7 Money Mistakes You Are Probably Making -- And How to Fix Them

Updated January 11, 2021

No one wants to waste money. We spend 40+ hours per week earning it, and we want to make the most of what we’ve earned. But sometimes, it’s hard to know if we’re doing the right thing when it comes to our finances.

To help you out, we’ve compiled a quick list of 7 money mistakes to avoid – and how to make sure you’re taking care of those hard-earned dollars.

#1 - Carrying High Interest Debt 

High interest debt is one of the worst money mistakes you can make, and high interest rates (15% or more) can quickly drain your savings. 

Examples of “bad debt” include payday loans and personal loans, but the biggest offender in America is tied to credit card debt. In fact, according to The Federal Reserve, Americans owe almost $1 trillion in outstanding credit card debt.

With average credit card interest rates above 14%, and households with credit cards carrying an average balance of over $8,000, there’s a lot of money wasted each month.

In fact, if you simply pay a minimum payment of 3% of your $8,000 credit card balance, it would take you over 16 years to pay off and cost you over $4,900 in interest.

How To Avoid High Interest Debt

The best way to avoid high interest debt is to avoid credit card use, especially until you can plan purchases based on your personal budget. Keeping track of your day-to-day spending – and planning for upcoming purchases – restricts you to only spending money available in your bank account. If you use a credit card, pay off the statement balance each month to avoid any interest charges.

As for personal and payday loans with high interest rates, avoid using these lending services at all costs. Instead, opt for a personal loan through a trusted local lender (and with a lower interest rate).

#2 - Rushing to Pay Off All Debts 

While avoiding high interest debt is a good plan, don’t be in a hurry to pay off all of your debt. Even though many believe that all debt is “bad debt”, there are certain types that may actually be beneficial. 

Here are the common types of good debt you can consider keeping around a little longer:

  • Home Mortgages

  • Student Loans

  • Home Equity Loans

  • Business Loans

If your interest rate is low (under 5%) and if the interest is tax deductible, consider hanging on to this debt for a bit longer.

Remember, keeping good debt around is only beneficial if you are earning greater returns on your money elsewhere. Consider taking advantage of the higher returns available through investments like Index Funds.

#3 - Not Having an Emergency Fund 

One of the most common money mistakes is not having an emergency fund – or having far too little set aside to help with big expenses. Expensive life events do happen, and if you’re not prepared, you’ll have to resort to other means of finding the money, including credit cards debt, or dipping into retirement savings (at a significant penalty).

To avoid unnecessary debt and to keep your financial life stable, it’s recommended to set aside 3-6 months of expenses in a liquid savings account that’s strictly for emergencies. From medical emergencies to car repair bills or even a job loss, you’ll have the funds to keep you afloat (and prevent further debt).

#4 - Ignoring Employee Benefits 

Your employer might be offering you more than just a paycheck: Do you know what kinds of employee benefits you’re entitled to? Chances are that you’re not fully taking advantage of everything your employer has to offer.

Whether it’s a company match on your retirement account, a free gym membership, or discounted life insurance, make sure you take a look at the details of your company’s employee benefits to get the most from your job.

A few common employee benefits may include:

  • 401(k) matching retirement funds

  • HSA (Health Savings Account) incentive funds

  • Healthy Choices discount on health insurance

  • Free memberships (e.g. gym)

  • Discounted cell phone or internet plans

  • Discounted travel/vacation packages

  • Local business discounts

To discover more what your employee benefits, ask your human resources department to send you the details.

#5 - Impulse Purchases

We’ve all stood in a checkout line at a grocery store and added a few more items to our carts – even though they weren’t on the list. Impulse purchases cost consumers billions of dollars per year, at an average of $450 per month per person.

How do you combat impulse spending and keep more of your money? The best way is to stick to a plan, whether you’re shopping online or in the store. Essentially, if it’s not on your list, you don’t buy it.

Research any major purchases ahead of time. Comparing items and learning more about your purchases gives you the confidence you’re getting the best deal.

If you’re considering an unplanned purchase, give yourself a 24-hour waiting period before making the decision.

#6 - Waiting to Have Money Before Investing 

You may think that you need a large sum of money before you can dip your toes into the investing world, but nothing could be further from the truth. One of the biggest money mistakes you can make with your money is waiting to invest. 

And no, you do not need a huge amount of money to start investing. In fact, you can start by simply putting a few dollars away per paycheck with your work 401(k) or 403(b) retirement plan. The money will come right out of your paycheck and will lower your taxable income at the same time. Or you can consider opening up a Roth IRA and investing in tax free growth for retirement.

Even starting with a small amount (say, $100 per month), can grow to a huge sum over time. That same $100 per paycheck, invested at an average 7% rate of return, would grow to almost $122,000 after 30 years.

Don’t wait to invest: Start now with what you have, and increase your investments over time.

#7- Not Communicating With Your Partner 

One of the best things you can do for your money is to make sure you are on the same page with your partner. In every relationship, money decisions need to be made, and both partners should at least be “in the know” about day-to-day financial details.

Even if one of you manages the bills, shopping, and most financial tasks, both of you should help set the direction of your financial lives together. This will improve your overall communication while helping you pursue common goals with greater intention.

How To Talk About Money With Your Partner

Bringing up money isn’t a fun topic, so here are a few tips to get get the conversation started:

Set Aside Time 

The best way to prepare to talk about money is setting aside specific time to do it. Make sure it has a start and end time, and keep it no more than 45 minutes.

Avoid Distractions 

If you have kids, make sure they’re in bed. If a messy house will cause you to lose focus, commit to getting it cleaned up before your chat. Avoid anything that will distract you from your “money date.”

Keep it Positive

It’s easy to focus on what went wrong with your spending, especially if you’re already stressed about your money situation. Instead, keep a positive tone throughout the discussion and make sure to highlight what’s going right with your finances.

Focus on Goals

Money conversations can quickly devolve into obsessing over small spending disagreements. Keep your eyes on the big picture goals. Focusing on your short and long-term goals helps you keep perspective, and it reminds you why you are discussing money in the first place. A goal-focused approach to money communication will help motivate better money decisions.

Why Smart People Make Big Money Mistakes

Smart. Well-educated. A successful career. Bad with money.

Just because someone can solve problems and make money, that doesn’t mean they’re automatically great at handling their finances. Many intelligent people make big money mistakes over and over again. But anyone can learn to handle their money and improve their financial situation. 

You Can Get Better with Money 

Now that you’ve learned some of the top money mistakes to avoid, you can start getting a better handle on your finances by educating yourself further.

Whether you need to learn a bit more – or simply get on a budget plan – the key is to start now, and not wait until you’ve made more money mistakes.

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At InvestingAnswers, all of our content is verified for accuracy by Mark Herman, CFP and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about 7 Money Mistakes You Are Probably Making -- And How to Fix Them.

What Are Common College Money Mistakes I Should Avoid? 

In college, you’re finally on your own but aren’t earning a salary to pay for some of life’s more expensive purchases. Here are a few money mistakes to avoid:

Getting a Credit Card (or Two)

Credit card companies are notorious for coming to campuses and giving out free swag to get you to sign up. They don’t educate you on how the cards work, and students can quickly rack up a substantial amount of debt in a short amount of time. 

If you do choose to get a credit card in college, make sure it’s a secured card with a low limit. It is important to start building your credit score early, and using and paying off a credit card regularly is one of the easiest ways to do this as long as you don’t allow the debt to build up. 

Getting a Car Loan 

As tempting as it might be to upgrade your car, don’t. Keep a cheap, reliable car for as long as you can. Not only will you save money on the upfront costs, but older cars usually carry lower insurance premiums as well. 

And don’t forget: The value of your older car has already mostly depreciated after the first few years, so you won’t be losing as much money over time as you would on a newer car. 

Ignoring your spending

Even if you don’t earn much in college, tracking money with a basic budgeting app (like Mint) will help you develop a great habit that will serve you well once you start earning more. Further, as your income hopefully increases over time knowing your budget will help you avoid so-called ‘lifestyle creep’ by allowing your living expenses to increase accordingly with income or raises. 

Should I Save or Pay Off Debt First? 

When you’re looking to pay off your debt, it’s actually more important to save up a starter emergency fund to cover any unexpected expenses that might occur. This will help you stay on track with your debt payoff plans (and not let emergency expenses derail your progress).

Start by only paying the minimum payments first so that you can quickly save 1 full month of expenses. Once you have a starter emergency fund saved, you can begin to tackle your debt. 

Though paying off your “bad debt” is a high priority, don’t neglect the returns from investing in your work retirement plan if they offer matching funds. This “free money” will far out-earn the interest paid on your debt

Mark Herman has been helping friends with financial questions since serving as an Army helicopter pilot. Since then, he’s gained valuable experience in the corporate world before moving on to become a CERTIFIED FINANCIAL PLANNER™.

If you have a question about 7 Money Mistakes You Are Probably Making -- And How to Fix Them, then please ask Mark.

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