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Personal Budgeting and Money Mistakes10 Mistakes You Can Make With Money Assuming that money management is only for the rich. Suppose a rich man earns $1 million a year, while you earn $30,000. He needs cash management and you don't — or so you may think. But you really need it just as much as, if not more than he does. For example, if you can save $1,000 on your income taxes, that amount is worth the same to you as taxing savings of $33,300 would be worth to him. However, because you have less to start with, the $1,000 is actually going to mean more to you. The difference between you is that you should be prepared to be your own money manager; he can afford expensive professional help that you can't.
Failing to be business like. Budgeting is boring, so many people never budget. As a result, they really aren't sure what's coming in or going out, and they often wind up with no savings and even with crippling debts. Make a once-a-year budget at tax time and live within it the rest of the year. Signing legal papers without understanding them. Never believe the interpretation a salesperson give to a contract. If you can't understand it, don't sign it. Ask someone you trust and who does understand it to read and approve it before you sign. Counting on two incomes. Today, with innumerable women aged 16 through 60 in the work force, it's easy for working couples to count on two incomes. The fact is, though, illness can strike anyone, anytime. Avoid hardship by realizing that there is a possibility if illness and budget accordingly. Failing to expect unexpected expenses. Murphy's law of Spending says that everything always cost more that you think it will. The principle applies no matter what your plans may be; always allow extra for the unexpected. Failing to face financial realities. Sadly, many people suffer from the ostrich syndrome. They hide their heads in the sand when dunning letters start coming in and they quit reading the mail or answering the phone. Or the bills mount up and they count on winning a lottery. This is prelude to disaster. Know your financial status, even if it hurts. Then, if necessary, take steps to improve it. Failing to keep basic savings. Almost every money expert agrees that people should have the equivalent to two to six months' income in highly liquid sayings before they invest in anything. Failing to understand the time value of money. A penny saved is more than a penny earned if it's invested at compound interest. For example, suppose your boss gave you a choice between a bonus of $10,000 in cash or one cent to be invested for one month with interest compounded at the rate of 100 percent per day. Should you take the ten grand? NO way! In five days, that one cent would grown to 32 cents; in 10 days, it would grow to $10.24; in 15 days, it would amount to $327.68; in 20 days, it would grow to $10,485 (you'd now be ahead on the original offer); in 25 days, it would grow to $335,544. 32; and in 30 days, it would amount to $10,737,418! With compound interest, the rate and the period of time for which the money is invested both count. They figure mightily in the time value of money. Have a garage sale mentality. Many people buy the latest fad item at premium price, use it two or three times, then sell it a year later at a garage sale for 10 percent of the original cost. The loss? Ninety percent per item. For example, if your children nag you to buy a computer game system, just wait — they'll become common at garage sales. Trying to keep up with the Joneses. When a person buys things he or she can't afford just to impress friends and neighbors, it can waste a great deal of money. Younger people are especially vulnerable to snob appeal. |
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