This article is a guest post from MortgageWiki.org – they publish buyer and homeowner tips and guides. You can check out their content by visiting mortgagewiki.org.
No matter your long-term goals, financial blunders can have long-lasting implications. For example a ruined credit score means you won’t be able to buy a home because there won’t be a bank that will approve you for a home mortgage. In this case you’ll have to pay for everything in cash, or take on a loan with very unfavorable terms.
The good news is that if you live within your means, you’ll be attractive to banks, lenders, and creditors.
Below is our list of common personal finance mistakes people make.
#1. Not having a good credit score
Credit scores are a financial profile of your borrowing and payment history. In many cases your credit report and credit score is a preliminary check when a lender is considering your application for a loan or credit card. The three-digit number ranges from 300 to 850, with score above 661 being good and scores below 600 considered “bad”. It basically measures the likelihood that you’ll default.
Many businesses – creditors, lenders, and other businesses – use a credit score to decide whether or not to approve your application and use it to create a max credit line, interest rate, and other loan terms.
Waiting too long to start building your credit means you’ll often have trouble getting approved. Also if approved, you may have to pay a higher interest rate or security deposits. By building a good credit score you’ll have a lot more options when it comes to any type of credit line.
#2. Not saving enough money
Most people won’t realize the value of putting money in a savings account until it’s too late. There’s several excellent reasons to put as much money into savings as possible.
It’s recommended that you keep an “emergency fund” of $5,000 or $10,000 to cover sudden, unexpected expenses. If you ever have a job loss or reduction in household savings, income can help supplement the loss. Savings can also be used for a down payment on a home or car, to pay for a child’s college tuition, or even starting a new business.
#3. Buying a home before you’re ready
For years, owning a home has been an essential part of the American Dream. But, rushing to make that dream come true can turn life into a nightmare, especially if you’re forced to take out a high-interest mortgage because you have a bad credit score.
FYI: To get the best mortgage rate you’ll need to have a credit score of 721 or higher.
A home mortgage is a major financial obligation. With homeownership, you are responsible for property taxes, homeowners insurance, HOA fees, and home maintenance and repairs. Buying a home before you’re ready can derail your financial progress, or delay other financial goals. Even though interest rates are near an all-time low, make sure to follow sound advice when deciding to buy a home.
#4. Carrying high interest credit card debt
If you don’t get rid of your high interest rate debt now, years down the road you’ll look back with regret about how much money you wasted on interest payments and fees. It’s money that you can’t get back. Cash that could have been invested or spent on something worthwhile.
Credit card debt is notorious for super high interest rates. Some cards carry annual interest rates upward of 30-percent!
Focus on getting rid of high interest rate debts now, even if you have to make some sacrifices. The money you save on interest and finances charges will be far more productive being invested or saved.
Each U.S. state is different when it comes to a statute of limitations. Debt collectors in California have 2-4 years.
#5. Not buying health insurance
Forgoing health insurance may sound like a good, temporary way to lower your expenses and have more cash on-hand. But not having health coverage is very risky, even if you’re healthy.
Health expenses are expensive. You could have an accident or fall ill at any point, and have to foot the hospital bill in cash or on a credit card. Without health insurance, you’re financially responsible for all your medical bills. If you can’t afford to pay medical bills, it could push you into bankruptcy. Medical debt is one of the biggest causes of bankruptcy in the United States and it stems from a lack of health coverage.
Even if you are hurt at work, Medicare or disability insurance may not take care of everything. It’s usually an incredibly hard process to navigate. Most people need a lawyer to get through the Social Security disability process.
Going broke from medical expenses is something people don’t realize or plan for until it’s too late. Be safe and buy health insurance. Even the most basic policies can be affordable and you may qualify for Medicaid (depending on the state you reside).
#6. Waiting too long before investing
Investing may seem intimidating, but once you understand how investing works, you’ll be upset with yourself for not getting started earlier. When you start investing earlier, your money has more time to grow.
It’s also wise to diversify. You may have heard the idiom, “Don’t put all your eggs in one basket”. If you put it all into one stock and the stock dips, you’re in trouble. By diversifying you are hedging against risk, and invested for the long-term.
If you’re younger and don’t have family or financial obligations, you have so have a lot of flexibility in how you spend your money. And for this reason it’s one of the best times to get started investing.
#7. Not Diversifying Your Career Skills
The workforce is changing. Automation is eating up admin work, and people are being outsourced technology, or someone cheaper. You’re out of your mind if you think what you do with your career is not a financial decision.
Everyone wants to “do what they love,” but very few people love what they do. They do it for money, plain and simple. Apart from the obvious ones, automation software is already taking hold of marketers, project managers, IT professionals, AP clerks, and the list goes on. It’s taking aim at more careers too.
If you want to stay employable, start embracing technology, and getting used to managing it. You should also be familiar with whatever higher-level tasks are available in your career vertical. This will be a huge help down the line.
#8. Living above your means
Spending more money than you’re bringing in is the express highway to financial disaster. There are only two ways to fund this lifestyle – either by dipping into your savings or creating additional debt – and both are disastrous.
You can ensure you’re living within your means by creating and sticking to a monthly and annual budget. Lower your expenses so they fit within your income rather than stretching your spending outside of what you can afford.
#9. Not educating yourself on personal finance
It’s your job to learn as much about personal finance as you can so you can work toward a secure financial future. There’s a wealth of free information available on the internet. You can also check out books from the library or purchase books if you prefer to own them.
Investing in your own personal finance education will prove to be invaluable when you look back ten years from now.
#10. Loaning money to friends or family
This is a debatable topic, and for good reason. Most of us want to help a loved one who’s in a tough spot, but all too often, these situations backfire. Loaning money to a family member get out of debt or helping out a friend has the potential to ruin your relationship, permanently.
Loaning money to friends and family turns your relationship from personal to business.
If they can’t afford to pay you back, it can put a strain on your relationship, and possibly even end it for good. That’s not to suggest you can’t help out, but considering your help a gift rather than a loan can keep your relationship from falling apart.