It’s easy to get caught up in the craziness of New Year’s resolutions. While it’s not painful if you fall off the wagon on your “no chocolate for the year” resolution, it is painful if you fall into avoidable financial traps.
If you’re hoping to stay out of the financial doldrums in the new year, here are 10 financial mistakes to avoid:
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1. Not taking advantage of employer-paid benefits
Most employers will offer a benefits package that is a great kick-start to financial strength. Things like life insurance, short- and long-term disability, retirement planning, and health insurance are all ways to protect you and your family from falling into a financial tailspin.
2. Not understanding what your employer offers
If you are lucky enough to have an employer that offers basic protections, make sure you understand what you have. It can be confusing when you see Long Term Disability and Long Term Care. Or 401(k) and 403(b). Or if you have life insurance with your employer, what happens when you leave for another job? Talk to your Human Resources department or a financial professional to help you get the information you need to make sure your goals are aligned.
3. Solving current budget woes using future earnings like a raise or a bonus
If you’re spending more than you’re making, you need to make real adjustments to your budget to get back on track. Believing you’ll get that raise this year to offset your budget woes is a step in the wrong direction. Instead of banking on windfalls, explore options to earn extra money on the side, or take a hard look at your spending and see where you can make cuts.
4. Creating a budget of what you’d like to spend vs. what you really spend
Be honest. A good budget isn’t worth much if the numbers you rely on are inaccurate. Take a step back and take at least one month and keep track of all the things you spend money on. The results may surprise you! Then you can honestly create a budget based on real spending and saving. Oh, by the way, don’t forget to track all of the little things like coffee and snacks.
5. Putting off for tomorrow what you can do today
There are certain financial safegaurds that people know they should get, but never actually get around to checking off the list. We’re talking about things like life insurance, disability insurance, renter’s insurance … you get the idea. So here’s the deal, if you’re a new parent, getting life insurance is probably the best thing you can do for your family in the new year. If you rely heavily on your paycheck (oh wait – almost everyone?), then exploring disability insurance is another no-brainer. And finally, if you’re a renter, please please just kick yourself in the pants and get renter’s insurance. You never know what the coming year might bring — be prepared!
6. Using the credit card mentality over and over
That new 60” flat screen TV is on sale for $600. You don’t have the money in your checking account but you think: I can put it on my credit card and pay it off $35/month, plus interest. You would never pay 15% more for an item with cash, so why do that with a credit card? If you use your credit card for convenience, make sure you can pay it off completely before the end of the month.
7. Not accounting for irregular expenses such as oil changes, car or bike repairs, or when the license tabs are due
Those license tab renewals always come at the worst time. And your usually reliable commuter bike needs some repairs. Make sure you account for those small yet important financial obligations that inevitably arise. Here’s a quick tip to budget for those types of infrequent expenses: take what they cost and divide by 12. Make sure you set aside that money each month in your budget. This post, 10 Things That Need to Be In Your Household Budget is a good reminder of oft-forgotten items.
8. Buying too much house
Home-buying season is also right around the corner and many young couples are looking to get into a house of their own. One of the biggest mistakes new homeowners make is buying more house than they can actually afford. Monthly mortgage payments shouldn’t be more than 35% of your pre-tax income. If you can afford it, aim for a down payment of 20% of the home’s listing price to avoid paying for private mortgage insurance. Get more tips on purchasing a house by downloading the free Homebuyer’s Guide.
9. Buying a new car
Here’s another big purchase that can land people in hot water. Before you even think about buying a car, make sure you know your credit score, as that will effect the rate at which you will be able to get a loan (if you’re not paying for that car in cash). A standard car dealer trick is to talk to you about a car’s cost in terms of what you are willing to pay each month instead of the actual price. Know the total amount that you can spend and don’t go above that number.
10. Being overly generous with your treasure
We all love to help someone out when they need it. Make sure that you have a plan for how you give. Ensure you have the budget for buying a friend’s lunch or that costly birthday present. A few bucks here and there to those less fortunate is a great way to use the gifts that God gave you—just make sure you don’t overspend your budget.