The Most Costly Financial Mistakes
The Most Costly Financial Mistakes
When it comes to your finances, it’s not always enough to do the right thing. Avoiding the wrong thing can be just as critical. Even a seemingly minor monetary blunder could have huge consequences down the road, derailing your retirement, impacting your ability to buy a home, and making your life more complicated than it needs to be.
Worst of all, many people make mistakes with their finances without even knowing it. If you think your finances are on track, you may want to look a bit closer. Here are some of the most common, and most costly, financial mistakes people make.
Know the Difference Between a Rainy Day Fund and an Emergency Fund
There is a lot of confusion about what an emergency fund is and what it should be used for. Specifically, many people confuse the emergency fund with the smaller rainy day fund, using the two accounts interchangeably and suffering financial harm as a result.
Not having both an emergency fund and a rainy day account is a common financial blunder, but one that is easy to avoid. Think of the rainy day fund as an insurance policy against small unexpected expenses, like a sudden increase in gas prices or a spike in overall inflation. Setting aside a small amount of money to cover those relatively minor increases in your cost of living is a great way to keep your finances on track, so you do not have to stop investing for retirement to meet your current expenses. When things settle down, you can use extra cash to replenish that rainy day fund, so you will be ready for the next small financial shock.
An emergency fund, on the other hand, is just what the name implies. This larger account should be reserved for true financial emergencies, like unforeseen healthcare expenses, a sudden job loss, or a catastrophic breakdown in the car you drive. Financial experts recommend that all workers have a minimum of six to twelve months of living expenses in their emergency fund, and that is over and above the cash in a rainy day fund.
Upsizing Your Lifestyle When You Get a Raise
In the wake of a promotion or significant salary increase, it is tempting to ramp up your lifestyle. After all, you worked hard to get where you are, so why shouldn't you reward yourself? But before you buy that fancy car or move into a more expensive home, you need to consider the financial implications.
Living below your means is the key to building wealth. Whether you are toiling away in the mailroom or spending your work days in the corner office, spending less than you earn is the only sure way to achieve financial success.
That does not mean you cannot treat yourself or enjoy the fruits of your labor. It just means you should avoid automatically ramping up your spending every time your salary increases.
Playing it Too Safe
Safety is certainly desirable - few people would walk down a dark alley in the middle of the night if they could avoid it. But there are some realms where too much safety is a bad thing, and that includes your finances.
Playing it too safe, especially when you are young, could be deadly to your finances. Avoiding the stock market because of its supposed risk could mean missing out on huge gains that are simply not available anywhere else, and parking investments in cash could mean giving up those interest rate gains to inflation.
While taking too much risk is also bad, playing it too safe is almost always a financial blunder. The amount of risk you can afford will depend on a number of different factors, including your age, the stability of your job, and your future retirement plans. If you think you are playing it too safe, it may be time to sit down with a financial advisor to review your holdings and make a few adjustments. The investment team at Eaton Community Bank may be the perfect place to start.
Sometimes you know you are making a mistake, but other times the blunders happen without your knowledge. If you recognize any of the financial mistakes listed above, it may be time to turn things around. The good news is most financial mistakes can be undone pretty easily, allowing you to get your finances - and your life - back on track.