While it may seem that everyone around you spends money like water, you can (and should!) think about what you do with your money and take steps to avoid costly mistakes. Banks and retailers profit off people who don't have a solid understanding of personal finance basics – you can break free and begin building a strong financial future by avoiding these 4 popular personal finance mistakes:
1. Believing the state lottery is your ticket to riches.
Sure, someone is going to win the lottery, and you've got just as much chance as the next person, right? If you consider a one in 80 million chance to win a “chance”, then yes! People who throw a dollar or two at the lottery once in awhile are not going to blow their chances at investing and saving their way to financial freedom – but individuals who play the lottery regularly and put all of their hopes and dreams on winning are blowing their money. If you took the money you usually spend on the lottery each week, you could be growing a nest egg through investing and compounding interest over the years.
2. Forgetting to enjoy some of your cash.
This may seem contradictory in a post about avoiding mistakes – but it's important that you use some of your hard earned money for enjoyment purposes. Experts will tell you to pay yourself first, but if you become a chronic saver, living so frugally that you give up all life's little pleasures you end up forgetting to enjoy life itself! What are you saving for if you never take the time to enjoy it?
3. Carrying credit card debt.
Anyone who has a balance on a credit card (or more than one card...) from month to month is making a huge financial blunder that will affect their bottom line for years to come. Carrying a credit card balance means you're paying finance charges and interest on things you've purchased previously – often making the cost of those items double or even triple the price tag before they're finally paid for! Do yourself a favor and focus on paying off your credit cards as soon as possible. Then, if you decide to use a credit card for making a purchase – do not carry a balance! Pay it off in full when the bill comes, preferably within the grace period – to avoid paying finance charges and interest on the purchase. The money you save over a lifetime of buying things this way over carrying credit card balances is astounding – and is much better used in savings and investments.
4. Financing your car.
Some people like to drive around in a new car. It feels good. You look good. You can impress your friends and co-workers with your “hot” new wheels, right? Buying a new car with financing is hardly ever a good financial move. Consider that most new cars lose 30% of their value within the first year, and some lose it as soon as you drive the car off the show room floor! Combine the loss of value with the standard 8% to 10% interest on a car loan and your financial mistake becomes more clear. Unless you're driving that car until it's dead and buried before getting another car – chances are you can't show that financing a new car is a good investment or use of your money. Instead, purchase a car you can buy with cash – or at the very least, get a used car (the used cars have already lost the biggest part of their value when the last person bought it new!) with a low interest loan.