For many people successfully managing their money can be one of the greatest challenges in life. Often times poorly managed finances can lead to disaster which is why it is important to learn how to prevent these mistakes before it is too late.
The biggest problem is in the fact that it is very easy to spend money but difficult to make it. This is why it is critical that you make a monthly budget for yourself.This way you will know exactly how much money you can allocate to any particular expense throughout the month and prevent yourself from spending too much in any on area.
The second biggest financial mistake that people make is improperly managing their debt. It is critical that you quickly pay off any high interest debt that you have before it becomes unmanageable. Credit cards are the most common source of problems in regards to debt because the interest rates on credit cards is typically higher than that of most other forms of debt, which can cause even a small credit card bill to quickly grow to an amount that you will never be able to pay off. This is why it is important that you completely pay off your credit card bill each month rather than just making the minimum payment because this will prevent you from having to pay any interest on the balance.
A third financial mistake that people often make is putting all of their extra money in a savings account rather than properly investing it. Although savings accounts pay interest on the money that is deposited into them, in the long run the money will in fact be losing value. This is because the rate of inflation is almost always higher than the interest rate. For instance if you had $10,000 in a savings account for 10 years at a 2% interest rate but the rate of inflation was 4% then at the end of the 10 year period your account would only be worth $8,104.27 due to the value that was lost to inflation despite the interest that was gained. This is why it is important that you invest your money in things that have a higher rate of return such as the stock market or CD’s and bonds.
However savings accounts do have a use and that is for keeping money that you will need quick access too but want to still earn interest on to limit the effects of inflation. This is ideal for keeping an emergency fund that will be used in a financial crisis such as a lost job or medical emergency. Neglecting to keep an emergency fund is another common financial mistake that people make.
Maintaining an emergency fund will keep your household functioning during a financial crisis. This is another reason why it is important that you maintain a monthly budget because it will give you a very good estimate of how much money you will need to keep in your emergency fund which should have enough money to support you’re from a few months to a year depending on what you think your needs are.