I’ve been successfully managing personal finances for over 25 years. Over those years I’ve learned a lot and made lots of mistakes.  I want to share five of these common money management mistakes and I how I resolved them to help you avoid them or fix them if you are currently stuck.  These strategies took me years to learn, but you can take these lessons and apply them today to start managing your money more effectively.

Mistake #1 – You already track your money so you don’t need a budget

I’m an accountant by trade.  I love numbers.  I love tracking them, I love categorizing them and I love analyzing them.   My husband jokes that our life is on a balance sheet. I spent years, at the end of each month, tracking where all my money came from and where it went.

I used apps on my computer and phone like mint.com.  When I started my own business, I moved everything to QuickBooks (I know.. that might be overkill, but I AM an accountant). And every month, I’d look at what I’d spent and think hmm…we seem to have eaten out a lot last month, thank god I just finished paying off the car so I have extra money now, or who the heck bought all those new sports clothes (I’m blaming my husband for that one).

The problem was that while it was great to look at what I had been doing, I was not pro-actively managing where my money was going. By the time I knew, it was too late to change anything.  And let me tell you, I didn’t very often end up with extra money to put into savings.

Lesson learned:  Plan where your money goes and track it to make sure you stay on your path.

You should start by tracking your money.  There are great apps like mint.com (it’s free) that you can use.  Once you have a few months under your belt, sit down, look at how you are spending your money, and start to think about how you wish you were spending your money.

Create a WRITTEN budget plan.

It doesn’t have to be complicated.  Make sure you include what you need to spend to live, money to pay off debt, and money to put into savings.  You can look at your historical spending to figure out what works in your life.   Your future will look an awful lot like your past. Don’t forget to include the right amounts for debt management and savings. If you want to learn about budgeting your money, read my blog  “What’s a Budget?  (and how to create one)”

Mistake #2 – Waiting until you have a bunch of money set aside to start investing.

The idea of investing scared me to death.   I felt like I had to know how it worked before I started or how would I know I was doing it right?  If I got it wrong, maybe I’d lose everything I’d worked so hard to save. What if the market tanked.  When should I buy in?  When should I sell?  Do you buy stocks, mutual funds, bonds, or one of those other things that I don’t understand?  How do I know what to buy, with so many choices? What do I need to know about loads, expense ratios and derivatives?

On top of it, I thought I needed a bunch of money, like thousands of dollars, before I could start investing.   So, I waited.

The problem? My money sat in a savings account earning 1% for a couple of years.   Those are years I could have been investing it and earning 10% or more.  That’s money I will never get back.

Lesson learned:  Start investing today and do it consistently

There are two lessons I learned here.

One, open up an account and get started today.  I personally use Fidelity (this is not a professional endorsement, just based on personal experience), though there are lots of other comparable firms you can take a look at as well.  You can open an account for free.   You heard that correctly.  Free. And continuing to use Fidelity as an example, they have no-minimum investment mutual funds that you can start investing in right away.  That means you can start investing today, with $1.   They are also what’s called market index funds.  These are mutual funds that have a team of professional money managers that buy and sell stocks in a way that tracks to what the overall stock market is doing.  I love market index funds.  Easy peeze to buy and sell and someone who knows what they are doing is managing it for me.   (for the sake of full disclosure, investing in the stock market is risky, and you need to balance how much money you want to make with how much time you have to make it)

The second lesson was that not only do you need to start investing, but you need to continue to put money into the market consistently. The market will be up and it will be down.  You can’t time the market.   There is tons of research out there that shows that the people who make out the best are the people who are consistent over the long term. Final thought….investing does not have to be complex or hard, but you should find ways to learn more.  Your investments are the key to a successful retirement so it’s worth a bit of time and education even if you are using a personal adviser to manage things for you.  

Mistake #3 – Taking on debt you don’t understand

When I was in my late twenties, I had a mortgage that was at a fixed rate for the first five years and then it went to a variable rate at whatever the market rate was after that.  All I knew was that my monthly payment was $675 and I could afford that. At that time in my life I had zero wiggle room in my budget.  Every penny flew out the door.

But I was good, right? Wrong.

Year five rolled around, the economy was in chaos, and the interest rate went from 5% that I had been paying to the new market reality of 12%.  My new mortgage payment was $1200.   Let me tell you….that was not a good month in my house… nor were all the months that followed. The problem was that I didn’t understand how a mortgage really worked.  I heard $675 and I was done asking questions.

Lesson learned:  Know what financial obligations you are getting yourself into when you commit to debt

I recommend that you come up with a list of questions you need answered before you sign up for a mortgage, a credit card, a car loan or any other debt.  Ask some friends for their ideas on what you need to ask so you don’t miss anything.  Make sure you know the answers before you commit to anything.  And beware of the salesman that tries to get you to sign before you know what you are committing to.   Be firm.  Tell them to wait. Some questions to include (but absolutely may not be all, depending on what you are doing)

  • What is the monthly payment?
  • What is the interest rate?
  • What is being financed (purchase price, fees, taxes)?
  • When you add up the purchase price and all the interest, how much total will you end up paying?
  • Can you pay it off early with no penalties?
  • What happens if you are late or miss a payment? (I know…that won’t happen, but you need to know)
  • What’s the impact to all your numbers if you put down more/less and finance it for a shorter/longer period of time.

If you are taking on debt, because the reality is you probably will at some point in your life, make sure you know what you are getting yourself it.

Mistake #4 – Thinking you will eventually make enough money to catch up on your retirement so you don’t save anything.

Life has a funny way of happening.  In my twenties I thought retirement was for old people.  In my thirties, I had a kid with all the accompanying costs, so there was no room for retirement savings. I was 37 before I started my retirement planning.  And…because I am a number nerd….I played with some numbers, and this is what I learned.

Age to start saving 27 37
Amount to save each year until I retire $2,750 $7,500
Average market return 10% 10%
Savings at retirement $1,000,000 $1,000,000

Yup.  That was a pretty sucky day too.    If I had started saving 10 years earlier, I would only need to save $2,750 each year until I retired to get to a million dollars.  Because I waited, I would now have to save $7,500 each year to get the same thing. Yes, I was making more money 10 years later, but I could be doing so many other things with that extra $5,000 each year.

Lesson learned:  Start saving now!

Start saving where ever you can. You CAN start now, no matter how tight things may be. There are two things you can do.  If you can fit it in your current plan, automate your savings.  Get it direct deposited with your paycheck, or if that isn’t available, every time you write your mortgage or rent check, write yourself a savings check.

The second thing you can do is figure out an extra way to make money that gets directed into savings.  That may be a side hustle, a better job, saving a bonus or refund check, or cleaning out your house and selling junk you don’t need anymore. Remember while you are doing this, savings is part of the five segments of the FAST Money Management System.  It lives alongside budgeting, debt management, investing and retirement planning.  All the pieces need to be working together!

Mistake # 5 – Not having an emergency fund or not having a big enough emergency fund

When my husband was 49 he was training for an Ironman Triathlon.  I know…crazy, swim 2.4 miles, bike 112 miles, then finish with a 26-mile marathon. He trained about 20 hours each week and was in the best shape of his life.  And then he got hurt. He worked for himself.  He was out or work for five months.

You know the drill, you don’t work, you don’t get paid. We didn’t plan his injury. We did plan for and had an emergency fund. All good right?  Well, we had a solid six months set aside.  That was good.  I have to tell you though….getting to that fifth month, knowing we only had a month of leeway left was pretty stressful.

Lesson learned:  Build your emergency fund and make sure it’s the right amount for your life.

If you don’t have an emergency fund, you need to start planning one into your money management plan today.  I hope you never have to use it, but if you need it, it’s a life changer.  It may take years to get it built up to the level you want. That’s okay.  If you start now, you will get there.

Take a look at your life and make sure that whatever number you set for a goal makes sense.  Your emergency fund should cover all your life necessities, including debt you need to pay monthly. General guidance says you should have 4-6 months set aside.  Again, you need to look at your life and come up with a number that makes sense for you.

Since our recent experience, we have determined that since we are both self-employed, we want that number to be more like 9-12 months.  That’s what will work for our lives, in our Personal Financial Plan.

Remember, there are lots of parts to your money management plan including budgeting, debt management, saving, investing and retirement planning.  After you put together your plan to make them all work together, you will be way more confident in the details of how you manage each section.  You will be better prepared to work on the kind of details we just went over.  Take a deep breath….you can do this!

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1 Comment

  1. Linda Hannon

    Any of these sound familiar? What’s your biggest money mistake?