American culture is inextricably tied with capitalism, materialism and debt. It seems that no matter how hard individuals and households try to save money and manage their finances well, financial security is elusive to most. Seventy-seven percent of American adults surveyed said that they are “always trying to save money,” yet out of the 47% of US households who have credit card debt, the average amount owed is $14,517. So why does such a discrepancy exist? Maybe their methods of financial management need reexamination. Here are six of the most common budgeting mistakes that Americans make every day.
1. Not living within your means. If you spend more than you make, you will eventually have nothing, and then you will have less than nothing. When you have less than nothing, everything is more expensive because you borrow to buy it. A budget is crucial; it doesn’t have to be precise to the penny and it doesn’t have to be complicated, but you need to know how much you make, how much you spend and how you spend it. When you start to have money left at the end of the month, save it!
2. Not saving for emergencies. If you live paycheck to paycheck, you are unprepared to handle non-routine expenses which are, statistically speaking, guaranteed to happen eventually. Something as simple as an unexpected week off work to care for a sick family member, a little fender-bender or an appliance that suddenly bites the dust becomes a catastrophe if you don’t have some savings to cover the immediate costs. Without savings, people use cash-advance services or credit cards, which will both cost far more in the long run with interest and other fees. Such situations often lead to a slippery slope of debt. One of the easiest ways to save is to have money taken directly from your paycheck to a savings account so that your savings can grow consistently.
3. Buying more car and house than you need. A car is a depreciating asset; the longer you own it, the less value it has. If you borrow money to pay for it, as most buyers do, you’re paying interest on a depreciated asset. If you need personal transportation to and from work, an SUV or large truck is much more car than you need, and it will be more expensive to buy, fuel and maintain. Unless you need it for towing or hauling power, you don’t need it. The same mentality applies to housing. A bigger house is not always better. While you need sufficient space for living, the rest is just extra. A bigger house means a higher mortgage payment each month, while if you bought a house just big enough for your needs, you could pay it off sooner and save money in interest as well. Factor in higher property taxes, maintenance and the time it takes to keep all that space clean and organized, and that McMansion suddenly looks a lot less appealing.
4. Paying again and again. Maintaining subscriptions, services and membership fees is like giving a retail store money when you walk in the door regardless of whether you actually buy anything. If you don’t watch most of the channels in your cable package, visit the gym just once a month or barely skim the magazines that arrive in the mailbox, why pay for them? Rethink whether you are still interested in the service; if so, consider other less expensive ways to achieve the same end. If not, just cancel it already!
5. Treating investing as a game. Fact: you can’t maximize returns on stocks simply by “timing the market” or suddenly “getting lucky” and having one of your obscure stocks become the next big thing. The stock market is not a slot machine or a lottery. Trying to make a quick buck in the short term by constantly buying and selling will earn you a headache and stress but probably not profits. Be rational in your investing; a solid portfolio will have both high-risk and low-risk assets working over time to build wealth.
6. Not checking your credit score. Your credit score is a number that will determine interest rates on car loans, home mortgages and insurance. The quality of your score could cost or save you thousands in the long run, so why wouldn’t you want to know it and maximize it? The three credit rating agencies –Equifax, Experian and Transunion- are each required to provide you with a free report once per year. Check the report carefully for clerical mistakes that could harm your credit score. The report is also a straightforward way to detect and stop fraud before it causes irreparable damage. This simple check performed just a few times each year can save you money and hassle in the long term.
Since the recession began, Americans have been learning – almost always the hard way –the value of thrift, the problem with keeping up with the Joneses, and the necessity of saving for emergencies. Saving money doesn’t have to be a full-time job itself, but it does take discipline and conscientiousness. This list is not a complete how-to for saving, but it provides key points to begin tackling your individual financial problems. After all, the first step of any process is the hardest.