The 10 Major Money Mistakes Keeping You Poor

Millions of people struggle with money problems every day. Some of these struggles stem from people making fundamental money mistakes that they don’t even know they are making.

The good news is that a little knowledge and discipline can go a long way toward breaking bad money habits and improving your financial situation.

It can often feel that just getting through life is all you can do, but ignoring these 10 major money mistakes can make life more difficult than it needs to be.

Mistake 1: No Budget

Living without a budget sets you up to make most of these other money mistakes, despite your best efforts. Just like the old saying that you can’t get to where you’re going if you don’t know where you are, you can’t get to financial stability if you don’t know what your income and expenses are.

Making a budget that you can stick to will help you develop good spending habits and help you see where all your money is disappearing to. Keeping your budget in mind before making purchases can help curb frivolous spending.

Mistake 2: Impulse Buying

Marketing is specifically geared toward making buying new things fun and exciting. It’s easy to impulsively buy something to make you feel happy. It’s even easier when shopping online and you have your credit card information saved on an e-commerce site.

One thing about impulse purchases is that you never stop to think how much money you’ve spent over the span of a month until the credit card statement arrives and you see that those impulse purchases totaled a couple of thousand dollars.

Mistake 3: Living Beyond Your Means

Living beyond your means used to be called "keeping up with the Joneses." It’s easy to fall into the trap of buying things you don’t need and can’t afford when you feel like you’re been left behind by everyone who owns one. Living beyond your means accentuates the urge toward impulse buying.

This is another situation where getting into the habit of consulting your budget before buying something can help you break the cycle of impulse purchases and overspending.

Mistake 4: Lifestyle Inflation

Lifestyle inflation occurs when your spending increases when your income rises. Getting that raise or a new job that pays more makes you feel good. You can afford things that you previously couldn’t. Before you realize it, the extra money is going towards more or better things every month, and your debt situation is the same as it was.

Think ahead about how that extra money would allow you to reduce your debt (which also means lower interest payments) or how it could provide an emergency cushion before you spend it in the heat of the moment.

Mistake 5: Carrying High-Interest Debt

Mistakes 2 through 4 often result in Mistake number 5: carrying high-interest debt. Even if you have excellent credit and a good interest rate, those interest payments are the same as throwing that money away. If you are carrying debt, you should get rid of it before you start investing or saving. If your credit card charges 18% interest, you would need to find an asset that yielded 18% just to break even. Paying off a credit card balance is the best investment you could make.

Mistake 6: No Emergency Funds

It’s easy to get caught up in living day to day, and not think of what you would do if something bad happened. Emergencies can range from home or auto repairs to suddenly losing your job or ending up in the hospital. Having an emergency fund can prevent the need to put a sudden expense on a credit card or help make up the difference if the emergency costs more than your credit card’s limit.

Mistake 7: Not Saving For Retirement

Saving for retirement is not something most people think about until they are too old to build up savings. Luckily, many businesses offer 401(k) or IRA accounts that let you put your retirement on autopilot. You should use online self-help resources or consult a financial planner to determine how much you need to save today to live the way you want when you retire.

Mistake 8: Ignoring Insurance

It’s easy to pretend that you will never need insurance, but that’s like playing craps against someone who is using loaded dice. Insurance is expensive, but having your house damaged by a natural disaster or getting injured in a car crash is more expensive. Even with health insurance, medical bills are the largest cause of bankruptcy in the US. Insurance and an emergency fund for covering copays can make a major emergency more managable.

Mistake 9: No Financial Education

Your budget has probably uncovered some money sinks in your spending. Now it’s time to put that money to work for you. Educating yourself in financial matters will help you make sensible decisions and plan for the future. For example, how will you choose the right saving options to match your retirement goals?

The basic essentials of your financial education will help you avoid the other nine mistakes in this list. You can make the most of your financial situation by learning how to track expenses and manage debt and understanding how important your credit score is, for starters.

Importantly, a financial education includes learning how to invest (and not invest) to meet your goals while understanding your risk tolerance.

Mistake 10: Falling For "Get Rich Quick" Schemes

A little knowledge can be a dangerous thing, but a medium amount of knowledge has its own pitfalls. Knowing that they exist is the first step in avoiding them.

While investing in an index fund can be a good foundation for many people, nearly everyone wants to get a better return. The danger in searching for that additional yield is falling for investment scams and "get rich quick" schemes. Even seasoned investors fall for Ponzi schemes. Look at all the people Bernie Madoff cheated.

One good way to spot a scam is this: If someone cold calls you or sends an unsolicited email with an incredible investment idea, the first thing you need to do is ask yourself, "If this is such a great investment, why are they having to hunt for people to invest in it?"

Conclusion

This article is just one step in your financial education. When you are ready to take a more active role in your investment decisions, taking advantage of the resources and professional expertise available at Verified Investing can help you avoid pitfalls and spot legitimate investing and trading opportunities.