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10 common money mistakes (that most of us have been guilty of)

Dennis Verhoeven
10 common money mistakes (that most of us have been guilty of)

Money mistakes, we’re all guilty of making them. Hold your breath as we take a look at the 10 most common money mistakes, and how you can avoid them!

Why we make mistakes

It might be our lack of a proper financial education or that we just don't have the discipline, or a combination of both. Most people adopt the financial habits of their parents, who learned from their parents, and so on. You might be stuck in a generational cycle of financial mistakes, but you can break the cycle and learn how to manage your finances like a pro.

To get you started, we have listed 10 of the most common money mistakes, and how to avoid them:

1. Spending without a plan

We know. Planning your finances is tedious and boring. But  if you're eyeballing your monthly spending and making many contactless payments, things can quickly spiral out of control. You're  likely to be living beyond your means, and get some anxiety around your finances.

So, instead of stressing about your financial situation between paydays, get an overview over your finances, and give every £ a purpose, as you work towards achieving your financial goals, and increasing your net worth.

Pro tip: Everybody slips up now and again. Don't get discouraged if you didn't hit your savings goal this month, or if you overspent on eating out at that fancy restaurant. The first and most important lesson is becoming more aware of your spending habits.

2. Living beyond your means

It should be simple in theory: If you spend more than you earn, you’re living beyond your means. And it's the quickest road to financial problems.

Some early warning signs that you are living beyond your means are:

  • Always carrying a credit card balance that you don't pay in full
  • You’re not saving at least 5% of your income
  • You have no money left before you get your next pay check
  • You’ often find yourself in overdraft

If some of this sounds familiar, stop for a moment to review your income and spending.

One way to fix the problem would be to increase your income. Can you ask for a pay rise, apply to a new job, or start a side-hustle? However, the risk with this approach is lifestyle inflation, where your spending increases in line with your income.

The second option is to reduce your monthly spending, and cut any unnecessary expenses. Can you move into cheaper accommodation? Pay off expensive debt? Cancel that subscription you haven't used in months? Your goal should be to spend no more than 50% of your income on essential expenses.

3. Maxing out a credit card that you can’t afford to pay back

This goes hand-in-hand with living beyond your means. If you can only afford the minimum payments, it's not only an indicator that your lifestyle choices exceed your income, you might also hurt your credit score long term. This will become especially relevant if you’re planning on getting a mortgage in the future. If you find yourself in this situation, start with a spending plan, and try to pay off your credit card first. Once there, only spend as much as you can pay off at the end of the month.

4. Buying stuff that you don’t need with credit

We've become a society that values instant gratification, and financial products adapted to this trend. Want that new necklace, but payday is still 3 weeks away? Why not use Buy Now, Pay Later?! But even if the offer is tempting, with a 0% interest rate, It’s just another way that your finances are telling you that you’re living beyond your means. The major risk is that, should you miss any of the BNPL payment dates, your new purchase can quickly become more expensive than expected.

Before buying something new through Klarna or another Buy Now Pay Later scheme, give yourself 24 hours to sleep on it and decide if its a good purchase.

5. Not checking your bank balance regularly

We’ve all been there. We’re paying for everything with our cards or phones, and quickly lose track over our spending. Anxiety sets in days or weeks later as we’re trying to figure out our bank balance. For some, it becomes a payment lottery. Will the next payment get approved or declined?  When we finally check our balance, it’s usually lower than expected, which is causing even more anxiety.

That’s why spending plans and regularly checking your balance are very important. That way you won't have to guess what's left in your account.

6. Ignoring ISA allowances

ISAs, or Individual Savings Accounts, offer tax free interest payments. So, if you're an investor in the UK and don't have an ISA account, you're missing out on free money.

They are a use it or lose it deal: You can invest up to £20,000 tax free every year. Otherwise, you'll be paying either 10% or 20% on any of your capital gains, depending on your tax band.

7. Not signing up for a pension plan

This should be no-brainer. Your employer is obligated to offer you a pension scheme (unless you're a contractor), and it's free money for your retirement. Most employers match your contributions, by at least 3% and the government doesn't tax pension contributions so you get a 20% or even 40% saving depending your income level. If you are self employed or a contractor you could still benefit from the tax incentives of a pension and put money into a Self Invested Pension Plan (SIPP).

8. Not saving up an emergency fund

Ideally, you should save at least 10-20% of your income every month. But start with what's possible for you and your first goal is to create an emergency fund - an amount of money that will cover at least 3-6 months of your basic expenses. After you've reached that milestone, you can look into investments that you can make with your savings.

9. Not setting aside “fun money”

The opposite of not saving money is constantly depriving yourself, and not setting aside a budget for fun stuff. Enjoying small things every month will keep you motivated, and give you a sense of achievement while still working towards your financial goals. If you plan for fun purchases, you're less likely to buy unnecessary stuff on credit.

10. Borrowing money when you have financial problems

If you find yourself in a situation where you don't have enough money to pay for your expenses, or your debt, you  certainly shouldn't think about borrowing more money. Long term, this will just make your problems worse, and might turn into a vicious spiral of debt. And, depending on from whom you've borrowed the money, it might negatively affect relationships with family and friends.

Again, start with creating a financial plan. Pay yourself first, then pay the most important expenses (rent, electricity, etc) first. Try to focus on paying off expensive debt first. If you can't, speak to the lender to find a solution that suits both. This should help you to get back on track financially.

and an extra bonus mistake....

11. Borrowing money to buy things that lose value

While borrowing money has its place, it’s often used to buy depreciating assets (things that lose value over time). Here's an example:

Let’s say you’re interested in buying a car for £20,000. The dealer offers you convenient finance with 0% interest. You have no upfront costs but a monthly payment of £500 to repay the loan. Now, most people will only look at the monthly payments, and make a decision based on if they can afford it. And with many 0% interest deals around, it seems to be an easy decision to make, right? But there are a couple of hidden costs:

1. Depreciation

As soon as you drive that shiny, new car away from the dealer, it instantly lost around 30% of its initial value. As the car gets older, its value will just decrease further. After 5 years, the car will be worth an estimated 50% of its original value, which means you've lost £15,000.

2.  Opportunity cost

If you had invested those £500 every month into an Exchange Traded Fund (ETF) with an average yearly return of 10% every month over 5 years, you would have £39,810 in your account, an increase of nearly £10,000. That’s the opportunity cost of buying the car.

As mentioned throughout this post, the very first step to avoid money mistakes in the first place, is to create a spending plan. There are many excellent and free tools out there, like Google's free budget sheet, or using apps like Quirk, where you can track your spending easily and for free so you're always in control.

Illustration by: Julia Boldysheva

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