Can Save Money by Journaling (From GoBankingRates.com)
By Sheiresa McRae Ngo, August 18, 2023
In a world that’s constantly bombarding us with expenses and temptations to spend, finding effective ways to manage our finances is more important than ever. Enter the seemingly simple yet highly impactful practice of journaling. Rachel Cruze, personal finance expert and co-host of The Ramsey Show, asserts that keeping a journal can be a game-changer for your financial journey. Cruze delves into the many ways journaling can help you achieve greater financial stability and cultivate healthier spending habits.
“Journaling has helped me love my life more than I ever thought possible, and gratitude has had an amazing effect in all areas of my life–including my financial, physical, and emotional well-being,” says Cruze in her article about journaling.
The Unconventional Money-Saving Tool: A Journal
When we think about saving money, we often picture creating a budget, cutting back on discretionary spending, and adopting frugal habits. While these strategies are indeed effective, journaling is another powerful way to manage your money. Keeping a journal can be a potent instrument for improving your financial well-being. According to Cruze, journaling allows you to gain a deeper understanding of your spending patterns, emotional triggers, and long-term financial goals.
The Power of Self-Awareness
Cruze highlights the pivotal role self-awareness plays in achieving financial success. By jotting down your daily expenses and reflecting on your financial choices, you become more attuned to your spending habits. This awareness enables you to identify areas where you might be overspending or making impulsive purchases. Self-awareness is the first step toward making conscious decisions about your money, ultimately leading to more intentional spending.
Tracking Your Progress
One of the most compelling aspects of journaling is the ability to track your progress over time. Cruze emphasizes the value of observing how your spending behaviors change as you consistently document your financial journey. As you accumulate entries, you’ll witness your growth, setbacks, and achievements. This retrospective view helps you celebrate your victories, learn from your mistakes, and fine-tune your financial strategies.
The Emotional Connection
Money isn’t just about numbers; it’s deeply intertwined with our emotions. Understanding your emotional relationship with money is crucial for developing a healthy financial mindset. Cruze discusses how journaling provides a safe space to explore your feelings and attitudes toward money. By examining your emotions, you can uncover any patterns of emotional spending or comfort buying that might be undermining your financial goals.
How to Start a Money Journal
- Set clear goals.Financial success is often built on the foundation of well-defined goals. Cruze suggests journaling can be a tool for clarifying your objectives. Whether you’re striving to pay off debt, save for a vacation, or build an emergency fund, writing down your goals in your journal solidifies your commitment. It keeps your aspirations front and center, motivating you to make daily decisions aligned with your financial dreams.
- Commit to overcoming impulse spending. Impulse spending is a common hurdle on the path to financial stability. We’ve all experienced the allure of an unplanned purchase that seemed irresistible at the moment. Cruze highlights journaling as an effective strategy for combating impulse spending. By recording your feelings and thoughts before making a purchase, you create a buffer zone that allows you to reconsider the decision. Over time, this practice can significantly reduce impulse spending and lead to more thoughtful consumption.
- Build a supportive community. Sharing your financial journey with others can be empowering. Cruze touches on the idea of using your journal to connect with like-minded individuals who are also striving for financial well-being. Online communities and forums provide spaces where you can share your experiences, seek advice, and learn from the challenges and successes of others. Journaling can serve as a catalyst for building connections that enhance your financial education and motivation.
- Transform your financial future. In a world where financial pressures are a constant presence, it’s crucial to equip yourself with effective tools for managing your money wisely. Cruze’s insights into the power of journaling offer a fresh perspective on achieving financial wellness. By embracing journaling as a means of self-awareness, progress tracking, emotional exploration, goal setting, impulse control, and community engagement, you’re embarking on a transformative journey toward a brighter financial future.
As you reflect on your financial journey, consider incorporating the practice of journaling into your routine. The simple act of putting pen to paper has the potential to unlock a world of financial growth and stability.
Editor’s note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates’ editorial team.
Source:
https://www.gobankingrates.com/money/wealth/rachel-cruze-save-money-journaling/
