How to Overcome Big Financial Mistakes
We’ve all made our fair share of financial mistakes over the years. The key is to understand what went wrong and to take action to fix the mistakes as best we can. Sometimes we can do this with little effort, while other times it will take time to repair the financial mistakes we’ve made, big or small.
Overcoming Financial Mistakes
I am going to walk you through four of the more common financial mistakes people make and how you can overcome them if you too have made them.
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Mistake: You Bought Too Much House
I know what this is like as I was guilty of it. I bought my house in 2007 at the height of the bubble. What was worse was that I allowed my realtor to talk me into buying a house that was $60,000 more than I could comfortably afford at the time. I needed a roommate just to make ends meet every month.
Regardless of how you might have ended up in too large of a house, what can you do to overcome this mistake? There are a few things you can do to make your house more affordable:
- Refinance: Assuming you have enough equity in your house and your interest rate is high (say above 5%), you could refinance. Doing so could reduce your monthly payment a couple hundred dollars. See the current mortgage rates to compare.
- Reduce Spending: Another option is to review your budget and see if you can cut anything back or out of your budget so you can more easily afford your house. It might not be fun eating peanut butter and jelly sandwiches for lunch every day, but it is a sacrifice worth making if it means keeping a roof over your head.
- Get a Job: Another possibility is to get a second job. You could either work nights and weekends or find something that pays you a little money on the side, like selling things around your house. Again, not glamorous, but a sacrifice worth making.
- Government Assistance: The government has extended various programs to help people who bought houses during the housing bubble. The new rules allow most people whose houses are underwater to refinance as long as they meet a few criteria. It is worth looking into to see if you qualify.
- Sell: The last option would be to sell your house and buy something you can afford or rent instead. Again, depending on if you are underwater, your options could be limited here.
Mistake: You Have Credit Card Debt
Another mistake that I am guilty of! When I was in college and then for a few years after college, I went on a spending spree. I was buying new things that I couldn’t afford and digging myself deeper and deeper in debt. I even opened up a new credit card to take advantage of a balance transfer offer and told myself I wouldn’t spend on my old card. That lasted for about a week.
How do you overcome being in credit card debt?
Your first step is to understand why you are in debt in the first place. Most times it is not a spending problem but something else. You have to figure out what this something else is. Otherwise, you will just end up in debt all over again.
For me, the issue was depression. I was depressed about not finding a job after college. I bought things to make me feel better, but that feeling wore off faster and faster so I bought more and more.
Once you realize why you are in debt, you need to stop spending and start paying off the debt. To stop spending, remind yourself the reason why you are in debt and how spending isn’t a solution to solving it. Then start paying more than the monthly minimum.
Cut out or reduce spending in other areas so you can afford to pay more. You may even look at getting a second job or using windfalls of money – like a tax refund – to knock down your debt. Just know that it will take time to pay it all off. You didn’t get into debt overnight, so you won’t get out overnight.
Mistake: You’re Not Saving any Money for Retirement
Finally, one of the financial mistakes I am not guilty of. Unfortunately, many other people are. If you aren’t saving anything for retirement, how are you going to stop working? The answer is you won’t. So what are some steps to take to start saving for retirement?
For starters, you need to see if your company offers a 401k plan. If they do, you need to start saving. Start off with 5%. Trust me, you won’t notice the smaller paycheck. After a couple of months, increase the amount you are saving another percent. Then repeat this every year. By increasing your savings rate 1% each year, you are going to save more which means more money will have the chance to grow.
You can also start saving outside your 401k as well. As with the previous tips, you need to look at your budget. What can you reduce? Maybe eat out one less time each month and with that $50, put it into an IRA.
While $50 doesn’t sound like much, it comes out to be $600 a year and will grow when you add interest into the mix. If you can save $600 this year, try for $1,000 next year. Then try to save $1,500 the year after that.
It might not seem like saving this money will pay off but it will. Don’t focus on needing to save $1 million dollars like the magazine headlines say. Just make an effort to start saving. Anything you can save will make your later years that much better.
Mistake: You Don’t Have an Emergency Fund
Many people don’t have the money to cover an unexpected expense that comes up. This is bad because should something happen (and it will), you will be resigned to paying for it with credit. This puts you behind the proverbial 8-ball and makes fixing your finances that much more difficult.
Begin by creating an emergency fund of $1,000. To build it, open up a separate savings account and set up an automatic transfer when you get paid for $20. Start small so you don’t notice any money “missing” from your checking account.
Then look for creative ways to build the account. For me, I take random income and put it into my emergency fund. For example, if I get a check in the mail for a rebate, the money goes into my emergency fund. If I receive a tax refund, I take 20% of that and put it into my emergency fund. If we have a community yard sale, I take the money I made and save it.
You also could adjust your budget too. Just work on getting your emergency fund up to $1,000. Once there, celebrate that you saved $1,000 and keep working to build it up to 6 months worth of living expenses.
There are the four common financial mistakes people make (including myself). If you are guilty of any of them, don’t be embarrassed. Instead, acknowledge your shortcomings and take steps to overcome the mistakes. Doing so will put you on better financial ground, which will lead to better opportunities to get your finances in great shape.
Which financial mistakes have you made? What are you doing to overcome the mistakes?
More on Overcoming Financial Mistakes
- Are You Making These 3 Excuses to Avoid Saving for Retirement?
- Are You Worried About Your Financial Future?
- 7 Emergencies You Think Are Emergencies But Aren’t
- How to Improve Your Finances When You Don’t Know Where to Start
- 8 Money Mistakes to Avoid in Your 20s
- 6 More Steps to Take Charge of Your Financial Future
I filed bankruptcy in 2007 because of high medical bills. Slowly moved back into credit card debt. By charging just an extra $105 per month, very easy to do in today’s economy. My debt grew to over $11,000 in 8 years. I never pay just the minimum, but it was getting hard to pay with over $200 per month going to interest. I found a $7,200 loan at 8% lower than my CC interest. Paid off 8 accounts and my credit score jumped 60 points. This allowed me to get 2 zero interest CC’s for 12 months. I am now paying less than half the interest per month. Balances are coming down at $600 per month and I will be debt free in Dec 2017. Once I am debt free the emergency fund will get the money I was paying on debt.