The most common mistakes we make when managing our money and how to avoid them
Despite the fact that financial education relates to matters that affect our daily lives, it is still something that is not included in our learning processes.
Because of this, we tend to make a lot of mistakes, especially when we are young adults, and we have to start managing our own money and our first paychecks.
What are the most common mistakes when it comes to saving and how do we avoid them?
- Spending more money than we earn
Because we don’t know how to manage our income, we often spend more money than we earn in a month. We assume we can repay the debts we accrue in the future, but we don’t realize the growing financial burden we are creating, from which it will be increasingly difficult to recover. Moreover, we have a tendency to spend income that we have not yet received, resulting in an increase in debt and putting us at risk if that income does not materialize.
To prevent this from happening, the best approach is to create a financial plan that clearly reflects our income and expenses. In this way, we can gain a perspective on the amount of expenses we can incur in a month.
- Failure to take savings into account
Savings must be an essential part of managing our finances. One of the biggest mistakes we make is not planning for the future and, therefore, not having an adequate savings plan. We tend to focus on the income and expenses we have in the moment, but we must also consider the future objectives we each have individually. When we begin managing our finances, we should prioritize upcoming expenses, such as buying or renting a home, purchasing a car, going on vacation, etc. We should then monitor our income and expenditure.
To achieve this, it is advisable to establish a savings plan that allows you to set the minimum and maximum amount you want to save each month according to your objectives or needs. By doing so, you can develop the financial cushion necessary to accomplish your future goals.
- Borrowing money
Every time we borrow, our purchasing power decreases. We often believe that credit is the solution to our problems. However, we often fail to fully consider the long-term repercussions of this debt. Before borrowing money, you should ask yourself a series of questions:
- Is the additional expense that comes with the debt truly affordable?
- How long will you be paying off the loan?
- Is the income received sufficient to apply for and cover the loan?
Once the scenario is set, if the answer to these questions is no or if it limits you financially, forget about applying for the loan and be realistic with the situation you are in.
- Failure to consider exceptional expenses
We need to bear in mind that we are not only responsible for recurring expenses, but we may also face unforeseen expenses that were not accounted for and will require additional spending. We never know what might happen, so it’s necessary to forecast possible expenses such as car breakdowns, home appliance repairs or replacements, fines, insurance premium increases, or fixed expense increases. In general, any kind of emergency.
That is why, in addition to the savings plan for the future that we have already mentioned, we must have a small cushion so that these extraordinary expenses do not put us in a financial hole. We need to categorize our income into fixed expenses, extraordinary expenses, savings, and variable expenses.
- Forgetting about small fixed costs
Forgetting that we have certain fixed expenses is also more common than we think. This statement is closely linked to the effective management of income and expenses we previously discussed. Sometimes, we purchase insurance or services that we later overlook as monthly expenses such as video or music streaming platforms, storage services, subscriptions, and so on.
It is very important to be aware of what we are contracting and to add these expenses to our financial map.
- Keeping unnecessary expenses
We tend to spend a lot on variable expenses each month, particularly those related to leisure and pleasure. Human beings are social beings, so they need certain activities to nurture their communal character. And sometimes we get carried away by our desires and this can lead us to spend more than we planned on social outings, meals, leisure activities, shopping and so on.
In this sense, it is crucial to avoid keeping unnecessary expenses as fixed, and to have a clear understanding of what expenses we can afford and what we cannot.