In a recent National Association for Business Economics survey, 72% of respondents expect a recession to hit our country by the end of 2021. The last major recession, from December 2007 to June 2009, brought with it a huge dive in the stock market.
While no one knows when the next recession will occur, you need to learn what not to do so that you can make yourself financially stable. With that in mind, Business Insider reached out to experts to analyze the mistakes which hurt you and to offer ideas for avoiding them. Here are some of the top mistakes along with some additional tips to make sure you’re prepared for anything!
Avoid excessive spending
People think that they earn in order to spend. But in reality, money has four jobs: spending, saving, investing, and donating.
Spending is one factor of money management. Most people make mistakes by spending excessively. They spend more and thus get into serious debt.
When you pick up that extra cheese pizza, stop for a latte, eat out, or pay for a movie, your spending seems small. However, it adds up to a larger amount once you consider how much you spend on these small items in a year.
If you’re enduring financial hardship, you need to monitor your expenses closely.
Not having a detailed idea of all expenses
Having only a rough idea of where your money goes can land you in a difficult situation. As the saying goes, you can’t manage what you don’t measure. When asked how much you will spend this month, a quick answer would no doubt include a few bills and other expenses. But when you start going through your bank and credit card bills, you will be surprised to see where a substantial amount of your paycheck is going. So, in order to avoid these errors, it is mandatory that you detail all these individual expenses, and there are many good tools to help with budgeting.
Living on borrowed money
Excessively borrowing or spending on credit is not financially healthy. Using a credit card for day-to-day purchases or for the airline miles or rewards programs is normal. But if you’re paying interest on gas, groceries, and other items, then you’re making a big mistake. Credit card interest rates make the price of the items a bit expensive. Purchasing on credit also has the tendency to allow you to lose track of exactly what you are spending, often resulting in spending more than you earn.
If you use credit cards to make purchases, make sure to repay the entire bill at the end of every billing cycle.
Making minimum payments on credit card debt
Paying extra on credit card debt is certainly better than paying the minimum amount. You can repay your debt faster by putting extra money toward the debt with the
highest interest rate and making just the minimum payments on the rest. As one balance is paid off, shift those payments toward the next card with the highest rate and so on until you’re debt-free.
Paying bills late
Paying bills late means extra money goes out of the pocket. Many people forget the due dates of bill payments. To avoid this, automatic bill payment is a great solution. In addition, you can use your phone’s calendar alert and easy-to-use apps to send you text alerts when bills are due.
Halting on regular savings and investing
The stock market was volatile in 2020. Many investors panicked as their investment portfolio temporarily went off track due to a sudden fall in the stock prices. The only way to deal with this is to reset your investment portfolio.
Watching the market drop doesn’t mean you should stop investing—in fact, you get the benefit from stocks being cheaper than they previously were.
Make a financial plan, choose an investment strategy that’s appropriate for your needs, and stick to the plan unless there’s a major change in your financial life.
Stopping retirement contributions
If you or your spouse lose your job when unexpected expenses arise, you might consider stopping your contributions to your retirement savings to cope with increased financial demand. However, once the situation comes under control, do not neglect your retirement fund.
Spending more to maintain a lifestyle
A sudden rise in your income can entice you to improve your lifestyle. Resisting this temptation is the smartest thing you can do, particularly if you have a large goal like buying a house, good education for the kids, etc.
You can splurge a bit but don’t spend beyond your budget. Rather, focus on saving the amount you need to attain a financial goal.
Using home equity like a piggy bank
Having a shelter over your head is the most essential thing. Your home is your palace. Taking out a loan from it gives the authority over your house to someone else. So, if you can’t repay the amount, you can lose your home. Think twice before doing so.
Spending too much on the house
Dreaming of a big house is good, but it is not a necessity. If you have a big family, you may need a larger house, but to go for a luxury home is something that hampers your spending. Choosing a more expensive or luxury home will only mean more taxes, maintenance, and utilities. After knowing this, do you still want to take a chance for a long-term dent in your budget?
Having the wrong life insurance policy
Life insurance is important if you have dependents. A general rule of thumb is to have term insurance equal to ten times your salary. Work with an insurance agent you trust, one who’s not going to try and sell you a more expensive policy than you need.
You should set aside extra funds for emergencies. They can happen to anyone at any time. Unforeseen circumstances like a job loss, car repair bill, illness, etc., should be planned for as much as possible. An emergency fund can protect you from crippling debts. A good rule of thumb is to have at least 3 to 6 months of your spending set aside in an emergency fund.
Avoiding the mistakes and following the strategies shared above can help you have a healthier financial life in 2021.
Written by: Phil Bradford | Exclusively for Merriman.com
Author Bio: Phil Bradford is a financial content writer and an enthusiast. He is not employed or associated with Merriman. He has expert knowledge about personal finance issues and he is a regular contributor toDebt Consolidation Care. His passion for helping people who are stuck in financial problems has earned him recognition and honor in the industry. Besides writing, he loves to travel and read books.
Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.
Everyone will agree that the COVID-19 pandemic has wreaked havoc on people’s budgets. Even financially disciplined individuals experienced a blow on their finances. You may have good plans and intentions for maintaining your wealth standards, but in the end there is nothing you can do when such an event happens. The catastrophe might have impacted your savings because of a decrease or loss of salary and income, or you may have had to overspend toward necessities during the pandemic when the prices of essential commodities shot up.
Sometimes low motivation and failure to hit the target can be the cause of wealth depreciation. However, as businesses reopen and people engage in their routine life activities, you might wonder what to do to regain your previous wealth status.
1. Cut on expenses
With low income due to the pandemic’s global impact, it is crucial to understand how you spend your money. Once you know where and how you spend your money, you can quickly determine what is essential spending and what is extra. You can sell or cut expenses with those things that you can survive without, like that other car, the vacation home, the RV—and even in a worst-case scenario, your home.
It might sound like an extreme tactic, but the benefits are immense. First, it will lower your necessary living expenses. Also, if one of these properties was attached to a loan, it will eliminate the debt. Lastly, when you sell—for example, that extra car or vacation home—you will have the much-needed cash to increase your savings.
What you need to understand is that selling or cutting expenses back will not happen forever. When you stabilize, it is easy to buy them back or even get better than what you sold. The aim here is to avoid going deep into financial depression by getting rid of expenses that are not essential.
2. Pay your debt in style
Be very strategic when it comes to paying off your debt, especially your credit card debt. Choose whatever model you think will work better for your situation, as no two financial cases are the same. In the first model, you can go the avalanche way. With this method, you focus on paying off the credit card with the highest interest rates first. Pay as much as you can toward that debt, but also pay at least the minimum amount toward the other accounts. This method will help you have the least interest in paying off your debt.
The snowball method, on the other hand, focuses on clearing the cards with the lowest debt first. In this method, once you clear one card, roll over to the next card with a minimal debt balance. Again, as before, as you clear the minimal debts first, pay at least the minimum amount toward the other cards, too. This will help you to have fewer loans to pay.
3. Continue saving despite the financial crisis
However hard it might be, especially when trying to pay off your debt, maintain a positive savings balance. With savings, the money can comfortably cushion you in case of an emergency. It can also help you achieve your financial freedom faster. Don’t strain too much, though; save as much as your budget allows to maintain a good saving habit.
4. If possible, take a side gig
If your current source of income does not generate enough wealth to return you to your previous state, consider adding another hustle. Is it possible to take up another job? Can you invest in a part-time business? A part-time business, dog walking, or freelance working will see your income grow faster.
5. Be patient
Though you are anxious to restore your finances, understand that this might not happen overnight. You should be prepared mentally and emotionally for the effort. Set up plans and specific goals to achieve, devoting time and focusing on effort toward achieving those goals. With sound steps and strategies, your financial situation will eventually get back to normal. Just remember that it will take some time.
Abby Drexler is a contributing writer and media specialist on behalf of Evolve Bank & Trust. She regularly produces content for a variety of finance blogs.
Life can throw you curveballs and if you aren’t prepared financially, these curveballs can turn into major problems. That’s why it’s so important to have a savings buffer, also called an emergency fund. An emergency fund is a cash account that you keep separate for life’s unexpected events. It can help prevent additional stress when these events occur. (more…)
All households, no matter their income, must decide how best to allocate their resources and manage their budgets. These decisions can be difficult as they require balancing immediate desires and short-term needs with savings and long-term investments. But having an intentional conversation about this topic allows you to commit to a plan that can help you achieve your future financial goals and ultimately provide greater control over your resources.
Developing a household budget requires understanding your regular revenues (employment income, investment income, rental income, etc.) and expenses (mortgage, monthly groceries, car payment, etc.). You also need to identify your long-term financial goals and any irregular expenses you expect in the near future, such as a major vacation. With this information in hand, you’re ready to develop a monthly household budget. In the budget, you determine how your revenues should be allocated to the various expenses and other goals. This approach is systematic and allows you to evaluate your spending, saving and investing needs together.
Where to Start?
First, list all your expenses. Start with your fixed costs, which are set amounts paid each month, such as a house mortgage or rent, car payment, cell phone bill, child care costs, etc. Next, list your variable expenses, which are expenses that occur each month, but the dollar amount varies, such as groceries, gas, entertainment, etc. Utilities may be variable or fixed, depending on the utility, but be sure to include them.
You should also brainstorm items that occur inconsistently throughout the year, but where saving each month would be helpful, such as travel, home improvement, clothing, etc. If you’re planning to save more for retirement, make note of that as well so you remember to plan for that monthly contribution. (more…)
Deciding how to best prioritize your savings can seem overwhelming, and the decisions you make can lead to very different long-term outcomes. It’s especially difficult to know where to start with all of the different account types and savings vehicles available to you. As with all goals, developing a plan you believe in and can consistently apply will greatly improve your success rate.
Use the following steps as a starting point for prioritizing your savings. If a step doesn’t apply to you, simply move on to the next step.
Step 1 – Contribute enough to your 401(k) to receive the full employer match
This is one of the few places in life where you can receive money by simply participating. Some employers require you to contribute 3% of your salary to receive a 100% employer match. This means your contribution is effectively doubled, at no extra cost to you. A few plans will match 50% up to 6% of your salary. In other words, you have to contribute 6% to receive their 3% matching contribution. Contributing this amount from each paycheck can put stress on a tight budget, but there’s no better alternative.
Step 2 – Pay down your highest interest rate credit cards
With the sky high interest rates charged by credit card companies, it makes sense to attack these debts before moving to the next step. Since credit card interest rates can be anywhere from 12% to 24%, it’s unlikely you will find an investment that can earn a return anywhere in this ballpark, let alone while taking on outrageous risk. Consolidating your credit card debt and even seeking help from a debt counselor may be appropriate if it’s a problem.
Step 3 – Build up at least three months’ worth of emergency cash
When you have unexpected expenses, like those associated with a job loss or a major house repair, an emergency fund can help fill the gap so you don’t have to turn to credit cards or withdraw from a retirement account. Holding three months’ worth of expenses in an emergency fund at the bank is a good start. For some, it may be necessary to have three months’ worth of your take-home pay or six months of expenses.
This fund should be increased over time as your income and living expenses grow.
Step 4 – Max out health savings account (HSA)
If your employer offers an HSA, this is an amazing savings vehicle used to pay medical expenses now and in retirement. These contributions are not subject to federal and state income taxes, or payroll taxes and withdrawals for medical expenses are tax-free. The excess cash in the account, usually balances in excess of $3,000, can be invested and grown over the long term. Considering this recent Fidelity study, which found that a couple in retirement spends $245,000 on healthcare, not including the cost of long-term care, saving in tax-advantaged accounts for these expenses is a must.
Think of an HSA account like any other retirement account. To accumulate the necessary funds to cover medical expenses in retirement, it makes sense to pay out of pocket for reasonable healthcare expenses while still employed to allow the HSA account to grow.
Step 5 – Contribute to a Roth IRA retirement account
Since contributions to this account grow and can be withdrawn tax-free in retirement, contributing to a Roth IRA makes a lot of sense. This is especially true when you consider the impact of compound interest over long investment periods for those earlier on in their career.
You can also withdraw Roth IRA contributions tax-free for an emergency or for a house down payment, and this can be done at any age. Be careful, however, to avoid touching earnings since they lead to tax consequences. Lastly, keep in mind that if your income is above IRS limits, your ability to contribute to a Roth IRA may be reduced or eliminated.
Step 6 – Save for house down payment
The number of first time home buyers is starting to pick up. Having at least a 5% down payment saved up in addition to your emergency fund is a good starting point. If you plan on buying a home in the next three years, keeping these funds in cash versus investing in stocks is a prudent move.
Once you own a home, increasing your emergency fund to six months expenses will be necessary as roof repairs and miscellaneous expenses that always seem to come up as a homeowner can quickly eat into your savings.
Step 7 – Pay extra toward your student loans
Since many are graduating with significant student loans these days, paying extra toward these loans can lead to significant savings. This is especially true with unsubsidized government student loans and private loans that have interest rates greater than 6%. Since there isn’t a guaranteed 6% plus return available, prioritizing paying off these student loans is a must.
Step 8 – Max out 401(k) plan
Being able to contribute the maximum consistently without jeopardizing your finances or being at risk of having to take an early withdrawal pays off long-term. Not only will you receive the tax-deduction up front on any contributions, the funds will grow tax-deferred throughout your career, providing a greater balance to draw from in retirement.
Step 9 – Contribute to a 529 College Savings Plan
If you have children or expect to have children, there’s never a better time to start saving in a 529 plan. The funds in the plan grow and can be distributed tax-free for college and graduate school expenses. This article discusses the benefits of 529 plans further.
Because your children might receive grants or scholarships to cover their higher-education expenses, we always prioritize retirement savings first.
Step 10 – Invest in a non-retirement account
Now that you’ve maxed out your tax-advantaged accounts, excess savings can be invested in a taxable account. These funds can be invested and used to accomplish a long list of long-term goals. Whether you’re saving toward a future vacation home, early retirement or a child’s wedding in five years, these extra savings can make a big difference.
This list isn’t a one size fits all, but it can provide a framework for developing a long-term savings plan that you can expand upon each year. The earlier you can progress through these steps in your career, the better chance you have of being financially fit and having a high probability of success when you retire.
I recently had the pleasure of sitting down with a client’s daughter. She’s in her twenties, just finished up her nursing degree six months ago and is working the night shift at a local hospital. She is living with a couple of roommates and is finally in a position to save some money after being a very broke college student. She now faces the question posed by many young people who are starting their first “real” jobs. (more…)
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