Working towards your financial goals? Personal finance management can be a daunting task for those without the right knowledge.
Making a bad financial decision can set you back from your goals or even worse cause major economic hardships. Here are the top 10 worst financial mistakes to avoid and how you can position yourself for success.
#1: Prioritising the purchase of a car over a property
To understand why buying a car instead of a property is a financial mistake, we must first understand the difference between an asset and a liability. In the simplest terms, assets put money into your pocket while liabilities reduce the amount of money in your pocket.
A car is considered a depreciating asset or liability. Not only is a new car a big-ticket purchase, it depreciates over time. In Singapore, the average depreciation value of a brand-new car is S$10,000 a year. On the other hand, a property generally has a longer lifespan than a car and appreciates over time.
While a car increases your convenience factor, you lose the opportunity to grow the money spent on it. Hence, if you are working towards your financial goals, buying a car is a bad financial decision.
#2: Spending beyond your means
A dollar saved is a dollar closer to your goals. It may not seem like a big deal when you get that mocha Frappuccino from Starbucks, but every dollar spent adds up. Spending less than what you earn is the key to making financial progress.
Overspending applies to both small and big-ticket items and tends to have a downward spiral effect. Unmonitored spending or worse still, getting into debts to meet your spending habits is definitely one of the worst financial decisions.
Budgeting is the most straightforward way to monitor your spending. A good budget goes a long way to help you stay within your financial lane. If you need help keeping track of your spending, you should check out the Planner Bee app.
#3: No emergency funds
An emergency fund is a separate savings account used to cover your expenses during unforeseen situations. Believe it or not, unexpected financial problems happen more often than you might think. Falling sick, electrical appliances breaking down, retrenchment from your job, etc.
Without an emergency fund, you are more likely to borrow money to pay for the expenses and we already know that borrowing or spending beyond your means is a bad money mistake.
So how much should you set aside as emergency funds? A general rule of thumb is a minimum six months of living expenses. This fund is best placed in an interest-earning bank account that can be accessed easily without any penalties.
#4: Paying off high-interest loans slowly
High-interest loans siphon away a sizeable amount of your money each month, hindering you from making any significant financial progress. Furthermore, the compound interest of these debts means that you will be paying much more over the long term. Hence, holding on to these loans is the last thing you want throughout your financial journey.
We understand the difficulty that comes with paying off your debt. If you are currently juggling a few loans, we suggest using the debt avalanche method. This method involves making the minimum payment on all your outstanding loans and any extra cash you have goes towards the debt with the highest interest.
Read more: Quick and powerful tips to clear your debt quickly
#5: Not having enough insurance coverage
Sometimes it can be hard to fully grasp the importance of buying insurance until you find yourself in the midst of an emergency that could potentially wipe out your entire savings.
Think of insurance as a big emergency fund that supplements your cash emergency fund. It is another safety net that protects your key assets, home, investments and loved ones.
However, do not go overboard and buy insurance for every category. Plan ahead, research and only get plans that best suit your current needs.
Read more: When do you actually need to buy insurance
#6: Leaving your money in the bank
Most of us were taught to save for a rainy day. So why then is leaving money in the bank a bad financial decision? The interest that most banks offer you in exchange for depositing in their bank is way lower than the inflation rate. This means that your money is actually losing value over time.
Unlike in the past, there are a plethora of options now for retail investors such as Robo-advisors as well as brokers that offer regular saving plans at competitive rates. These platforms provide you with a better alternative to grow your money. Alternatively, you can consult a financial advisor on how to make the most out of your money.
#7: Ignoring your credit score
Ignoring your credit score is a very common mistake. Financial institutions assess your reliability through this score and a bad credit score can affect your chances of getting a loan in the future. In contrast, having a higher credit score can help to secure a loan at a better interest rate.
A bad credit score will take time to fix. Hence, it is crucial to monitor your score once you start building your credit. You can purchase your credit report directly from Credit Bureau Singapore (CBS) or request a free one when you apply for a new credit facility with any CBS member.
#8: Underutilised monthly subscription packages
Companies nowadays adopt the subscription business model to retain customers and generate consistent revenue. Hence, you can easily find yourself having multiple monthly subscription packages.
Are you making full use of each subscription?
Having an underutilised subscription package is as good as “throwing money down the drain”.
It is also common to forget about a package that you are subscribed to. Unfortunately, these subscription services can inflict more financial damage than any other purchase. This is due to the payments being charged automatically to your credit card and since each payment is usually a small amount, it can go unnoticed. This amount may seem negligible but adds up over time.
#9: Not comparing prices before making big-ticket purchases
Big-ticket items refer to major purchases that require a significant level of financial commitment. Examples include buying a house, car, home renovation, etc. Not comparing prices before making such purchases can set you back financially.
Ask yourself if you really need to make the purchase or if there is a cheaper alternative that can help reduce your financial burden. Also, take into consideration the time of purchase. It could be worthwhile to wait for year-end promotions or seasonal deals. With so much information available online, there’s really no excuse not to do your due diligence before committing to the purchase.
#10: Lack of interest in financial literacy
Lacking the skills needed to make informed financial decisions can lead to serious money problems. Financial literacy refers to the knowledge to manage your financial resources. This is an important skill set as it lays the foundation for your relationship with money. Being financially literate allows you to make financially wise decisions and sets you up for success.
Financial literacy requires a lifetime of learning. Having no interest in financial education will result in continuous bad financial decisions, making it seemingly impossible to reach your financial goals. Hence, this is easily one of the worst financial mistakes anyone can make.
Hopefully, you have not made any of the above mistakes but even if you did – it’s okay. Understanding these missteps can help you prevent making the same mistakes in the future.
Bad financial decisions are often a result of a lack of awareness. We can’t emphasise this enough but the key to financial well-being is to invest in yourself and improve your financial literacy.
Planner bee has plenty of resources to help you achieve your goals. Do check out the product comparisons such as this one on Integrated Shield plans and finance glossary if you are still unsure of where to get started.