It’s the start of a new year and a great time to think about improving your relationship with your money. Perhaps you want to invest more, spend less, or create a budget.
As you think through the improvements you need to make, consider the following financial pitfalls that could hinder your progress towards building your wealth and financial net worth.
Here are seven mistakes to avoid:
1. Impulsive spending
This is a big one. Impulse shopping or frivolous spending may be driven by your emotions. This is totally normal. We’re human and we have emotions. A study revealed that 95 percent of our purchase decision making happens in the subconscious mind.
However, overspending and allowing your emotions to dictate your wallet can be a slippery slope. You could easily end up in unnecessary debt, which may hinder your ability to save and grow your overall net worth.
Action steps to help curb emotional spending
Impulsive spending is a hard-to-break habit that may prevent you from reaching your financial goals. If you’re finding that your emotions are driving your purchases and are having a hard time controlling it, consider taking the following six action steps to help you.
Action step 1: Acknowledge the problem. A good way to stop reasoning with yourself is by looking through the last two or three months of your spending. Look for purchases at retail stores, restaurants, spontaneous trips, and anything that might be included in impulse spending.
Action step 2: Identify the emotional triggers. Think about what prompted you to spend at that moment and write it down. Note these experiences so you can start to become more aware of them.
Action step 3: Is it a need or a want? The next time you find yourself wanting to spend impulsively, ask yourself if it’s something you need or want. Did you need this item before you walked into the store? If not, you probably don’t need it.
Action step 4: Set a small budget for unnecessary purchases. This is more of a mental trick than anything else, put away $10 or $20 a week for a guilt-free budget. Once you’ve accumulated some funds at the end of the month, you can splurge on whatever item you want to purchase. Just remember to stick to this budget and don’t spend beyond what you have in your account.
Action step 5: Postpone your purchase for up to 24 hours. Leave the item in the shopping cart and sleep on it. Chances are when you wake up the next day, you may have changed your mind.
Action step 6: Unsubscribe from all of your mailing lists, newsletters, and promotions from retail and online stores.
2. Buying a new car
There’s a reason why millionaires, money coaches and experts advise against buying a new car. A new car depreciates by more than 10 percent in value, as soon as you drive it off the lot. It’s all downhill from there—the amount your car is worth may continue to depreciate by more than 20 percent after the first year.
If you need a newer car to replace the one that’s breaking down, consider a car that’s a few years old. When you purchase a car that’s a few years old, it’s already experienced a value drop. This may help provide some buying power to help you negotiate a better price with the dealer.
3. Paying full price
With the Internet at our fingertips, there’s no reason we should ever have to pay full price for anything. There are plenty of price-drop apps that alert you when there are sales or prices are reduced from your favorite retailers.
Shopping at thrift stores or consignment shops for clothing or “showrooming” (trying on items at the store and then buying it for less online) is a great way to save money.
If you adopt the mantra of never paying full price into your lifestyle, you’ll get into the habit of keeping your eyes peeled for deals. These savings add up over time.
Waiting for deals and seasonal sales such as Labor Day, Black Friday, or after-holiday deals can also help you to adopt the habit of patience. Another added benefit? While you’re waiting for the sale to happen, you may decide you don’t even want the item anymore.
4. Not having a budget
When you get in the car and don’t know the route to your destination, you use your maps to set the destination so you can get there efficiently and safely. What if you just guessed? Chances are, you’d get lost or find yourself driving around in circles.
This is the same concept when it comes to your money. Having a budget means setting a plan and then figuring out the best route to get there.
A budget should include long- and short-term goals with strategies (i.e. spending less, saving more, investing) to achieve them in a certain amount of time. A long-term goal can include saving for retirement while a short-term goal can be saving for a down payment for a home.
5. Borrowing from your savings
So you blew your budget for the month and borrow money from your savings to make ends meet. It happens.
Just don’t make it a habit because it defeats the purpose of having a savings account. Plus, if you transfer money from your savings to checking more than six times a month, you may get charged a fee by your bank or financial institution.
To help prevent constantly borrowing from your savings, make it a habit to know where your money goes every single month. This will help you understand your spending habits, impulse shopping, and how much you’re saving.
6. Not having an emergency fund
About thirty-nine percent of Americans have enough savings to cover a $1,000 emergency. If an unexpected event were to occur, from a job loss to a medical expense, most folks will likely have to borrow the money or go into debt to pay for it.
You may be thinking, “I have health insurance so this doesn’t apply to me.” Wrong. Often, your insurance doesn’t cover everything, so many expenses need to come out-of-pocket.
Medical bills (67 percent) are the leading cause of U.S. bankruptcies. Additionally, health insurance premiums are rising at a steady rate of 5.5 percent per year from 2018 to 2027.
Automate your finances
In order to build up your emergency fund this year, consider automating your finances each month. If you work for a company, you may be able to ask your payroll department to take out a portion of your paycheck to be directly deposited into your savings account. When you don’t physically see the money in your account, you’ll be less tempted to spend it.
After a few months, see if you can increase the amount you’re saving by 10 percent.
Consider opening an FSA or HSA
Open a Flexible Spending Account (FSA) or Health Savings Account (HSA) this year if you’re concerned about out-of-pocket costs for medical bills. These plans are great because you can put away pre-tax money to help cover future qualified medical costs. Talk to your HR department to get details.
7. Always carrying a balance on your credit cards
This is a common financial pitfall. A poll revealed that 56 percent of credit cardholders have carried credit card debt for at least a year.
If you use credit cards, make sure you’re paying them in full each month to avoid costly interest charges. At the time of writing, the average credit card interest rate is about 19 percent for new offers and 15 percent for existing accounts.
If you have credit card debt, the first thing is to stop racking up a higher balance. Use cash until it’s paid in full. Doing this may also raise your credit score, since paying off debt may improve your debt-to-income ratio.
Making a plan to better your financial situation is unique to you, how much you earn, your credit score and overall net worth.
By being aware of your challenges (i.e. compulsive spending), taking action steps to overcome them, and adopting tools to manage and automate your money, you can improve and make the most of your financial situation this year.