13 Common Money Mistakes to Avoid

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People make mistakes. Mistakes involving money are no different. However, money mistakes have the potential to make our lives much more difficult than they need to be. To help you identify and hopefully avoid these mistakes, I’ve compiled a list of 13 common money mistakes to avoid below:

Table of Contents

Not Having a Financial Plan

To get where you want to go financially, you need a plan. It serves as a guidance document that will inform the financial decisions you make.

Some items that you should consider including in your financial plan are:

Current Net Worth – this gives you a snapshot of your current wealth and, along with you budget, should illuminate which assets and liabilities are harming your net worth and should be eliminated as soon as possible.
Financial Goals – This includes savings and investing goals. This may also include goals for increasing income, lowering or eliminating certain expenses and paying off debt.
Debt Repayment Planning – this should include how much you anticipate being able to devote to paying off debt each month, what debt repayment strategy you’ll be using (debt avalanche, debt snowball, etc.), and how long it will take you to become debt-free.
Saving and Investing Planning –
- What are you saving for? Emergency Fund? Retirement? Car replacement?
- How much will you save each month to meet your saving and investing goals?
- How long will it take you to achieve each goal?
- What mix of investments will you use to meet your investing goals?
Insurance Needs – both health and life
Retirement Planning – there may be some overlap between your retirement planning and your saving and investing planning, however your retirement planning should be specific to your retirement goals.
- How much do you anticipate needing in retirement?
  - What about insurance costs?
- What retirement mix do you anticipate having in retirement? Pension? 401k? IRA? Social Security?
- How much do I need to save each year to meet these retirement goals?
- How many years until retirement? What will my age be and what will I be eligible for?
Estate Planning – you went through all of the trouble of living frugally, saving, and investing, so if something happens to you, don’t you want to make sure your loved ones reap the benefits?

Once you’ve developed your financial plan, it’s important to revisit it regularly (monthly or quarterly) and update it annually to ensure your still heading in the right direction and that your goals haven’t changed.

Not Having a Budget

A simple, monthly budget is your personal income statement. It tells you how much income you are generating each month, how much you’re spending on expenses, and what’s left over for actions like paying down debt, saving, and investing.

For more information about creating a budget, check out: How to Create a Simple Monthly Household Budget

Spending Money on Stuff You Don’t Need

When it comes to budgeting, there are financial needs (things like shelter, food, water, etc.) and financial wants (anything that’s not essential to earning money and survival).

To get ahead financially, you need to minimize the amount of money you spend on “wants”.

To cut down on “wants”, consider adopting mindful spending. The next time you go to purchase something you “want”, pause prior to making a purchase. Take a week or more to mull over the decision and consider:

How the purchase aligns with your values
Whether you really need the item
How much the item costs in hours worked using your “real hourly wage”
Performing research
- Consider alternatives
- Consider customer reviews for the item
How your life was affected by not purchasing the item immediately

To learn more about how to practice mindful spending, check out: How to Save Money Guilt Free with Mindful Spending

Not Having an Emergency Fund

An emergency fund is your life raft in the event that your financial ship starts sinking.

To use another analogy, it’s like a spare tire. When you’re driving along the highway and you have a flat, the spare tire allows you to quickly get back on the road. As long as you replace the tire that went flat at the next opportunity, your spare will be there the next time you have a flat.

The same is true for an emergency fund. You need one because it keeps smaller financial emergencies from becoming large, life-altering financial emergencies.

Let’s go through two scenarios: one with an emergency fund and one without.

*Scenario 1**: With an Emergency Fund*

In this scenario, let’s say you are the sole breadwinner for the household and have an emergency fund equivalent to 5 months of expenses.

One day, out of the blue, you get called into your boss’s office. With no warning, you find out that the company is in trouble and needs to make cuts to stay alive. Unfortunately, you are one of those cuts.

With the emergency fund in place and your expenses covered for 5 months, you’re able to calmly and rationally look for another job.

You find a job and start working in a position with comparable pay and benefits within 3 months. You spend a little time refilling the emergency fund, but ultimately, the layoff didn’t end up affecting you adversely in the long run.

Scenario 2: Without an Emergency Fund

In this scenario, let’s say you are the sole breadwinner for the household and have no emergency fund. Let’s say the same situation as above plays out.

With no emergency fund, you need money quickly and are desperate to find another job.

To start, you go to the bank and secure an equity line of credit on your house.

Next, you begin looking for another job, but because your desperate and need to start making money quickly, you find a job that pays considerably less than your previous job.

When everything is said and done, you now have more debt and have less earning power all because you didn’t plan ahead.

Also, if your new income doesn’t cover all of the debt each month, you run the risk of losing your house (your biggest asset) if you get to a point where you can’t make your payments each month.

The moral of the story is that you need an emergency fund.

To learn more about emergency funds, check out: Emergency Fund Guide: What, Why & How Much Money to Save

Not Saving or Investing

To get ahead with your finances, you need to have money to save and invest each month.

Once you’ve paid down your debt and have an emergency fund, at the very least you should be saving and investing for retirement.

However, as part of your financial plan, you should also be considering saving money towards maintenance and replacement costs for the major assets you have like your vehicles and home.

Letting Debt Hang Around

Debt will gladly stick around if you let it and mooch off of your hard-earned money.

Having debt limits how much of your spending power you can devote towards other areas of your finances like saving and investing.

Also, there’s a negative psychological effect to knowing that you owe money. It’s like a weight you drag around with you keeping you from being free.

The sooner you can pay off debt, the faster you can save and invest, and start putting your money to work for you.

Buying or Leasing a New Car

If you’re serious about meeting our financial goals, you don’t need a new car. New cars lose value quickly and will wreck your wealth building efforts.

According to Carfax, a new car can be worth as little as 40 percent of its original purchase price after five years.

Leases are even worse because there are mileage restrictions, fees associated with damage, and you don’t even own the vehicle when everything is said and done.

Instead, find a car a few years old and buy it for half the cost of new. Use the money you save to pay off debt or invest for the future.

Buying Too Much House

Don’t buy the biggest, most expensive house your lender says you can afford. They don’t know your financial situation as well as you. They’re strictly looking at your income, debts, and credit score, and aren’t considering the other monthly expenses you may have.

If you’re looking for a rule of thumb to help guide how much you should spend on housing, consider the 28% rule. Many financial advisors advocate spending less than 28% of your gross income on your monthly housing expenses (rent, mortgage, PMI, taxes, insurance, etc.).

The less you spend on housing, the faster you can pay it off and accelerate your saving and investing goals.

To learn more about how much to spend on housing, check out: What Percentage of Income Should Go To Housing?

Using Home Equity Like a Personal Checking Account

Your home is most likely your biggest asset. Under no circumstances should you take out a second mortgage and put your biggest asset in jeopardy. If you absolutely need the money, there are less risky ways to take out debt.

Also, I don’t personally advocate cash-out refinancing because it’s just taking out more debt. If you’ve been following your financial plan, you should have money in your savings that you can tap instead.

Also, even if you’re taking out the money to invest because you think you can achieve a higher return than the interest rate on your home loan, there are no guarantees. That investment could just as easily underperform over the time frame you choose to invest.

When it comes to investment risk, Warren Buffett says it best:

“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1” – Warren Buffett

Paying Off Debt Using Retirement Accounts

This is another cardinal sin. Do not use money in your retirement accounts to pay off debt. Not only will you most likely have to pay a penalty for taking out, you also won’t be able to put that money back in.

You’ll lose the years of tax-free compounding which can make a big difference over a longer time horizon.

Quitting Your Job without a Plan

This should be intuitive for most people, but you shouldn’t quit your job without having a plan in place first.

If you are just fed up with the company you work for and are looking elsewhere, try to secure another job before quitting the first one.

If you are starting your own company, make sure everything is in place before quitting. This may even mean working both jobs for a limited time until you can be certain your company will be profitable.

Staying at a Dead-End Job

On a related note, don’t stay at a job where you have no opportunity for advancement.

For most people, their job is their primary source of income. The more you can increase your income, the faster you can achieve your financial goals.

When your career has hit a proverbial wall, you may need to consider switching departments or even companies to keep growing and moving up in your career.

Investing Too Conservatively or Aggressively

This goes back to your financial plan. You need to make sure your financial plan is current and that you are investing to meet your financial goals.

If you require a 7% return on your investments each year, it doesn’t make sense to invest your money in equities that return 3% on average.

However, if you only have a couple of years until you’ll need the money and prefer a lower risk tolerance, it may mean revisiting your plan and updating it with a lower anticipated return. In this case, instead of investing more conservatively, you may just need to save more or work longer to meet your goals.

Investing either too conservatively or aggressively could mean you don’t have enough money when you need to withdraw it.