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.
Gather knowledge and purchase a policy that fulfills the needed requirement.
Not having an emergency fund
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 to Debt 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.