While there are far more than 3 financial pitfalls to avoid, we thought we would bring attention to 3 very common ones. If 2020 taught us anything, it should be that we need to mind our money and plan for the unplanned. Maybe some of these mistakes will resonate with you.
- Spending your entire paycheck. This is so common that it is more common than likely any alternative. You become familiar with your take home pay and you budget around 100% of it. Your housing, your car, your food, your entertainment and your discretionary spend eats up 100% of your paycheck. You make $5000 per month therefore, you have $5000 per month to spend. Wrong approach. What happens when you have an unexpected layoff? What happens when your typical commissions are much lower for a month? You have no safety net. You will be unable to pay your bills because you have no savings built up. Additionally, you are not preparing for your future. Do you plan to work forever? Do you have any designs on saving for something greater like a home or an investment? We covered saving strategies here and now would be a good time to revisit them.
- Spending MORE than your paycheck. Are you spending more than you are making on a regular basis? We are not talking about a random month where maybe an unexpected expense came up like a car problem or a new water heater. We are talking about a constant habit of spending $1.25 for every $1 you take home. If you are doing this, you are digging yourself a hole that you cannot escape. You need to make adjustments. If you’re “needs” are the problem, figure a way out. Either find a way to make more money or reduce your fixed expenses. It may be a tough pill to swallow but it really should not be an optional choice for you. If you’re wants or discretionary spending is the problem, easy, track every dollar and stop doing it. Do you need designer coffee every day? Do you need to drive that exact vehicle that has a high payment? Cut the nonsense. This is basic advice but for so many, it is not followed.
- Not living beneath your means. Here is the trap many fall into: They do a great job living well while saving some money. Then, they get a promotion or a new job and start pulling in more money. Instead of making small adjustments to their living expenses, they go all in. They decide they can sell their home and move into a much more expensive home. They decide they can take that surplus and buy the luxury vehicle. The key to financial independence is living beneath your means and saving until working becomes OPTIONAL. The fastest way to do this is by working your way to a standard of living that is comfortable and within your budget and keeping that standard of living regardless of whether your income increases substantially or not. An occasional splurge within reason of course makes sense but it is what you do habitually that matters. Do not get caught up chasing friends or neighbors with every incremental dollar you earn. Remember the goal which should be FINANCIAL INDEPENDENCE.
None of this is groundbreaking information or new news. Instead, these are just 3 foundational ideas for you to consider going into 2021. If you cannot abide by these 3 ideas, you are going to struggle with any more complex or advanced financial strategies. This is a tough time for many so this is not meant to be insensitive or demeaning but, where there is a will, there is a way. Approach your finances like you would approach a fight.