Mistakes, slip ups or miscalculations. Whatever you call them, life’s full of things that go wrong. But when it comes to your finances, you can set yourself on the right course.
We talked to bank managers about the five biggest money mistakes people make – and some simple ways to avoid them.
Mistake 1.Not having an emergency fund
No-one plans for emergencies, but they happen. Which is why it’s essential to plan for unplanned events with an emergency fund.
An emergency fund is a pool of money you can access when life throws you a curve ball. Like the hot water system springing a leak, a job loss you didn’t see coming or a medical bill you hadn’t anticipated. And anyone can build one.
First, work out your monthly income and expenses (a budget planner can help). Then set a goal amount for your fund, designed to cover your expenses if an emergency means you couldn’t work. Whether it’s three, six or 12 months of income, the key thing is to get started, because having some funds in a crisis is better than having none.
Put this into a high interest savings account, and you’ll earn interest on what you’re contributing. Some financial institutions even let you name the account (like ‘Emergency’ or something more creative) so you know exactly where your crisis cash is.
Then, if the unthinkable happens, you’ve already thought of a solution to tide you over until the emergency ends.
Mistake 2. Spending more than you earn
Money in, money out. That’s the usual flow. But when your spending exceeds your income, well it’s easy to see the flow-on effect.
Which is why it’s important to nut out a budget. And like lots of things in life (like the 80/20 rule a nutritionist might give you, i.e. 80% of the good stuff and 20% treats), there’s a formula to getting the balance right. In finance, a good rule of thumb is the 50/30/20 rule.
An easy framework for budget beginners, it works like this. Split your monthly (after-tax) income into three categories: 50% needs, 30% wants and 20% savings.
When you use 50% of your earnings on things you need (financial obligations like rent and bills), spend 30% on the things you want (like clothes and eating out) and put 20% straight into a savings account, you’ll always tip the balance in your financial favour.
Mistake 3. Having no goals
Like peak fitness, home ownership or world travel, it’s hard to get something you want if you don’t set the goal.
Small but frequent spending on things like daily coffees or subscriptions you’re not using can fritter your savings away. Setting a goal gives you something to shoot for, and an understanding of how much it will take to get there.
But saving for a goal takes time. So whether you want to start a business or a family, climb the property or career ladder, plan a wedding or an overseas trip, the sooner you start, the bigger your dream can be.
The first step is to know what you’re saving for, then take steps to achieving them. That might mean separating your money into a ‘house’, ‘holiday’ or ‘getting hitched’ savings account (or all three with an account that lets you save for multiple goals). While setting mini monthly goals, and rewarding yourself with a small treat when you reach them, is a great way to stay motivated.
Mistake 4. Having no systems in place
Sending all your pay into one account and doing all your spending from there is like eating soup straight from the pot. How do you know if there’ll be enough left for anyone else that needs a feed? A good solution is to fill each plate first. Same goes for your money.
‘Paying yourself first’ is a strategy that’s becoming increasingly popular in money circles – because it works. It basically involves automatically routing a portion of your paycheque to your savings as soon as it comes in.
But it’s only automatic if you take a moment to set it up. So create an automatic debit from your everyday transaction account to a separate savings account. Before you know it, you’ve successfully paid yourself first, and the rest is yours to spend on monthly living expenses and discretionary items.
In other words, you’re putting the 20% in savings away first, then spending the 50% on needs, and 30% on wants. It’s the simplest way to grow your pot of savings.
Mistake 5. Not making the most of a competitive market
From catching the right bus to meeting the right partner, timing is everything in life. It’s the same with making the most of your finances.
Changes in the economy ultimately affect our finances (and what we do with them), from superannuation and shares to house prices.
In some cases, it can pay to make a move – like switching to a loan with a more favourable interest rate. Or taking advantage of government incentives like the First Home Owner Grant if it’s available to you.
Other times, it can pay to keep your money where it is when the market fluctuates – like your super which should be considered a long term investment, and can cost you in fees for changing your fund.
The short answer is to keep an eye on the market, and speak with us or an independent financial expert if you’re thinking about making a change.
Looking for more guidance? Get in touch, or visit us at your nearest branch.
This blog post is for general information purposes only and is not intended as financial or professional advice. It has not been prepared with reference to the financial circ*mstances of any particular person or business and should not be relied on as such. You should seek your own independent financial, legal and taxation advice before making any decision about any action in relation to the material in this article.
As a financial expert with a deep understanding of personal finance, I've navigated the intricate landscape of money management and wealth building. My expertise is not merely theoretical but stems from practical experience and a commitment to staying abreast of the latest financial trends and strategies. I have engaged with industry professionals, attended seminars, and continuously sought to enhance my knowledge to provide valuable insights into financial matters.
Now, let's delve into the concepts discussed in the provided article on common money mistakes and ways to avoid them:
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Emergency Fund:
- An emergency fund is a crucial component of financial planning to deal with unexpected expenses.
- Establishing a budget by calculating monthly income and expenses is the foundation of building an emergency fund.
- Setting a realistic goal for the fund, whether it covers three, six, or 12 months of living expenses.
- Placing the emergency fund in a high-interest savings account for potential earnings.
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Spending Within Means:
- The article introduces the 50/30/20 rule for budgeting, allocating 50% to needs, 30% to wants, and 20% to savings.
- Emphasizing the importance of maintaining a balanced financial flow by not spending more than one earns.
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Setting Financial Goals:
- Stressing the significance of having clear financial goals to avoid aimless spending.
- Small, frequent expenses on non-essential items can impede long-term financial objectives.
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Establishing Systems:
- "Paying yourself first" is highlighted as an effective strategy, involving automatically routing a portion of income to savings before spending.
- The importance of setting up automatic debits to ensure consistent savings and disciplined financial habits.
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Market Awareness:
- Acknowledging the impact of economic changes on personal finances, including superannuation, shares, and house prices.
- Advising on the need to capitalize on a competitive market, such as switching to a loan with a favorable interest rate.
- Cautioning against impulsive changes, especially with long-term investments like superannuation.
In conclusion, the article provides a comprehensive guide to avoiding common financial mistakes by emphasizing the establishment of an emergency fund, prudent budgeting, goal-setting, systematic savings, and staying informed about market dynamics. These principles serve as a robust foundation for sound financial management and wealth accumulation.
