Financial mistakes are easy to make, and many of them are fairly easy to rectify but it does require time and attention as money management isn’t an overnight skill. There are some very common errors people make on a daily basis and some which occur monthly or even yearly. Depending on how confident you feel with your ability to manage your finances, you may decide to tackle only a few areas at a time.
Budgeting is key to effective money management, but it’s often overlooked. Some people assume that creating an accurate budget will have little to no affect on their finances and some people think they know their finances too well to warrant a structured approach to their spending. However, without having a sustainable budget in place – which takes into account fluctuations in income, expenditure, one-off bills and savings – it’s easy to overspend and rely on overdrafts and credit cards to manage the day to day.
Creating a budget gives some framework to your finances and can massively improve your ability to meet repayments on time, spend within your means and save money for a rainy day. Budgets don’t have to be complicated; they only need to include your income and your priority bills. You don’t have to budget all of your disposable income if you don’t want to, but it can help you accommodate unexpected expenses if you know roughly how much money you have left over after you’ve paid your bills and allocated leisure spending money.
Acknowledging your financial commitments like this can also help you make repayments on time and reduce your dependency on credit as you’ll give more consideration to your use of loans and overdrafts if you’re factoring in the repayments each month. Many people underestimate their financial commitments which leads to continuous overspending and credit usage.
Next to failing to budget, not saving money is one of the biggest financial mistakes people make. With access to credit being so easy and with the cost of living being high compared to wages, saving money is often neglected and difficult to do. But having money ready for emergencies or even luxuries can give you control over your finances and help improve your financial resilience. You will no longer need to rely on credit and money management becomes easier as you suffer less cashflow shortfall and less anxiety over your finances.
You don’t need huge funds to build your financial resilience. With roughly £300 in savings, you’ll likely cover most emergency expenses like new tyres, a new washing machine and even things like new school uniform for your children when they come home with ripped trousers. Once you’ve become familiar with saving regularly – even if it’s just £50 a month – you can start to build towards a bigger financial cushion to cover you in a worst-case scenario: loss of income. If you lose your job, your finances take a huge hit, and it can put a massive strain on other areas like your relationship, mental health and general wellbeing.
Having three months’ worth of income saved means you know you are covered for at least three months if you lose your job. This means you can spend that time looking for new work without worrying about your finances. If three months’ income feels like an impossible target right now, start with just three months’ rent or three months’ worth of priority bills. If you hit a small bump in the road along the way, you can always use these funds to cover other emergency payments, as long as you intend to replace the used money. If you are tempted to use your savings to make up for poor budgeting throughout the month, consider using a locked savings account or one which requires you to visit a branch in order to withdraw the cash.
It can be a tricky topic, but a big financial mistake is not preparing for a comfortable retirement. While there is a state pension and auto-enrolment in private pensions, this is seldom sufficient for many people’s lifestyle. While your expenses will likely reduce with mortgages being paid off and potential council tax reductions, you will still need to pay priority bills and essential costs like food shopping and transport. There are online tools to help you calculate your pension and if it will be enough for your living standards.
If you are self-employed, you will not be auto-enrolled into a private pension and you will be solely responsible for arranging one. The basic state pension is around £135 a week which is unlikely to cover most people’s essential bills. You can open a private pension online, or there are alternative ways to save for retirement such as opening a Lifetime ISA which pays a bonus of up to £1000 a year if you qualify, or you can consider investing in property, for example.
Your expenses in retirement are typically less, but if you want to live comfortably without worrying about money, you need to avoid the financial mistake of ignoring your pension.
Finances are complicated – some people even pay professionals to manage their money and pensions for them – but they don’t need to be scary. As long as you try to be sensible and make responsible decisions, you’ll probably avoid most financial mistakes anyway. But giving extra care and consideration every now and then won’t hurt. As well as budgeting and saving there are smaller things you can do on a daily or even weekly scale to make sure you’re getting the most out of your money.
Switching energy providers and cancelling unused subscriptions regularly could save you hundreds of pounds a year. Often, changing bank accounts can earn monetary rewards as well and there are vast numbers of online support tools and money saving tips to help you in almost every area of your financial life. Another way to improve money management is by paying off your debts; whether it’s a £100 overdraft or a £5000 credit card spend, you should always aim to repay your borrowing as soon as possible. You may always turn to credit when you need money fast, but consider using your savings instead or adjusting your budget to accommodate the expense without borrowing.
You don’t need to revolutionise your money habits in order to see an improvement in your financial health but making small changes and putting plans in place to build your financial resilience makes such a difference. You may still make mistakes at first, but practice makes progress, and you’ll start to reap the rewards sooner than you think.
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