Financial pitfalls can be very costly and can set you back financially for many years.
In order to be able to move forward in your financial goals and not derail from them, you needs to identify these financial pitfalls and put measures in place to avoid them.
So which financial pitfalls should you avoid this year?
1. Not setting boundaries
Many people have a hard time setting boundaries, financial or otherwise. Setting financial boundaries, or boundaries, in general, is one of the single most important things that you need to do before you start taking control of your money. If you don't have boundaries in place. This will lead to impulsive purchases and poor financial decisions.
2. Not investing
In investing we make use of compound interest. The longer you delay investing, the less time your money will be able to work for you.
The reason is that compounding is dependent on time. So the longer your money stays in a tax favored account, the more profit you will get from compounding. Thus investing early rather than later, is beneficial for building wealth. Whenever you do start investing, make sure you put measures in place to reduce your financial risks.
3. Not having insurance
Insurance protects the assets that you acquire as you build wealth, and also prevents you from going into debt. When emergencies or unforeseen events like a car breakdown, illness, job loss or death happen you want to have measures in place to take care of those emergencies or replace that income without going into debt.The easiest way to overcome these roadblocks is by having insurance. For Example, car insurance will protect you if your car breaks down, health insurance takes care of your bills when you need to make that emergency trip to the hospital, life insurance will protect your beneficiaries if you pass away.
4.Using debt as a wealth building tool
A lot of people are comfortable with debt because “everyone has debt”.Society has normalized debt preventing you from appreciating the disadvantages of having debt. Sometimes in building wealth, you have to go against what society deems as normal.
People usually go into debt because they do not have enough money saved up to cover expected or unplanned expenses or emergencies that may arise. It is estimated that 51 million Americans saw an increase in their credit card debt as a result of the pandemic.
Debt ties up your income thereby delaying investing. It takes up money. You could otherwise have used to invest and make use of compound interest. To break away from the masses and build wealth faster, you need a mindset change. Understanding the debt takes up your income,delaying your ability to invest, is the first step to getting rid of your debt.
5. Buying a house without budgeting
The advantages of buying a house include;
Being able to customize the features exactly how you want them
It gives you that sentimental value because you have a place that you can call home and your kids can come home to.
It can be a good investment
On the other hand , buying a house like any investment involves taking risks.
Often times when people compare renting and buying they fail to compare the true value of buying a house. They usually compare the monthly mortgage to the rents that are paid every month. The actual comparison should be,
The mortgage, annual taxes, costs of renovations and repairs of the house against the rents that are paid every month.
Other costs that should be taken into account include:
Cost of closing the sale
Cost of selling the house
Relocation costs
Consider computing your numbers before you buy a house, then compare it to how much you're paying in rent.
Financial pitfalls are easy to miss but can slow down your financial progress. Being mindful of them helps you avoid them.
What are other financial mistakes that can cause a person to take on more debt?