Financial mistakes can happen to anyone—whether you’re a financial pro or a complete beginner. These mistakes can lead to missed opportunities. But the good news is that it’s never too late to bounce back and learn how to avoid them.
1. Having a sloppy budget (or no budget at all)
One common financial mistake is neglecting to set or maintain a realistic budget. A budget acts as your financial compass, guiding you towards achieving goals like purchasing a home, reducing debt, or even taking a much-desired trip.
However, a budget is only as good as the effort you put into it. If you created a budget last year but never bothered to track your day-to-day income and expenses, it likely isn’t doing you any good.
Or, if your budget leaves out easily overlooked expenses (like annual car registration fees or holiday gifts) or never allows for the occasional shopping trip, it may be impossible to stick to.
So, set aside time to do a financial audit and strengthen your budget. One good rule of thumb to use when establishing a budget is the 50/30/20 rule:
50% for needs (housing, car, healthcare, etc.)
30% for wants (entertainment, etc.)
20% to savings, debt repayment and investments
These percentages are flexible. If you can comfortably allocate more than 20% of your income to savings, you’ll be better off over the long term. Use a budgeting app that automatically captures your spending and helps with the math.
2. Not having a solid emergency fund
Most Americans don’t have enough savings to cover a $1,000 emergency, albeit a ruptured water heater, urgent car repair, or trip to the hospital.
If you can’t cover an unexpected expense, you may have to turn to other options like borrowing from family or friends or a high interest rate credit card.
This is why an emergency fund is so important. Experts recommend contributing to it regularly. For many, this means carving out a portion of each paycheck for an emergency savings account. Ideally, you’ll do this with a direct deposit, so you won’t forget or be tempted to spend the funds.
To figure out how much you need to save, calculate how much money you would need to cover three to six months’ household expenses. That amount should be readily available in your emergency fund at all times.
3. Leaving money on the table
Does your employer offer matching funds for your 401K retirement plan? Do they offer you the opportunity to buy stock at a discount? Don’t leave free money on the table!
Many employers offer a 401K program as part of your benefits package, and some will match your contributions up to a point. If your employer offers to match your retirement contributions up to 3% of your income and you don’t take advantage of it, it’s like turning down part of your pay.
If you have life insurance or similar benefits through your employer, make sure you list a beneficiary on them. Your benefits package is part of your compensation—you want to maximize your potential benefits.
4. Foregoing life insurance
No one wants to think about their mortality. Don’t let that force you into the mistake of not planning for the security of your loved ones if something unexpected happens.
The average funeral costs $8,300. Life insurance will help your family handle the expenses incurred if you pass away as well as ensure they have the resources to get through a difficult transition after you’re gone.
Life insurance is often inexpensive for adults in good health, and the peace of mind it offers is priceless. Knowing your loved ones have the resources to thrive after you’re gone is one of the smartest moves you can make.
5. Not shopping around for big purchases
When considering significant expenses such as car insurance, home loans, or appliances, many people settle for their initial choice. Yet, comparison shopping is key.
Whether it’s insurance, mortgage rates, electronics, or travel deals, comparing can save you a considerable amount annually.
With the advent of online comparison tools and apps, it’s easier than ever. Even if you’re loyal to a particular brand or company, regularly review the market to ensure you get the best deal.
6. Continuing to pay for subscriptions you don’t use
Do you know all the services you’re paying for monthly? Many people are surprised by the number of unused memberships and subscriptions draining their accounts. Among Americans who use streaming services, the average consumer spends $552 per year.
You can easily save money by checking your bank account periodically and highlighting recurring payments like gym memberships or streaming services. There are also subscription-cutting apps that will help identify which ones to cancel and even do it for you.
While each payment may only be 10 or 20 bucks, these can add up to hundreds of dollars yearly. Think carefully about whether you use each service enough to make the expense worthwhile.
7. Buying a new car
You shouldn’t buy a new car just because you can afford the monthly payment. Cars are depreciating assets, which means they drop in value as they age. A new car can lose 20% of its value in the first year of ownership. Depreciation slows down after the first year or two, so a used vehicle is usually a better value than a new vehicle.
Many manufacturers offer certified pre-owned vehicles, which are typically two to three years old and have low mileage.
These programs usually include a complete vehicle overhaul and a manufacturer’s warranty. You get the advantages of a new car for a much better value; all you give up is the new car smell.
8. Overusing credit cards
A credit card is a powerful tool to help build your credit history, but a high credit limit can encourage living beyond your means.
Many people don’t realize that the minimum payment generally only covers interest. Responsibly using your credit card has many benefits, but you’ll want to avoid getting in over your head.
But if you’re already carrying big credit card balances, it’s not too late to recover! Consider using an online personal loan or a credit card with a low balance transfer interest rate to knock down those balances.
Then, find a card with a solid rewards program and a reasonable interest rate for everyday purchases while paying it off every month to improve your credit score.
9. Ignoring your credit report
“Out of sight, out of mind” is a dangerous mantra to apply to your credit profile – and it’s a critical financial mistake many make. Lenders check your credit report as they determine whether they’re willing to let you borrow money and on what terms.
Landlords and potential employers can check your credit report, too. If there’s an ugly surprise or error in your report, it can seriously impact your financial life. You might be forced to pay high interest rates or be denied a loan altogether.
You’re entitled to a free credit report from each of the three credit bureaus once yearly, which you can request via annualcreditreport.com. If you spot an error on your report, begin the dispute process by contacting the credit reporting bureau as soon as possible.
10. Falling behind on monthly bills
It’s no secret that staying on top of your payments is a primary money management tip. Whether it’s rent, utility bills, or credit card balances, falling behind on your payments is problematic for several reasons.
First, you’ll likely wind up paying late fees and other charges.
Second, late payments may cause your interest rates to rise, so you’ll pay more on future charges.
Lastly, creditors report late payments to the major credit bureaus, and your tardy payments could remain on your credit report for seven years.
If you currently have past-due payments, catch up on them ASAP. The longer a payment is late, the more negative the impact.
Next, honestly address the issues that caused you to fall behind. If you have trouble keeping track of due dates, consider enrolling in automatic payments or setting up calendar reminders.
If your payments are late because you’re short on funds, an effective budget can help you manage expenses and curb overspending.
11. Not having a plan to manage your debt
Debt doesn’t need to be an enemy—it just needs to be well-managed. If you don’t have a plan, you might slip into the habit of making minimum payments on your credit cards, which can be quite costly.
Or you might end up hurting your credit utilization ratio by needlessly maxing out your credit cards. Lastly, if you don’t have a plan in place to build a healthy credit profile, you may find it difficult to get a loan.
To fix this, establish your goals and pick the right plan. If, for example, your goal is to pay down high interest rate credit card debt, you may consider a debt consolidation loan (a way to combine multiple debts into one loan with a fixed payoff schedule).
Or you might decide the debt snowball method is a better fit (starting to pay off small balances then moving to bigger ones). Either way, having a plan to manage your debt will improve your overall financial well-being.
How to avoid the 11 most common financial mistakes
If you’ve made any of the money mistakes we’ve listed, don’t worry–you can turn it around by following these money management tips. No matter where you are in your financial journey, you can find help.
Staying on top of your finances takes time and effort, but the payoff is worth it (pun intended). By correcting financial mistakes you may have made, you’re setting yourself up for financial wellness in the future.
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