If nothing else, this latest recession has made us brutally aware of what we don’t know. Young adults are graduating college lacking a basic proficiency in financial literacy. Employers are finding that their employees don’t understand their paychecks, much less their retirement plans. And every day people make bad monetary choices that can end up costing them for years to come. Here are some of the more common, and costly, every day mistakes and ways that people can avoid them.
1. Not having an emergency fund. Experts recommend that everyone have a three-month emergency fund—at least. You never know when you’re going to get a flat tire or a leaky pipe—emergencies that happen all of the time but that can become very expensive if you’re not ready for them. Having to borrow money on a high interest credit card can cost you hundreds in wasted interest payments.
What happens if you lose your job and have to dip into your emergency fund? First, don’t stress. It’s ok to use the emergency fund for rent or food—for needs. It’s not such a good idea to use it for that pair of shoes you really want or a night on the town. During a recession it can be hard to have and maintain an emergency fund. That’s ok, as long as you save what you can.
2. Slow leakers. These are the people who spend money on bottled water and daily Starbucks runs. The people who use their debit card for everything, no matter how small, and then forget to include these little things when they balance their bank account or budget. Even that $2 coffee can lead to overdraft fees.
3. Bad budgeters. These are the people who forget about certain expenses and therefore don’t budget for them. Or, they don’t budget at all, and wonder why they don’t have any money at the end of each month.
4. Minimum wagers. Paying just the minimum on your credit card is another expensive mistake. The bigger the balance, the longer it will take for you to pay it off and the more you will spend paying the interest. If possible, only use your credit cards for emergencies and pay off the entire balance on time. If that’s not possible, pay off as much as you can each month.
5. Plastic life. Living off of a credit card is one of the worst money mistakes that you can make. If you are living off your credit card this probably means that you are spending more than you’re earning, a big budgetary no-no. If you are out of work and out of money, you may have to live off your credit card for a while, but, in this case, you should really tighten your belt and spend as little money as possible. In addition, try to find a credit card with a low interest rate. A credit card is like a loan, meaning that the money will have to be paid back, with interest.
6. No doggy bag. It is possible to have some money leftover from a college or personal loan. As tempting as it may be do not use this money for anything other than paying back what you borrowed. Loans have to be repaid. The longer it takes to repay them the more money you’re going to end up paying in interest. Instead of spending any leftover loan money, simply use it to pay back what you have borrowed. In fact, it’s a good idea to make a loan repayment plan and begin paying back your loan as soon as you possibly can.
7. Too much, too young. Many young people make the mistake of thinking that they need to build credit while they are still in college. While it is always good to have good credit, it is not always necessary to have credit—period. Remember, it’s a lot easier to turn your credit bad than to keep it good. Don’t open a ton of accounts trying to quickly build up your credit. In reality, it only takes three months to build an adequate credit history.
No one can be perfect all of the time but if you can avoid making some of these costly mistakes you can save both time, money, and a lot of headache.