Avoiding common financial pitfalls

What are some common pitfalls to avoid financially?

One of the most straight forward ways to identify and avoid common financial mistakes to is work out what you should be doing and then picture the opposite.

On our Budgeting Tips page we outline several steps people can take to get their finances under control. These steps to improve one’s finances include advice such as:

Identify your wants and needs – separate what you truly need to purchase versus what you’d like to have.
Track all of your income and expenses – know what money is coming in and what is going out. Without good information it’s hard to make good changes.
Spend money based on how much income you have. Don’t spend money and then try to replenish your bank account or credit cards.
Save up to purchase things you want rather than buying on credit.
Try to downsize things you want or need. You might need transportation, this doesn’t mean you need a brand new car. You need shelter, but not a mansion.
Identify and eliminate little, repeating costs. Daily coffee, subscription services you no longer use, and weekly treats can add up over time.
Pay off any high-interest debts as soon as possible.
Build up a cushion of savings for emergencies, don’t rely on credit or overdraft to protect you in times of need.
Budget money for your savings and future by making “paying your future self” a priority over your wants.

Now that we have covered some tips to improve a person’s financial situation, we can reverse these to identify common problems or financial traps. Here is a series of bad ideas and poor financial advice:

Treat everything as a need, don’t prioritize your spending. Put another way, you might view this as buying whatever you want on impulse without giving focus to your basic needs.
Don’t keep track of how much money you spend. Don’t bother keeping records or planning a budget, just hope for the best.
Spend money based on the lifestyle you want, not how much money you currently make. Try to make up the difference later.
Make purchases you cannot currently afford on credit and pay it off later. Don’t keep any savings around for big purchases or emergencies.
Buy the biggest, best, or most luxurious version of whatever is available. New car, nice watch, big house.
Enjoy small luxuries, purchases, and subscriptions. They are inexpensive and you don’t need to worry about them.
Pay off debts in any order you like, or focus on small debts you can knock off first, regardless of their interest rates.
Don’t worry about maintaining savings or an emergency fund. Rely on lines of credit, overdraft, and credit cards to handle emergencies.
Save money and invest when you have left over cash at the end of the month, don’t prioritize investments for the future over your current wants.

Most of these tips probably sound straight forward. Some of them might even seem obvious to the point of being silly. Why would anyone go out and purchase the biggest and best of everything on credit, knowing they can’t afford it?

This raises one of the hardest parts of any attempt to better ourselves and our situation – it’s important to be self-aware. It’s important to be mindful of what we are doing and how we are approaching things – whether we are dealing with money, dieting, difficult emotions, or furthering our education. Any time we want to protect ourselves from mistakes or improve our approach to something, we first need to be aware of ourselves and how we are approaching the situation.

When I’m talking with people about their budgets, taxes, or investments one of the most common statements I hear is: “I didn’t know….” As in “I didn’t know I was spending this much on utilities and services,” or “I didn’t know I was paying this much on debt interest each month,” or “I didn’t know I was spending so much on coffee and treats,” or “I didn’t know I was spending this much shopping with my credit card.”

The first step to helping yourself is being aware of what you are doing, how you are reacting, and how these actions are affecting your life. This is the part people tend to struggle with the most. Many of us handle eating, budgeting, shopping, and talking to people on auto-pilot. We do what seems to be working, what has always worked well enough, for us up to this point. When our default approach to something is working, this is fine, but to effect positive change we first need to be aware of what we are doing and what the outcome is. Then we can start looking at making changes – big or small – to improve our approach and the results.

To get better at making financial choices, first it’s important to pause, examine our priorities, and determine how we can best achieve our goals. One of the worst things we can do to ourselves (and our money) is to blindly function on auto-pilot, not stopping to consider our daily decisions.