You’ve been doing a great job of learning all of the things you ought to be doing with your personal finances over the years. Have you ever stopped to think about what NOT to do?
Like anything in life, we should always look at both sides of the coin. When you look at the task at hand from a different angle, you just might see something you hadn’t before.
This is why golfers read a putt from both behind their ball and behind the cup. You can see the sun shining on the grass differently. Further, breaks and bumps appear that weren’t seen when standing just a few feet away.
When learning all about what you should be doing with your finances, it’s also important to consider what you shouldn’t be doing as well. Here’s a short list to get you started:
1. Not Paying Full Credit Card Balance Each Month
Credit card companies charge some of the highest interest rates around - usually in the 20-30% range for any monthly balances. Carrying a balance can be catastrophic to your long-term financial health and is a difficult cycle to break. One of the very first financial lessons by parents taught me was to always pay the credit card off in full every month, no exceptions. I’ve followed their advice and have been grateful ever since.
2. Not Receiving Employer Match
If you have an employer-sponsored retirement plan, like a 401(k) or 403(b), you most likely have what’s called a matching contribution. Your employer will match your personal contributions dollar for dollar up to a certain percentage of your income, usually around 3-5%. At the very least, you should be contributing enough to your retirement plan to receive the full matching contribution, as this is free money from your employer.
3. Not Having Disability Insurance
For those still in the workforce, disability insurance plays a critical part in your financial plan. One of your largest assets is your ability to earn a future income (human capital), and having an appropriate amount of disability insurance helps protect against any loss in your ability to earn an income due to disability.
4. Watching Financial News
Financial news networks are entertainment companies that want as many viewers as possible so they can sell more advertising and generate revenue. They are not intended to be educational, as that isn’t what sells. What sells is fear and greed, which is exactly what they use to draw viewers in on a daily basis.
5. Underestimating Monthly Spending
Sticking to a monthly budget is hard, I get it. What’s worse than not sticking to a budget is not knowing what you spend in the first place. It is important to start tracking every expense you incur throughout the month, both planned and unexpected expenses. This will help you keep the proper amount of cash reserves on hand when high expense months occur, so you don’t have to go into credit card debt to pay the bills (see number 1 above).
6. Not Saving For Irregular Expenses
It’s easy to predict what our monthly base expenses are, as those happen each and every month. It’s more difficult to plan for those big, irregular expenses we don’t see coming. Try this - you know you will be buying Christmas or holiday gifts in November/December. Determine the total amount you plan to spend and divide that by 12. This way, you can start saving on a monthly basis for that one big spike in your expenses. This process can be repeated for other big expenses that you know will be happening at some point during the year - like car maintenance.
7. Not Having Estate Documents
Estate planning is far more than how your assets will be distributed at your death. It is important to complete your estate documents so you can determine how you’d like your financial affairs handled in the event of incapacity, protecting your assets against creditors, and more.
8. Not Tax Planning Year-round
The worst time of year to try and save money on your tax bill is when you are filing your tax return for the previous year. There are only so many options available to you at that point. It is best to work with your accountant or financial planner year-round to plan your taxes and maximize your tax-saving opportunities.
9. Making Impulse Decisions on Major Purchases
Major purchases are hard enough to pay for under normal circumstances, let alone when purchased on a whim. If you feel the urge to make a major purchase (whatever that dollar amount is for you), take an extra day or two to think about the purchase and see if you either truly need that item or if you can save money on it in any way.
10. Using 0% Interest to Justify Spending
Credit card companies, furniture stores, car dealerships, window companies, and more offer 0% interest rates to make their offering seem like a good deal. However, by breaking up our large purchases into smaller monthly payments, we will be more inclined to buy more in the long run. It is best to save up beforehand and make the lump sum payment in cash. It’s a lot more difficult to write a check for $20,000 to buy a new car than make 72 monthly payments of $347.22 (which equals $25,000 paid over 6 years).