As a child I learned that most mistakes, when caught and resolved early enough, are rarely serious.  But what happens if you aren’t aware of a mistake being made?  What if you continue to err repeatedly, causing greater and greater damage without even knowing about it?    This is the problem for many people who make unfortunate financial mistakes without realizing the full effects of their actions.  Below are 7 financial mistakes that should be avoided at all costs – and ways to correct them before it’s too late.

1. Skimping on insurance.  Many people think that minimizing their insurance (or avoiding insurance entirely) is a great way to save money.  After all, what are the chances that your house will actually burn down?  And what are the chances that the tree in your front yard will crash down on the car?  It’s true that the chances may be slim, but it only takes one act of nature or horrible accident for you to realize the benefits of insurance – but when you’re slapped with crushing expenses resulting from an accident, it’s already too late.  Spare yourself this sorrow by investing a few dollars a month into proper insurance plans (homeowners insurance, health insurance and car insurance for starters).  It may seem like a lot now, but it’ll seem like peanuts compared to the costs you may face in the future.

2. Running up credit card debt.  Spending money on your credit card seems so easy, but for some reason paying it back is never quite as simple.  Thousands of consumers each year find themselves buried in credit card debt, even if they’ve paid their minimum payments, because their spending continues to outpace their repayment.  And, while you may be enjoying your new pair of shoes, the ramifications from this splurge can have deleterious effects on your long-term credit score – and your ability to find a job.  If you are unable to pay off your credit card debt your file will likely be turned over to a collections agency, a move which will ruin your credit history and will likely prevent you from purchasing a house, receiving other credit cards or receiving a loan.  New studies also indicate that employers have now begun to look at the credit scores of potential applicants before hiring new workers.  Consequently, running up credit card debt can actually prevent you from getting the job you need to repay this debt.  The first step towards eradicating your credit card debt is to stop using your credit card entirely so you won’t continue contributing to the problem.  Once this is done, contact your credit card company and see if you can negotiate a deal with them.  Pay it off in installments until the damage has been undone – and pay attention to each purchase from now on so that you won’t purchase things you can’t truly pay for.

3. Keeping up with the Joneses. At first glance, buying a new car, a designer sweater or season’s tickets to the local basketball team don’t seem like bad ideas – until you realize that you can’t afford the mortgage, doctor’s co-pays or groceries.  The best way to avoid this financial pitfall is to simply ignore what gadgets, fashions and vacations your friends are purchasing so that you don’t feel any pressure to conform.  But if you absolutely must stay up-to-date on the latest trends, consider surrendering other luxuries or purchasing knock offs so that you won’t overspend on items that will soon be passé.

4. Rushing into real estate for investment purposes. Making poor investments in real estate is a financial mistake of many eager young couples, aggressive investors and people who are generally optimistic.  The primary problems with this strategy are twofold. Firstly, your money will not be accessible in the event of an emergency as you’ll need to sell your property in order to have the cash, a proposition which may be time-consuming or ill-advised depending on the market at any given time.  Secondly, there are no guarantees that real estate prices will rise or that you’ll be able to make a profit on a ‘great’ investment.  High taxes, closing costs and attorneys fees don’t help too much either.  If you’re truly wedded to the idea of investing in real estate consider going in on a group investment backed by reliable investors and leaving some of your money aside for other investments.

5. Failure to create a budget.  Many people consider budgeting extraneous, but practically speaking, not creating a budget is one of the worst financial mistakes that you can make.  A budget serves several critical purposes including ensuring that you spend within your means (at least most of the time) and allowing you to notice where you’re overspending so that you can reduce these expenses and have more money for your savings.  In short, a budget is the key to your family’s overall financial health, and it is an element that should not be overlooked.  For templates that can help you create a budget quickly, click here.

6. Lack of tangible long term goals.  If budgeting is what will control your spending today, long term goals are what will control your savings for the future.  For many young professionals, long term goals seem excessive.  After all, why save for retirement at the start of your career when you can save later as your salary increases?  This faulty logic, however, is one of the worst financial mistakes you can make.  After all, if you don’t become accustomed to saving money from the start of your career you’ll have a very hard time putting money aside later, when you have a mortgage, more mouths to feed and childcare expenses (among other things).  The best way to undo this financial blunder is to rethink your approach to retirement or to sit down with a financial planner who can explain to you the benefits of creating long term goals.  Even if you’re not as young as you once were, it’s not too late to start saving.

7. Smoking.  Health risks aside, smoking is responsible for significant financial loss on an annual basis.  The most obvious financial downside of smoking is the cost of cigarettes which can cost up to $1500/year.  And yet, the hidden costs of smoking combined with the cost of the cigarettes are what truly make this habit one of the worst financial mistakes.  Smokers tend to pay more for health insurance and healthcare related costs than their non-smoking counterparts do.  Likewise, damage to teeth caused by smoking often requires smokers to shell out more for dental treatments.  Oftentimes homeowners insurance will cost more for smokers as the risk of fire is greater.  And, of course, a smoke-filled home won’t smell as clean as a smoke-free environment which means that if you plan on selling your home you can expect to get less than a non-smoking neighbor might get for a similar property.  The obvious solution to this financial mistake is to stop smoking.  If this is not a realistic goal, however, you may want to consider cutting back and smoking only outside the home so that you’ll minimize the risk of damage to your body and to your home.  This plan may also mean fewer cigarettes a day which will save you a few dollars each month as well.

This entry was posted on Monday, July 26th, 2010 at 11:59 am and is filed under General Money Saving Advice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.