Money mistakes can be costly. From poor credit to no savings for emergencies or retirement, falling into major money pitfalls now can mean years of financial hardship. We surveyed the top financial planners to find out the six biggest money mistakes people make. We’ve got all the sage advice to avoid them, but if you have already taken a bad turn, we’ve put together a guide to help you recover.
Money Mistake: No. 1
NOT HAVING A BUDGET
“Most people don’t know where their money goes,” says Marlena Sonn, a Certified Financial Planner at Christopher Street Financial.
How to Avoid It: Keep a spending diary to track your monthly expenditures. Use only your ATM card for purchases, and at the end of the month, download the information into software such as Quicken (quicken.intuit.com) or Mint (mint.com). Once you know where the money is going, then you can decide where to gradually cut back. Sonn advises separating expenses into two buckets: “wants” and “needs.” Cut from the “wants” list, and use the money to create a savings cushion.
How to Recover: Create a budget that will actually work over the long term. To create a workable budget, Mina Ennin Black, a financial planner at WealthEssentials Money Management, advises breaking up your take-home pay as follows: 65 percent toward things you need, including groceries, rent or mortgage, utilities and transportation; 20 percent toward savings and debt reduction and 15 percent toward things you want (such as vacations and going out with friends). “That way, you can take care of your obligations and still enjoy life, too,” says Black.
Money Mistake: No. 2
Loaning money to family and friends instead of saving or paying down debt.
According to Prudential’s 2013 African American Financial Experience study, Black families are often financially responsible for family members. Fifty-seven percent of respondents said they provide financial support to another family member or unemployed friends—nearly double the rate of the general population.
How to Avoid It: Take a “no personal loan” policy or consider ways to help other than money. But if you do loan money, put things in writing and draw up a payment plan. You can use the online calculator at Bankrate.com to create a loan schedule. Determine ahead of time what will happen if repayment is not made on time.
How to Recover: If you’ve already loaned money, consider asking the person to complete a promissory note. You can get a complete note for $15 at LawDepot.com. If payment is overdue, don’t be shy about sending a reminder in writing. This lets the debtor know you are keeping track and developing a paper trail.
Money Mistake: No. 3
Living check to check and not having an emergency fund
Prudential’s study found that having “emergency savings” was the third priority, after paying down debt and saving for retirement. Most financial planners advise that emergency savings should be a top priority, even before retirement savings. “It’s important to have three months’ worth of cash in savings for emergencies—six months if you are self-employed,” says Sonn.
How to Avoid It: Pay yourself first. Automate your savings and set the money aside in an account that is not easily accessible.
How to Recover: Take serious steps to re-evaluate your budget to find money for savings. Michael Sangirardi, a financial advisor at Bryant Park Wealth Advisors offers these suggestions: Negotiate for lower interest rates on credit cards. Cut back on discretionary expenses, including dining out. Consolidate student loans, if possible. Review insurance plans for cheaper rates. Start keeping a diary of spending awareness. Keeping track of where your money is going can help you identify new areas where saving can be achieved.
Money Mistake: No. 4
Piling up debt on credit cards and not being aware of your credit score
According to Prudential’s study, 60 percent of African-Americans surveyed have significant credit card debt versus 45 percent of the general population. “Most people end up paying interest on their interest if they carry a balance over the long term,” says Sonn.
How to Avoid It: Keep credit card balances low. Your credit utilization rate—the amount of debt you have compared to your total available credit—determines about 30 percent of your credit score. Make sure to pull your credit report every four months using the free website annualcreditreport.com to monitor your credit and let the credit reporting agencies know if there are errors. Also, get your FICO score (myfico.com). It is the one most used by lenders.
How to Recover: “Cut up your credit cards, but don’t close the accounts,” says Sonn. Next, make a budget, and start saving to create a cash savings for unexpected expenses.
Money Mistake: No. 5
Not having life insurance, a will or long-term
60 percent of African-Americans surveyed have significant credit card debt versus 45 percent of the general population.