Editor’s note: This article was first published in June 2013. Its statements that in Spain the financial planner does not yet have the importance it should, and that many people pay more than 50% of their income on their mortgage, describe 2013.
We make plenty of mistakes when it comes to money. Managing your personal finances properly takes habits, guidelines and some knowledge of the strategies you’re going to follow.
Although in Spain the financial planner doesn’t yet carry the weight it should, in the United States these professionals advise not only companies but also couples of two kinds: those who have built up a lot of debt and want to get rid of it, and those who want to do everything right from the start so their finances stay healthy.
Without forgetting our previous article, The 6 most common bad financial habits, let’s look at a few other things we may never have thought about.
7 money mistakes we often make
1. Budget for the year, not the month
Many people draw up a monthly budget, so they know how much money will go on shopping, paying bills, and how much they can spend on leisure and save. A financial planner would tell you that your budget should be annual, setting from the start how much you should have saved by the end of the year. Keep in mind that some payments don’t come every month, such as car insurance or road tax, and that you need to set aside some money each month for unexpected expenses. If it isn’t spent, move that money into an emergency fund. Every three months, do what companies do and review your results to see whether you’re meeting your targets.
Various financial studies have shown that people who had an annual budget managed to save much more than those with a monthly one.
See also: 7 creative ways to save more money
2. Spending too much on housing
It’s often said that it’s very hard to get ahead if your mortgage payment is more than a third of your income. In Spain, many people pay even more than 50% of their income on their mortgage, and that seriously limits and erodes their chances of saving for the future. It’s not a bad idea to try renting for a couple of years until you have enough savings to take on a mortgage with peace of mind.
3. Not investing, or investing badly
Money has to be made to grow; it has to earn a return. It really isn’t hard to do. All it takes is a minimum of knowledge about finance and investing. I have nothing against tennis, football or Formula 1, but if many people took the same interest in a basic financial education as they do in sport, there would be far fewer money problems. Lacking that basic knowledge makes many people steer clear of equities, only to end up signing up for an investment product that’s far less profitable and riskier than the stock market, without having any control over their investment. Learn the basics. I insist: it isn’t complicated at all, as long as you take a minimum of interest.
4. The credit card trap
There are many types of credit cards, and there are now even cards that give you money back on your purchases. This makes us use card credit more and more. When it comes to credit cards, I’m blunt: I don’t want them. When your finances are shaky, it may be a good idea to have one in case it gets you out of a temporary jam, but always pay off the card balance at the end of the month. Most people don’t realise the financial death that credit cards can cause. They only become aware of it when the damage is already severe. (Credit cards: the saver’s worst enemy)
5. Not knowing how to shop, and not negotiating
When was the last time you negotiated the price with a shop assistant? You’ve probably never done it: if you go to buy a suit with a label saying it costs €450, you just buy it and pay.
I knew a businessman who always wanted at least 5% off the price on the label, especially for clothes, and if he was buying a lot he always got 10% off. For him, the sales lasted all year round. I once asked him whether doing that wasn’t a bit cheap.
He asked me whether I had a financial plan. I said no, so he told me: “When you have one, we’ll talk.” According to him, business is called business, or trade, because you trade and you negotiate. In his own company, customers negotiated with him to get good prices. So couldn’t a clothes shop with wide profit margins negotiate too? Clearly it could, because he always got his way. He said that this way he also stayed in practice.
As for not knowing how to shop: there are products we buy every week that keep for a very long time, such as cleaning products or toilet paper. It’s a good idea to buy them in bulk, enough for the whole year. That way you get better prices.
(Read: 10 ideas for making money by saving)
6. Earning money from a single source
If you don’t have any income-producing assets, what finance calls passive income, having only one source of income is dangerous, to say the least. First, because we adjust to the salary we earn, which may not leave enough to save; and second, because if you lose your job, the situation gets drastically worse. We’ll soon publish a whole range of business ideas for earning extra money.
At other times, the main problem is staying with the same source your whole life: many people settle into a job they don’t like because it gives them financial security. At that point, it’s worth asking yourself whether it’s really worth spending your whole life doing something that doesn’t fulfil you.
7. And debt
This is where that wretched problem of debt should go, but we’ve spent the whole week talking about debt and the problems it brings. If you have too much debt, draw up a financial plan tailored to you to get rid of it as soon as possible. You don’t need to go and live in a van like Ken Ilgunas did. Those who are just starting out should be very clear that, when it comes to debt, the less the better, unless it’s financing to start a business. And if the debt carries more than 8% interest, be very careful.
Further reading
Featured image: Giulia Forsythe, CC BY 2.0, via Flickr.
