The 5 Worst Financial Mistakes You Can Make
It is the financial mistakes you avoid that makes all the difference. People think that they need to make more money, catch a break, or get ahead on finances to be wealthy. Sometimes, all it takes is to avoid the big financial mistakes that can destroy you. Here are the worst five things you can do with your finances:
- Getting Into Credit Card Debt
- Buying a Brand New Car
- Not Investing or Saving
- Excessive Spending
1. Getting Into Credit Card Debt
The worst kind of debt is credit card debt. The only thing remotely as bad as credit card debt is buying a new car (which we will get to next). However, they aren’t even in the same category of detrimental. The extreme interest rates on credit cards can quickly put you in debt for life. According to Value Penguin, in 2018, the average interest rate on a credit card account was 13.64%. The site even shows that the interest rate has been rising for the past five years. According to the same website, the average credit card debt per household in the United States is $9,333. Using the average interest rate and the average amount of debt, we can calculate just how much the average household is paying in interest per year.
$9,333 x 13.64% = $1,273.02 per year
Over $1,200 per year (or $100 per month to put it into perspective) is going toward credit card interest in the average U.S. household. Credit card debt is calculated at a daily rate, but we use this calculation to show how impactful credit card debt is on finances. It is easy to see why it can destroy your finances.
There are perfectly viable reasons why someone may have to get into credit card debt. Many college students do it to eat, pay for gas, etc. We are not trying to bash people for having credit card debt if it was necessary, but most of the time, it is not.
If you have found yourself in credit card debt, it is probably a good idea to make it your top priority to pay it off as quickly and effectively as possible.
One of the best ways to stay out of credit card debt is to create a monthly budget. A budget will help you to allocate your dollars to what is necessary and show you exactly where your money is going.
2. Buying a Brand New Car
Almost everybody knows that a brand new car loses value the second it leaves the car lot, but many people still seek the pleasure of “owning” a brand new car. Other than that, however, there is an undeniable reason why buying a brand new car is a bad idea.
It is just a terrible investment.
Let’s say you are looking to buy a $22,000 car, you have good credit and can get a 3.5% loan, and have $2,000 for a down payment. Your payment will be about $364 a month for only 60-months! Before taxes and fees, you will be paying $23,840 for your car over five years. At the end of these five years, your vehicle will be worth maybe $12,000. You are essentially throwing about $400 in the trash and buying a $12,000 car for double the price. It is tough to justify by looking at these numbers.
On top of this, insurance costs are higher for a car with the liability of a loan. Plus, YOU DON’T EVEN OWN THE CAR. In review, financing a brand new car is like wadding up hundred dollar bills and throwing them in the trash. No, it is not just like buying a house. Would you buy a house that was going to lose half its value in five years? Absolutely not. So, why do it when buying a car?
Vices are usually tobacco, alcohol, gambling, drugs, junk food, etc. Not only are they terrible for your health, but they are awful for your bank account. Smoking a pack a day at around the current cost of about $7 per pack will cost about $2,500 per year. The same thing goes with drinking a six-pack every day. If you go to a casino, you can see people gambling their life savings away. Even buying a $5 Starbucks coffee every day can harm your financial situation.
Think about your addictions. Everybody has a couple. What are the things that you can eliminate from your bills? Can you make coffee or food at home instead of going out?
There are so many ways to add extra income to your life, and it starts with eliminating the things that are detrimental to both your wallet and health.
Stay away from vices, and they will stay away from your bank account.
4. Not Investing or Saving
If you ask retired Americans what their number one financial regret is, we predict that the most common answer would be not investing or saving enough. Another standard answer would be not starting to save or invest at a young age. The earlier you start, and the more you invest, the better off you will be. Ideally, you would want to start as a baby. (Note to all the new and upcoming parents out there.)
The difference between starting at 14 years old compared to 24 years old can end up being millions of dollars. The power of compound interest and starting at a young age is the key to becoming wealthy. It is never too late to start, however. If you are looking to have a comfortable retirement, become financially free, or become wealthy, invest and save now!
5. Excessive Spending
Excessive spending can link to all four of these mistakes. Credit card debt is directly related to overspending. Buying a brand new car is overspending. Vices are unnecessary spending. If you are not investing and saving, you are spending.
Almost every way you look at it, there is a better place that you could be putting your money. You don’t have to live well below your means, but there are always places to cut back. There is a massive problem in America with people living paycheck to paycheck.
One positive from our newest consumer Pulse report? The % of respondents saying they live paycheck-to-paycheck hit an all-time low in our survey dating back 5 years. Still at 37.8%, however. You can access Pulse here: https://t.co/iKFPKfPtUO pic.twitter.com/DODWd8UoiD
— Bespoke (@bespokeinvest) March 6, 2019
One of the biggest problems we see is people spending a majority of their paychecks the day they get it. Don’t go to the mall or straight to Amazon on payday. Pay yourself first, invest, and save before you start spending your hard-earned dollars.
Avoiding these five financial mistakes can be the difference in living a wealthy life. Becoming financially free is not about making millions, hitting the lottery, or buying the next Amazon stock. Freedom comes from being smart with your money. The best way to be smart with your money is to avoid the five biggest financial mistakes.