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Are you aware of the common financial pitfalls that trap most people? Financial pitfalls don’t discriminate. Every generation is prone to common financial mistakes. For example, many millennials live paycheck to paycheck and have crippling debt and boomers fail to save for retirement early enough. Here we’ll discuss 7 financial pitfalls and the preventative measures you can take to avoid them.
Making Emotional Investments
Relying on market hype is one of the most common investment pitfalls. To prevent poor decisions, consult a financial advisor or investment professional before investing your money. Money management should be strategic and not based on trends or outside influence if you want to protect your investments.
Relying on One Income
Does your family rely on only one income? Are you prepared if there is a loss of a job? As far as preventative measures, diversification is the only way to protect yourself when unforeseen circumstances arise. While it may not be possible to add another full-time income to the mix, consider side hustles and passive income to supplement the money you’re bringing in.
Not Insuring Properly
Are you protected if disaster strikes? Many people make the mistake of thinking that bad things won’t happen to them like property loss. Especially with an increase in recent natural disasters, it’s essential to protect your assets and understand your coverage. You don’t want to be left underinsured when you need it most.
Living Beyond Means
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It’s very common to live beyond your means. Most people who don’t have a budget often fall into the trap of lifestyle creep regardless of how much they make. There are so many landmines when it comes to overspending. Some people fall for the sale trap, just because an item is on sale you feel like you have to have it. Others overvalue brand names and end up spending too much for designer labels when they can’t afford them.
Then of course there are impulse purchases and FOMO spending. For instance, 40% of millennials, according to a Credit Karma/Qualtrics study, have fallen victim to FOMO spending. Even if the expense isn’t in their budget like a trip or a concert, millennials will still find a way to finance the purchase for fear of missing out on experiences. To counteract living beyond your means, you need to have a clear understanding of just how much money is coming in and going out. Financial management apps can help you stick to a budget and take control of your finances.
Carrying High-Interest Debt or Borrowing Too Much
This common pitfall usually affects millennials the most. The mentality of wanting things immediately, often leads to overborrowing. This means having more debt than you can handle. Additionally, taking on too much student debt leaves borrowers with large monthly payments for years.
So, how can you avoid these pitfalls? As far as education, make sure to use all of your resources like grants, scholarships, financial aid, and federal work-study. To avoid credit card and loan debt, it’s important to make sure you grow your savings and emergency fund before putting purchases on a high-interest credit card. This way, you are able to pay off your cards more easily and won’t be stuck with large balances.
Banking on Windfalls
Do you rely on your tax refund every year or gifts from family? These windfalls should be viewed as additional money to support your financial goals. If you are relying on windfalls to pay your expenses or get by, you aren’t taking preventative measures to improve your financial health.
Over-Generosity
On the flip side of banking on windfalls, you may fall into the trap of being over-generous with your money. This often stems from your money mindset. If you want to share your wealth that is very noble, but not if it stretches you too thin. Preventative measures for being too generous include looking at your budget, investments, and savings before deciding how much of your money to give to others.
Have you fallen for any of these financial pitfalls? How do you take preventative measures against financial mistakes?
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