We all want a life that’s free of debt, where we’re not worried about our paychecks vanishing as soon as they appear and we’re able to create a financially secure future for ourselves.
Unfortunately a lot of us make some really big mistakes that jeopardise our entire financial future. This is perhaps a result of not receiving a great financial education but it’s never too late to learn and there are some useful tips here that will allow you to increase your odds of becoming financially independent.
Here are 5 of the most common financial mistakes people make that can have serious consequences, make sure you’re not committing them too!
An investor has the best chance to make a higher return and take on bigger risks when they have a long term horizon. Starting to focus on long term goals when we’re young means we have much more time of taking advantage of steady, long-term compound interest rates to generate a decent return.
By starting later, you can have a serious impact on the percentage you garner over the years. Applying investment fundamentals earlier on in life means that there’s a greater chance of having a larger portfolio later on. Not only that but diversifying into multiple streams and gaining a deeper hands-on experience much earlier on.
You don’t have to know a huge amount about investment to make your money work for you, but any extra knowledge you do learn is always a bonus. To get started, open an account with a mutual fund company that has no-load funds and low expense ratios. Build a diverse portfolio and you can expect to earn 8% to 10% annually on your investments over the long haul. This can amount to quite a lot over a long period and if you continually expand on your investment knowledge, you can steadily grow your annual returns.
Remember, it’s a gradual process. Leave the emotion at the door and invest sensibly, it will eventually reach great sums.
Buying a House You Can’t Afford
Generally speaking, the maximum mortgage someone should pursue is between 2 and 2.5 times of your annual gross income. In other words, those earning $100,000 per year can afford to mortgage between $200,000 and $250,000.
There are many reasons that borrowing more than this is a really bad idea. First of all, the markets can change quickly and you can be plunged into negative equity, rapidly. One of the biggest repercussions of the last great economic collapse was the bursting of property bubbles. Repossessions are still above normal levels and house prices are only still beginning to return to normal. What’s shocking is that people are being offered the chance to purchase large mortgages again, sometimes with as little a downpayment of 5%… history repeating itself?
You also don’t want to sacrifice your quality of living by trying to take on massive repayments. Keep it affordable and between the limits set above.
Using a Credit Card Debt
Racking up bills on credit by shopping for things like vacations, clothing and other items that are considered luxury is a recipe for disaster. If they’re not essentials then you shouldn’t be going into debt to purchase them.
This is how people end up creating tens of thousands of dollars worth of credit card debt and struggling for years to pay it off. Credit Cards can be wonderful when used in emergencies, but unless absolutely essential, you shouldn’t be purchasing on credit. Pay outright for the thing you want and, if you can’t afford it – save.
To be financially secure, you need to live below your means. One of the easiest ways to do this is to set yourself a budget and be incredibly strict with it. Set up an account specifically for bills and transfer a portion of your paycheque into it as soon as you get paid. Also set up a transfer of the amount you want to save from your wages as soon as it comes in as well.
The most obvious reason that you shouldn’t cosign a loan is that if the other person decides they’re not paying anymore, it falls back on you to pay. How well do you know a person?
On top of this, many people don’t know that cosigning affects their own debt-to-income ratio. This is the percentage of your debt payments in relation to your income and appears on your credit report.
It is a huge thing to ask someone to cosign a loan, and you should never feel pressured to enter into an agreement.
Not Taking Advantage of a company’s 401(k)
Perhaps one of the biggest mistakes that people make is not making the most of a company that offers a 401k. It’s a fantastic savings tool that will take away some of the guessing work when it comes to retirement. On top of this, contributions to a 401(k) are made in pre-tax dollars, so they reduce your taxable income – you’re being rewarded for looking after your retirement.
It’s recommended to save between 5-10% of your income into these funds but make sure to carefully read through your company’s terms and gauge how much you can afford you save. However, what a company is willing to match is really what you should be looking to save.
Investopedia: Mortgages – How Much Can You Afford
Investopedia: Common Mistakes Young Investors Make
Money Crashers: Cosigning a Loan – Understanding the Reasons & Risks
Prudential: Take advantage of your company’s 401(k) plan