It’s not uncommon to focus on the here and now as you embark on a new career or education plan. However, too many of us don’t plan sufficiently for the future, or unknowingly walk right into hidden financial quicksand.
Falling into these pitfalls ultimately creates a domino effect. For example, you live paycheck to paycheck, so you pay the minimum on a credit card, leading to more interest fees, which leads to less money to save for the future. Sound familiar?
Even if you’ve fallen into a common financial pitfall before, it doesn’t have to happen again. It’s time to break free of unsustainable cycles and get yourself on the path to financial success! And we have compiled these top ten common financial pitfalls to help you get there.
The Top 10 Most Common Financial Pitfalls
Knowing these common financial pitfalls will help you avoid making costly mistakes in the future:
1. Not Having an Emergency Fund
An emergency fund provides a financial buffer you can use in a crisis. Examples of common crises include losing your job, suddenly moving, or needing to take time off from work due to injury or illness. You’ll want to build a fund covering at least three to six months of your living expenses.
Investment accounts are certainly assets for financial success, but a market downturn can drastically reduce your emergency fund when you need it most. Additionally, funds in these accounts are not easily accessible. Because these funds are for emergencies only, we recommend creating a savings account for them instead of an investment account.
2. Making the Minimum Payment on High-Interest Debts
If you have high-interest loans, pay them off as aggressively as you can. A common financial pitfall many fall prey to is making minimum payments because they simply don’t understand how much they end up paying over time.
Minimum payments benefit creditors, not you. For example, let’s say you carry a $2,000 balance on a credit card with a 19% interest rate. If your minimum payment is $80 a month, you’ll pay $3,170.76 by the time you repay the balance.
That’s not to say that using a credit card or applying for a loan is always bad. Lines of credit can be used to cover emergency expenses, build your credit history, and pay higher interest loans. But it’s best always to pay them off as quickly as possible.
3. Frivolous, Excessive Spending
Unnecessary spending is a slippery slope. Living outside your means—or casually using significant chunks of your income that could have been saved or invested—is dangerous. And it’s not all about big purchases, either.
Are you a coffee drinker? If so, do you brew your coffee at home, or do you regularly spend $5 at a coffee shop? $5 doesn’t seem like a lot, but it quickly adds up. If you buy a $5 coffee Monday through Friday, you spend $25 on coffee weekly. If that still doesn’t seem like much, that’s $100 a month and $1,200 a year on coffee.
4. Being Underinsured
Health insurance has become easier to acquire, but over 31 million people were still underinsured in the U.S. in 2020. Where it’s a choice, many people don’t like investing in insurance because it’s a monthly expense for something they hope they’ll never need to use.
Being uninsured hurts you in the long run, even if it feels like you’re saving money now. However, one medical emergency or serious illness can set you back financially for months or years. In 2022, the average cost of a trip to the emergency for an uninsured person was $2,200. Depending on your condition and treatment, your bill could be far higher.
Aside from health insurance, we recommend other types of insurance as well. Disability insurance, life insurance, and renter’s insurance are all worth considering.
5. Living Paycheck to Paycheck
Most households in the United States live paycheck to paycheck, spelling out disaster in the event of unforeseen problems or expenses. That’s why having an adequate savings account and maximizing savings with a monthly budget is so important.
Even if you don’t feel like you need a budget, they’re great for finding extra savings and keeping yourself on track toward financial success. With a budget, you see where your money is going to reduce expenses. For example, when was the last time you used that gym membership or subscription service? Remember, small reoccurring expenses add up.
6. Failing to Invest in Retirement
One of the most common financial pitfalls people in their 20s and 30s fall into is failing to save for retirement. Retirement can feel like a long time away—and you may think you have plenty of time to save—but the longer you don’t save, the less compound interest you’ll accumulate.
Anyone can create a retirement account, and many types of accounts can choose from. The most common is a 401(k), which employers frequently offer. Many companies provide retirement matching, depositing funds in your retirement account to match yours to a specified amount. When these plans are available, maximize your contributions if you can.
7. Overusing Lines of Credit
Credit cards are an excellent tool for building credit score and history. But they’re overused, and you’ve got a hefty balance. Credit cards make it easy to fall into debt traps. Or worse: living on borrowed money.
When using credit cards, stick to purchases you can immediately pay off, such as gas or groceries. By immediately paying off your credit card balance, you reap the benefits to your credit score and any reward programs your credit card features—without paying interest.
8. Spending Too Much on Your Car or Home
It can be tempting to stretch your budget to get a larger house or newer car. But doing so can easily lead to living paycheck to paycheck, having little-to-no savings, or missed payments. Limited income also makes unexpected expenses or unforeseen hardships far more difficult.
Homes and vehicles are some of consumers’ largest purchases, so take the time to find the right deal within your means. Search out the best mortgages and auto loans you qualify for to help you save more money.
9. Saving for the Kids Before Yourself
Here’s a common financial pitfall you may not expect: saving for the kids before yourself. Parents frequently fall for this one, and it’s easy to understand why. They’re your kids. You want them to have a good start in adulthood, so you save big to help cover their college expenses.
The problem is there are many ways students can help pay for their education, including grants, scholarships, and work-study programs. On the other hand, there aren’t programs to help you save for retirement or emergency funds. Like oxygen masks in an airplane, you must put yours on before helping loved ones next to you.
10. Cashing Out Your Home Equity
Home equity is the value of your home after liens are subtracted from the amount. As you pay off your mortgage or the market changes in your favor, your home equity grows. Unfortunately, too many homeowners use their home equity like a personal piggy bank through refinancing.
While this practice may seem great in the short term, it’s destructive in the long run. Doing so stretches the amount of time it takes to pay off your mortgage, which means paying far more overall.
Power Finance Texas Can Help
We all need a little help sometimes. Emergencies happen despite our best efforts to avoid them. That’s where Power Finance Texas comes in.
We provide easy-to-qualify loan options that put cash in your hands fast. We offer installment loans for every occasion, and most of our applications are processed within minutes.
At Power Finance Texas, we aim to provide you with the best financial solutions for your situation. Learn more about the loans and services we offer today!