When it comes to money, there are avoidable money mistakes no matter whom you are or at what age.
Most of us are aware of basic personal finance rules to negotiate, comparison shop, avoid debt, save money and live within your means. Despite these basic rules of success with money, sometimes we get careless and fall into pitfalls that are pretty hard to get out of.
Poor choices will cost you, no matter what stage or age you are in life.
So, here are four very basic rules of money mistakes to avoid in order to achieve financial success whether you’re in your 20′s and just starting out, or pushing 50′s and around the corner from retirement.
1. Accumulating Debt
Knowing the difference between good debt and bad debt can save you a lot of aggravation in the future and help you avoid accumulating debt. Taking out a mortgage for a home is considered good debt, while financing more car than what you can afford can easily become bad debt. The simplest way to rationalize between good and bad debt is to understand whether taking on debt will bring value in the future. If there’s no future value (or the purchase is a depreciating asset), it’s likely that you’re accumulating bad debt.
Here are a few suggestions on how to avoid accumulating debt:
- Pay in cash
- Create a budget and monitor your budget often
- Pay your debt off on time
- Don’t settle for paying only the minimum balance – instead snowball your payments
- Avoid instant gratification purchases
2. Skipping out on Retirement Savings
Skipping out on retirement savings is one of the most dreadful things one can do to their finances, because when it comes time to retire, if you didn’t plan for years, nobody won’t take care of you when you need it the most. Government pension and supplementary income won’t be enough to live even a basic lifestyle, so it’s essential to start saving and investing as early as possible towards your retirement.
I started saving for retirement three years into my career, and haven’t looked back since. It made sense for me to start stashing away for retirement because my change in income was quite large, and it was easy to set aside a percentage of my income.
You can start saving for retirement at any age, but the earlier you start; the less catching up you’ll have to do when it comes closer to retirement. The key towards making retirement savings effective is to automate the savings process. Look at your budget or create one, and find a percentage of your income that’s comfortable for you to put away towards retirement, and then automate the whole process.
Since I started putting money away towards retirement, the savings have always been automatic. Every two weeks (pay day) an amount gets withdrawn from my primary account and goes into my RRSP account. Set it and forget it, as I call this process. Then every so often (when you feel comfortable), you just increase the amount and watch your retirement savings grow.
3. Lack of Proper Insurance
There are many different types of insurance out there to protect you, your loved ones and your assets in different scenarios. Having proper insurance coverage set in place is essential in case a worst case scenario arises. Here are three different types of insurance coverage I deem very important:
- Auto Insurance
- Life Insurance
- Home or Rental Insurance
The next three types of insurance are optional in my opinion, but very good to have:
- Travel Insurance
- Health Insurance
- Disability Insurance
Here’s a little description on the above three:
Travel Insurance – This type of insurance covers the cost of medical services that you may need outside of Canada and that exceed the amount covered by provincial health insurance. Travel insurance can also cover travel expense; such as if you need to cancel you trip due to a lost ticket, passport or other unforeseen circumstance.
Health Insurance – As Canadians we’re fortunate enough to have basic health care. However, you may need to buy private health insurance in case you’re not eligible for basic health care or to pay for services that are not covered by the basic health care.
Disability Insurance -If you’re unable to work due to a work related injury or a non-work related accident or permanent disability, having disability insurance will provide you with some income and with most policies you’ll get medical home care as well.
Personally speaking, I only carry two types of insurance presently: Auto and Home Insurance. However, I’ve been contemplating taking onto life insurance. Even though I’m a singleton with no other dependents, it would make sense for me to get life insurance as it would be relatively cheap now due to great health and my age.
It’s best for you to assess your situation, and find out what type of insurance coverage would work best for you. Having a family and other dependents, it would be wise to have proper insurance coverage. Take your time when shopping for insurance coverage, and always read insurance policies carefully so you know exactly what you’re getting.
4. Spending More than You Make
Spending more than you make is the fastest road to despair and financial ruin. It’s a road that’s quite hard to recover from and one that leads to bankruptcy for thousands of Canadians every year. Majority of Canadians know that they need to live within your means, save money and make more than they spend – despite the majority knowing these basics, many Canadians are still in debt.
If you’re spending more than you make or barely make it by every month, here are a few reasons you’re likely spending more than you make:
- You don’t budget
- You justify all spending
- You don’t actually know what you’re truly earning
- You’re just coasting in life without proper planning and goals for the future
- You’re not earning enough to support your current lifestyle
The above are just of the reasons you may be spending more than you make. Gain control of your finances by simply knowing what’s coming in, and allocating the incoming money. If you don’t do it, nobody will do it for you.