Common Financial Mistakes That Employees Should Avoid

If 2018 is the year you’re going to focus on fitness, hobbies or learn something new like a musical instrument or driving, you’re going to have your hands full. So the last thing you would want to read is a list of financial resolutions you could make, such as setting aside more time to check your bills and managing your hobbies and money with a full time job.
But even if you aren’t ready to take such proactive steps in managing your money, you could still quite easily make some real improvements. Below are some of the most frequent financial mistakes – and how you can avoid them.

• Trying To Save Money When You Have Debt

Everyone should have some emergency savings in place as it’s absolutely essential for financial security. Most personal finance experts recommend having between three and six months’ worth of salary saved, so that you can weather out storms like unexpected bills, redundancy or household disasters.

However, if you’re saving more than that and you have expensive debt built up using credit cards, or high-interest personal loans, then it’s time to rethink. After all, the interest you will be paying on such debt will be much higher than the meagre returns you’re earning on your savings.

Keep an emergency fund but prioritise paying down your debt first. Otherwise it will cost you much more in the long run.

• Dipping Into an Unapproved Overdraft

It’s terribly easy to do. An unexpectedly large bill hits your doormat or you get a bit carried away on a shopping trip and suddenly you’re in the red and racing past the overdraft limit the bank has set.

An unauthorised overdraft is one of the most expensive ways to borrow money, with penalty fees and high interest charged. It can even damage your credit rating, making it harder for you to borrow in the future when you really need to.

If you think you’re heading for an unauthorised overdraft and you can’t avoid it then give your bank a call to see if you can temporarily extend your overdraft.

• Applying For The Wrong Products

Not all debt is bad and it’s perfectly possible that in 2017 it will make sense to apply for a loan or credit card. A common mistake people make is to apply for several products at once to see what rates they are offered, or to apply for a product they are unlikely to be accepted for.

These applications result in searches being carried out on your credit history that leaves a temporary footprint on your file. If you make more than one application then the footprint can put several lenders off. Multiple applications make you look like a higher risk to lenders and mean you end up paying higher interest rates.

Instead, browse the market by using a comparison site or lender that offers a ‘soft search’ first, allowing you to see whether or not you are likely to be accepted and if yes, then at what rate.

• Being Over-Insured

Under-insurance is a real danger that leaves people exposed when they are most vulnerable, but there’s another, lesser-known, mistake which is over-insurance. It is where you pay for more cover than you require, which can leave you paying a substantial monthly sum for no good reason or benefit.

What’s worse is, a surprising number of people do not realise they are insured twice through extras provided with their bank account, meaning they waste money unnecessarily. If you have a packaged current account, for instance, check what is included. If you receive phone, travel and breakdown cover, make sure you don’t pay for standalone policies as well.

• Spending Too Much Money At The End Of The Money

If this was a blog about positive steps that you can take to save and ‘detox’ your finances, then this is where we would suggest drawing up a budget. However, since this is about avoiding mistakes rather than making changes, we will simply suggest roughly dividing your disposable income by the number of weeks in a month.

When you know how much you have to spend each week, you can make sure you don’t overspend at the beginning of the month. Using up the month’s money too fast is what leaves you vulnerable to unplanned debt and financial shocks.

• Making Minimum Repayments

When you do have a credit card debt, it can be tempting for you to pay off just the minimum amount each month. However, that’s a tactic that can really backfire as it means you’re left paying interest for far, far longer, resulting in a much higher overall amount.

Clearing the debt by more than the minimum can save you hundreds of pounds in the long run, even if it is tough to manage on a monthly basis.

• Not Getting Money You’re Owed

A lot of people do not get money they are entitled to and this can leave them struggling. As it often happens, we give away money to our friends or somebody in the family and either forget about it or procrastinate asking for it. You should not wait until the time you are in a financial crisis to ask for that money. This money that you get back can be the reserve that should help you last the entire month.

• Excessive Spending

Great fortunes are often lost one buck at a time. It may not seem like a big deal when you pick up that double-mocha cappuccino, stop for a pack of cigarettes, or have dinner at an elite hotel, but every little item adds up. If you’re enduring financial hardship, avoiding this mistake really matters – after all, if you’re only a few pounds away from foreclosure or bankruptcy, every buck will count more than ever.

• Never-Ending Payments

Ask yourself if you really need items that keep you paying every month, year after year. Things like cable television, subscription radio and video games, cell phones and pagers can force you to pay unceasingly but leave you owning nothing. When money is tight, or you just want to save more, creating a simpler lifestyle can go a long way to fattening your savings and cushioning your from financial hardship.

• Buying a New Car

Millions of new cars are sold each year, although few buyers can afford to pay for them in cash. However, the inability to pay cash for a new car means an inability to afford the car. After all, being able to afford the total payment is not the same as being able to afford the car. Furthermore, by borrowing money to buy a new car, the consumer pays interest on a depreciating asset, which amplifies the difference between the value of the car and the price paid for it. What’s worse is, many people trade in their cars every 2 or 3 years, and lose money on every trade.

Sometimes a person has no choice but to take out a loan to buy a car, but how much does any consumer really need a large SUV? Such vehicles are expensive to buy, insure and fuel. Unless you tow a boat or trailer, or need an SUV to earn a living, is an eight-cylinder engine worth the extra cost of taking out a larger loan?

If you need to buy a car and/or borrow money to do so, consider buying one that uses less fuel and costs less to insure and maintain. Cars are expensive. You might need one, but if you’re buying more car than you require, you’re burning through money that could have been saved or used to pay off debt.

The Bottom Line

To steer you away from the dangers of overspending, start by monitoring the little expenses that can add up quickly, then move on to monitoring the big expenses. Think carefully before adding new debts to your list of payments, and keep in mind that being able to make a payment isn’t the same as being able to afford the purchase. Finally, look for places where you could be entitled to get money by reclaiming and make saving some of what you earn a monthly priority.


  About

  Lewis Donnelly is a finance fanatic who works as a freelance writer in Northampton with his core areas of interest being reclaiming PPI, digital marketing and HR. A working professional by day and writer by night, he is always enthusiastic about describing himself in the third person!.


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