So, I was traveling recently and one of my friend’s sisters asked me what the biggest mistakes are that I see people make with their money.
No one has ever asked me this before, but I came up with five answers in a matter of seconds… and now I’m sharing them with you! 🙂
Based on my own experience, these are the biggest money mistakes I see people make.
1. Not having an emergency fund
I see people not having an emergency fund all the time.
Instead, I see people using their credit cards to cover emergencies.
Generally, it’s standard advice to have at least 3-6 months of non-discretionary expenses (money that you have to pay even if you lost your job; think rent, car payment, etc.) stashed away for when sh*t hits the fan. This won’t take away the pain of what’s happening, but it will relieve you of the financial stress associated with it.
I seriously cannot even imagine not having an emergency fund — especially because I don’t have a credit card! If you don’t have an emergency fund, I like to say “you’re currently in a state of emergency.”
Here are a few posts to help you get started with a savings strategy for building an emergency fund:
- 75 Money Saving Tips
- 4 Ways To Add $3K To Your Savings This Year
- 10 Habits That Will Help You Save Money
- How To Save An Emergency Fund That Actually Lasts
2. Not paying off credit cards in full every month
The second mistake I see all the time is people not paying off their credit cards in full every month.
Why. Why. Why do people do this?
Sorry! Trying not to judge. 🙂 As someone who is a spender at heart, I fully know the temptation. I just think that if you are a natural spender, don’t have a credit card at all. This is why I’ve never had a credit card.
And if you are a frugal-nista who pays off your card every month, then this doesn’t apply to you because you don’t carry a balance.
It’s such a huge mistake to carry a balance on your credit card.
When you keep a balance on your credit cards, interest compounds and you pay a lot for whatever it is you bought.
If you are in credit card debt, here’s a blog post that can help you – How To Get Out Of Credit Card Debt.
3. Not saving for retirement
The third mistake I see people making is not saving for their own retirement.
Typically, I see this from people who are intimidated by investing, so instead of choosing, they do nothing.
Whatever the reason for putting off saving for retirement, it’s usually a mistake (and I say usually because if you’re prioritizing paying off debt or have another legit reason for not saving for retirement, then it makes sense).
If you’re not sure where to start saving for retirement, I really like the book Retire Inspired by Chris Hogan as a starting point.
I also have many blog posts about retirement that can help:
- How To Start Saving For Retirement
- How To Save For Retirement In A Roth IRA
- Retirement Plans For Self Employed People
4. Buying insurance products for investments
The fourth biggest mistake I see people make is buying insurance products as investments (e.g.: whole life insurance).
This one really gets me going because there is sooooo much misinformation on the topic.
The general consensus in the financial industry is that you shouldn’t view insurance as an investment.
For a full explanation of why mixing insurance and investments isn’t my cup of tea, read this post by Mom & Dad Money. They do a great job of explaining why it’s often not a wise investment option.
The main reasons why I don’t love whole life insurance (and mixing insurance with investments in general) are:
- Whole life policies are expensive, and it’s hard to determine the actual fees you pay (commissions are paid out to the advisor/salesman who sold it to you, along with administrative fees that may be hard to find).
- The returns can take a long time to appear positive and when they do, they’re not guaranteed as advertised when you consider the fees you pay. If you decide to surrender the policy for the cash value in the short term, you can come out negative because not enough time has passed to recoup the cost of the policy.
- The investment isn’t diversified (you’re basically putting all of your eggs in one basket).
- There’s no real incentive to invest in an insurance policy versus buying a term insurance policy and investing separately. Yet, there are benefits to doing the ladder, including more investment options, more transparency, and more of an opportunity to increase your likelihood of earning positive returns over time.
Typically, the only people I see recommending mixing insurance with investments are the people selling these policies.
I have never had a whole life policy, but I see so many of my friends buying them right now because someone is recommending it to them. The sad part is that they have no idea what they’re buying.
If you need insurance, figure that out yourself and look into buying insurance just for insurance (e.g.: term insurance). You can use Policy Genius to search for insurance, for example. If you want to invest, save money in a retirement account or some other investment account where you have more options, clearer fee structures, and more control.
5. Not having a financial plan
The final mistake I see people make the most is not having a plan.
This happens a lot with people who don’t have an interest in money or financial health at all.
The problem is they steer clear of taking action because they’re intimidated by it. The result is a financial mess (at worst) or a hodge podge of random financial decisions that haven’t resulted in disaster, yet (at best).
It’s not great.
I remember feeling this way after law school. I was broke. I knew nothing about money. I decided to start listening to podcasts and reading financial books. This is what helped me the most because I wanted to learn and have a solid, basic foundation about money. And a few years later and now I do this for a living. So, anything is possible! 🙂
Here are a few suggestions to get started learning about money:
- Get on a budget – (you can look into my Budget Bundle if you want spreadsheets)
- Read one of these personal finance books
- Listen to personal finance podcasts
- Take Budgeting For Budget Haters (a budgeting course)
Getting on a financial plan starts with education. The rest will follow. At least it did for me!
The five mistakes above are money management related (meaning they’re the mistakes I see people make with the money they already have).
If I had to add something I see a lot that’s beyond the traditional money management mistakes, it’s focusing too much on either being frugal or making money.
I see people committing to one or the other, usually. And this is most often because they’re either frugal or spendy by nature.
The mistake here is that you need both.
You need to manage the money you have, and you also need to make more money if you want to take advantage of things money can buy (aka if you want freedom).
Here are my make money blog posts you can read to learn how to make more money:
- How I Made $45k Blogging In 1 Year While Working Full Time
- 45 Ways To Make Extra Money
- How To Start A Side Hustle & 23 Side Hustle Ideas
A Final Note!
These mistakes may seem obvious, but I swear I see them alllll the time.
So, remember to not fall victim to these mistakes even though they’re simple. Money doesn’t have to be complicated!