Managing your finances is the best way to build wealth and bring security to your future, but there are many traps that can easily cause you to fall off track. Here are a few common issues people run into, as well as solutions to counteract them.
Not Planning in Advance
The majority of consumers pay their premiums such as health, car, home, and other insurance costs, annually. If you do not plan ahead, the sudden appearance of one of these large bills can throw your monthly budget dramatically off track, not only causing stress, but derailing your financial planning strategy. For financial security, leave a cushion for unexpected costs, and distribute the money for your insurance bills between all twelve months of the year instead of allowing them to pile up all at once.
Caving in to Pressure
Advertisements and pushy salespeople are paid to get you to part with your money. Avoid falling victim to these by practicing using the word “NO.” When you see an attractive advertisement, ask yourself if you really need what they are selling, and look at your shopping list to reinforce your answer. If it is on your list, go for it; if not, keep walking. Sales people will cajole, compliment, degrade and try just about every trick in the book to get you to buy their products. A good way to respond is to listen to their pitch and politely inform them that you will consider it for another time.
Improper Use of Unexpected Money
Sometimes we get money that was not planned for, and thus is deemed “extra”. Funds from sources such as inheritance, a tax return, gift money, or even a bonus from your job all fall under this category. Most families use these funds to splurge on vacations, luxuries, or items that were on the original spending plan, thus adding to their savings. A better way to put unexpected funds to good use is by immediately using half to add to your savings account, a quarter to pay down any credit card debt, and the remainder for family fun so you do not feel that you are denying yourself. Another option is to make any previously planned large purchases while you have cash. This will allow you to reduce your interest payments and give your budget breathing room for the rest of the year.
There is no replacement for the little pleasures of life, but that does not mean you should spend money on them freely. Small impulse purchases are one of the fastest ways to reduce your savings to zero without ever knowing where that money went. To cut down on these little expenses, make a list before you go to the store—and that means any kind of store. Only purchase the items on your list, unless of course you forgot to add your medication or something critical to the list. Plan “fun” money into your budget and use it where it will do the most good. This way you can allow yourself to buy some of those small things without feeling guilty or losing sight of your long term strategy.
Underestimating the Cost of Ownership
When you make a large purchase—or even a small one, in some cases—there are additional charges that come along with that purchase. For example, buying a car adds monthly cost of gas, insurance, and maintenance. If you do not buy it outright, you also have to include interest charges. The same goes for purchasing expensive electronic devices, a home, or major appliances. By including these hidden expenses in your plans you can stay within your budget without depriving yourself.