Wednesday, October 26, 2016

20 Common Financial Mistakes People Make and How to Avoid Them

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Many Americans make common financial mistakes and keep making wrong financial decisions regarding their money. It takes 23 days to develop a habit and 23 days to start a new one. 

To stop making mistakes requires acknowledging that you are making a mistake and requires changing your mindset. It also requires discipline, determination, commitment, perseverance and the willingness to make a change and do better. 

Everyone makes mistakes but the key is to learn from them so that you do not make them again in the future. Unfortunately, most people did not learn good financial habits growing up and as a result have or continue to make bad financial mistakes and learn financial lessons and skills through trial-and-error. Learn from the financial mistakes of others to avoid losing money, stress and fights with your spouse or partner.

If you are currently experiencing financial difficulties, it is of vital importance that you avoid making financial mistakes because it is the key to surviving your difficult times. Avoid mistakes multiple mistakes regarding your finances and avoid procrastinating about making a change, this only makes your situation worse.

Common financial mistakes that people keep making can wreak havoc on your life and may lead to financial disaster. These twenty tips will help you improve your financial situation and overcome your past mistakes and set you on the right path to financial stability.

Mistake 1 - Overdraft fees on bank accounts.

Solution:  Use online banking or setup text or email alerts to remind you when your account balance is low.

Mistake 2 - Paying late fees.

Solution: Pay bills on time or call creditors to setup payment plans.

Mistake 3 - Not reporting all income on your taxes.

Solution: Report all income on taxes even if you are unsure if it should be reported, this reduces your tax liability.

Mistake 4 - Paying an over-the-limit fee or an annual fee on a credit card.

Solution: Monitor your credit card balance to ensure you do not go over your limit and read the credit card disclosure or terms and conditions of the credit card to avoid paying penalties.

Mistake 5 - Buying an item you cannot afford.

Solution: Only buy items you can afford to pay back, purchase items with cash to prevent going into debt.

Mistake 6 - Not tracking your spending.

Solution: Create a budget to track how much you earn, spend and owe and include debt and financial goals in your budget.

Mistake 7 - Using credit cards for everyday purchases.

Solution: Pay the balance in full at the end of each month or immediately after your purchase to avoid paying finance charges and paying more than the item is worth.

Mistake 8 - Using payday loans or cash advances.
Avoid quick fixes.  The interest rate can be as high as 200%.

Solution: Earn extra income through a part-time job, selling items at a garage sale or flea market, selling items online or at thrift stores.

Mistake 9 - Using checking cashing places or liquor stores to cash checks which charge high fees.

Solution: Use direct deposit for free. 

Mistake 10 - Credit score monitoring.

Solution: Avoid buying credit score monitoring, you can check your credit score yourself and most major banks offer a free option to view your credit score.

Mistake 11 - Not tracking spending. 

Solution: Record receipts of all purchases and reconcile daily, weekly or monthly to track spending and to catch errors quickly.

Mistake 12 - Not saving for retirement.

Solution: Retirement is meant for one person.   You will need enough income to cover your monthly bills and expenses for at least 30 years.

Mistake 13 – Using auto dealer financing.

Solution: Obtain an auto loan through your local bank or credit union that offer better deals and will give you the best interest rate based on your credit score.  Dealer financing comes with lots of extra fees and hidden costs.

Mistake 14 - Extending a loan.
Avoid extending the car loan for more than 4 years or extending a mortgage loan beyond 30 years.  Paying a couple of more points in interest and extending the loan for another year or two is expensive.

Solution: Obtain a loan you can afford. Purchase a cheaper auto or purchase a smaller home. One you pay it off you will be in a better financial position to upgrade.

Mistake 15 - Continuing to apply for credit once you have been denied or have maxed out your credit cards.
This lowers your credit score.

Solution: Use credit as a backup payment method. Use only two to three credit cards. Keep credit card balances at 20% or less of the limit. Use a debit card or cash to purchase items.

Mistake 16 - Misusing introductory rates.

Solution: When the introductory rates expire, the balance plus any new purchases are charged at a higher interest rate and you could end up owing more debt than you did before transferring the balance.

Mistake 17 - Using home equity loans to remodel a home or pay off debt.
If you experience difficulties in making payments, you could default on the loan and risk losing your home. Since the amount that you can borrow is based upon your home’s value, as the value of your home decreases, so does your equity.

Solution: Obtain a personal loan or line of credit, earn extra income or save up to pay the amount.

Mistake 18 - Using a credit card advance.
Few understand that payments made to the credit card will first go toward regular purchases. Since cash advances carry higher interest rates than credit cards, problems arise when balances are carried over and both interest and fees compound.

Solution: Earn extra income, obtain a personal loan or create an emergency savings account.

Mistake 19 - Withdrawals from your retirement account.
If you withdraw money prior to retirement age or if you leave your job, you’re obligated to pay back the entire borrowed amount generally within 30-60 days. If you don’t, the unpaid balance will be treated like a distribution and you’ll owe taxes on the money and be charged a penalty.

Solution: Create an emergency savings account to cover monthly bills and expenses for 9-12 months to reduce usage of credit card, home equity loans, and other risky financial products.

Mistake 20 – Not checking your credit report.

Solution: Check your credit report at least once a year and at least three months before to major purchase to ensure all the information is accurate and to avoid any surprise accounts that may appear on your reports that you are not aware of.


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