No one is immune to mistakes — humans are not perfect after all. Mistakes provide an avenue to learn about the weakness you possess and a chance to deal with them and grow as an individual. By heeding the lessons of failure today, you can allow yourself the opportunity to celebrate the wins of tomorrow.
When it comes to personal finances, mistakes are inevitable no matter how well you equip yourself with financial knowledge. There are just some mistakes you must make not just to grow but to prepare and avoid the most devastating errors that can cause almost irreversible damage.
So what mistakes should everyone make to learn the most about their finances? This article will discuss ten common mistakes you will likely make and some lessons you can take from each.
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Keeping a rainy day fund is vital for anyone who wants to avoid disrupting their budgets or savings goals. It can come in handy when you have an unexpected bill to attend to, like car repair, medical expenses, or when you lose your source of income. An emergency fund is even more important if you have a family or other dependents.
Keeping an emergency fund will prevent you from having to dig into your savings or taking emergency loans that can have high interest.
As a rule of thumb, three to six months' worth of expenses is a safe amount to put away for rainy days. You should keep this money in a current account or an investment that can be liquidated easily.
Putting 20 or 30% of your income away every month in a savings account can constitute a good savings habit. But misusing that money later could be easy when you haven't specified exactly what you are saving for. Saving for the sake of it can cause an overspending habit, make you lose track of your priorities, and affect your motivation and commitment levels.
Before you start filling up your bank account or investing your money, identify all your financial goals. These can be short-term goals like saving to buy a washing machine, medium-term goals like saving for a vacation, or long-term goals like saving for a house down payment.
This helps you measure progress, develop a strong money mindset, improve your financial well-being, and help you account for all the money decisions you make.
Every once in a while, your loved ones might have an emergency and run to you for a quick loan; without thinking twice, you lend them. You do this unconditionally, feeling like it's your duty or with the hope that they'll bail you out when you are in a financial fix. But once you loan them, getting back your money will be hard, and you will have to write it off.
While it isn't necessarily wrong to lend to friends and family, you should learn to say no sometimes. Put the emotions aside and logically approach it. Think of how giving out that loan can affect your budget and savings goals. And if you lend them, consider making it formal or taking collateral. This will give you leeway to follow up on your money.
One lesson you'll learn from lending to friends or family is who you can trust moving forward. You can write off a loan now, but you'll know not to trust them again with your money, how to identify people like them within your cycles, and how to protect yourself moving forward.
Is taking part-time jobs or more responsibilities at work to make more money always the best move? It might increase your income, but you also have to factor in the negative effects. These effects can be in the form of burnout (physical and mental), lack of time to focus on things outside your job, and in the long term, it can lead to poor performance at work.
It could be better if you improve your career prospects and income level by learning new skills or perfecting your skill by taking a postgraduate/master's degree or looking for better-paying jobs.
Take some time off every once in a while to focus on things outside work, connect with people, and unwind. You can do this daily by setting a simple rule for yourself, like not taking work home or answering work calls over the weekend.
Attaining financial freedom takes a lot but learning to live within your means, having a budget, and sticking to it can be a start. This will help you avoid impulse spending, peer pressure spending, and even courage a saving habit.
A perfect start could be adopting the 50/30/20 rule. Elizabeth Warren popularised the rule in her 2005 book All Your Worth: The Lifetime Money plan. It is a straightforward strategy, basically divide your income into three parts:
This rule will help you learn how to control your money, stick to budgets and save for the future.
When it comes to your finances, you can’t afford to be a people pleaser. You can do someone a favour today, they will be back for more tomorrow, and before you know it, it has turned into a loop. This is why it's important to have boundaries and put yourself and your money first. Prioritise your goals, invest in yourself, learn to say "no" without feeling guilty, and stop caring about what others might think.
Read Also: Money & Me: Are You a People Pleaser?
Spending money and other resources on something beyond repair and not knowing when to give up can hold you back and waste more of your time and resources. This happens when you develop a sunk-cost fallacy that prevents you from stopping an action just because you have already spent money up to that stage. Learning to count your losses and not taking things personally will ensure you know when it's time to move on.
Taking risks can propel you ahead, increase your income and help you learn valuable lessons. But without proper calculations, it can have adverse effects. This is why you shouldn't risk it all at once; while in your late 20s or early 30s, you can choose risky investments, for instance, but avoid career risks.
That shouldn't mean you should be passive and avoid any risks. You've probably heard of the true but cliche adage, "it's better to take risks and fail than fail to try.”
Doing a job you are not passionate about or working in a place where you are being exploited, and overworked can help pay your bills, but it's the long-term effects you need to worry about. You should use such avenues as stepping stones to something you'll enjoy doing.
Or, while at it, you can make the best out of it by recognising your worth and asking for a raise when you've earned it.
Also Read: My Money and Me: Should I quit My Job Now?
However well you might be doing at any given time, learn not to let it go into your head. This might lead you to overestimate your ability which can affect your progress. Take every opportunity to learn from your mistakes, understand the limits of your strengths and work on improving on your weaknesses. Make efforts to connect with others to increase your opportunities and widen your horizon, and when stuck, ask for help; it won't hurt.
Some mistakes are part of life, and instead of hiding yourself and taking hundreds of precautions, you could learn more if you could take a risk. Embracing mistakes will leave you unscathed with newly gained knowledge that will come in handy later in life.
Considering common mistakes can be, you can choose to focus on what you have learned, enjoy the experience and stop sweating about it.