When I was living in my first place after graduating from college, I remember thinking how it seemed I could never get ahead. I’m sure many people feel that way when they’re starting out (and even after they’ve been on their own for a while).
I had a sufficient income — nothing remarkable, but enough to pay my bills and have a little left over. On paper, my budget worked, and I should have been able to save. But I always ended up with more month at the end of the money. Eventually, after I started learning more about finances, I realized I was succumbing to some pretty common money mistakes.
If you feel like you’re barely keeping your head above water in the metaphorical pool of your finances, you’re not alone. See if you’re falling into these 14 financial pitfalls, and learn how to avoid them.
1. Overloading on Subscriptions
At one point, I pulled up my ROKU account and was shocked to find about 6 different channels that we never watched. I also realized we were accumulating a stack of magazines that we never read.
Nowadays, everyone has a subscription (or 20), but many are unused. Even things like gym memberships and fancy boxes for dog toys, skincare, and other products turn into wasted opportunities and unwanted clutter.
If you use your subscriptions, great, but regularly do an assessment and weed out the dormant ones. Otherwise, you could be wasting over $30 a month or more.
2. Not Knowing Where Your Money Is Going
A small purchase here, a last-minute mocha there, and before you know it, you’re in the red. I know many people who are anti-budget because they consider it restrictive, but that’s not the point.
Call it a “conscious spending plan” a la Ramit Sethi if you prefer, but it’s the same concept. You need to tell your money where to go so it works for you and your financial future.
This doesn’t mean you can’t keep your spending flexible. My husband and I often divert money from one category into another if something unexpected happens. The point is, you have a plan.
3. Leasing Vehicles
Suze Orman, Dave Ramsey, and other finance gurus are very much against car leases. The Money Guy says leasing is rarely a good idea and typically slows down your financial momentum.
I leased the first vehicle I purchased based on my dad’s advice. His reasoning was I could get a better car, but leasing usually leads to never-ending payments. You jump into a new vehicle (and lease) every three years.
Buy a used vehicle, preferably with cash, or at least with a low-interest rate, 36-month max term. No car payment frees up a significant amount of your income.
4. Buying Too Much House
You’ve probably heard the term “living house poor.” It means you pay so much on your mortgage (or rent) and other housing costs that you have hardly anything left. You may spend so much on your home each month that you don’t have any margin for saving, investing, or even ordering a pizza.
Some experts recommend housing costs stay at 30% of your income. Others, like Dave Ramsey, suggest making that number 25% of take-home pay.
Aim to keep your total housing costs between 25% and 30%. This should include your mortgage, insurance, property taxes, utilities, and home repairs.
5. Spending Everything You Make
Before I got into personal finance, I pretty much spent most of my income. Any money I made went to rent, car insurance, gas, food, and then fun money.
A friend of mine mentioned Suze Orman’s The Money Book for the Young, Fabulous, and Broke. I started looking at money in a whole new way.
I thought more long-term. We teach our son to put 10% of his money into savings and 10% toward giving. The rest is his to spend, save, etc. Adults can do the same. Put a certain percentage toward retirement, an emergency fund, and future goals.
6. Putting Everything on Credit Cards
This financial pitfall likely comes as no surprise. According to The Motley Fool, the average household in the US carries $8,871 in credit cards.
It’s too easy to buy more than you can afford when you use plastic. (Or even worse, online shopping that allows you to save your payment information and pay in an instant.)
You can use an all-cash system. Parting with the physical bills makes you pause. Or switch to a debit card (note transactions so you know what’s in your account). Cut up your credit cards, except for one, but don’t carry it with you.
7. Forgetting About Taxes
A friend of mine asked me for help with their budget a while back because they couldn’t figure out why they were overspending. They swore they only spent what was in their budget.
The problem was obvious immediately. They used their total salary, before taxes and other deductions. It’s a common mistake for spending plan newbies. Create your budget based on your take-home pay.
Another pitfall is doing freelance or contract work and forgetting to set money aside for taxes. If this is you, set aside 15 to 30% of your income as you assess how much you owe.
8. Falling Into the Comparison Trap
Throughout time, there’s been a sense that the grass is always greener on the other side. But I think today social media makes that so much worse. You look on Instagram or TikTok and see people going on luxury vacations, shopping sprees, buying new cars, or decorating their mega-mansions.
You wonder, why not me? You overspend, trying to match that lifestyle (which likely isn’t real). Then, you end up compromising your financial future.
I read Rachel Cruze’s book, Love Your Life, Not Theirs, and it offers practical tips and encouragement about being true to your own money picture.
9. Taking Out Payday Loans
Imagine taking out a loan with an interest rate of 600%. Yikes. Talk about a surefire way to obliterate your finances.
Payday loans charge excessive rates and aren’t worth it. You end up in a cycle of taking out more loans to try and stay ahead of the enormous payments.
Instead, research local nonprofits or check your local credit union for a more reasonable loan. Also, budget wisely and track your spending so you can get a better handle on your financial situation. Concentrate on paying off any other debts to put more money in your pocket for other expenses.
10. Never Checking Your Credit Report
In 2021, over 23 million Americans were victims of identity theft. Most of them dealt with someone else using their credit cards and others had new loans opened in their names.
It’s critical to check your credit reports regularly for fraudulent or incorrect information and know your score. A poor credit score makes it hard for you to get a mortgage or secure low interest and insurance rates.
It also affects things like renting an apartment or passing a job interview, since potential landlords and employers often check credit scores. Check your reports yearly for free at annualcreditreport.com.
11. Not Planning for Retirement
I saw firsthand what happens when someone prepares for retirement and when they don’t. My mom’s parents had ROTHs, a 401k, and a long-term plan for their finances that led to a comfortable retirement.
My dad’s parents didn’t know much about retirement funds. My grandfather had an extremely small pension from his work (under $500 a month). They relied on social security and lived a much sparser life.
Aim to save 15% of your income for retirement. But you’ll need to save more if you start too late.
12. Using Debt to Pay Off Debt
Some family members recently asked us for our opinion on taking out a personal loan to pay off their credit cards. They also were thinking about borrowing more than necessary to give themselves a cushion for monthly expenses.
The problem with this plan is that it doesn’t address the behavior and reasons you got into debt in the first place. Consequently, you usually just end up owing even more money.
Review your income and expenses and make adjustments to pay your loans. Cut back on spending, find ways to boost income, and stop creating more debt.
13. Underestimating Insurance
Insurance is expensive, whether it’s for your car, home, or health. However, saving money by cutting back on your coverage can cost you even more. Review your needs to determine the appropriate amount of insurance for you, and make sure you understand your coverage.
After Hurricane Ida, we needed a new roof. Luckily, we had replacement value coverage because our roof was old. Therefore, our insurance paid what a new roof cost today.
My parents didn’t realize their insurance considered depreciation. They had to come up with thousands extra for a new roof. They changed companies soon after.
14. Letting Lifestyle Creep Take Over
One of the biggest ways to jeopardize your finances is succumbing to lifestyle creep. This is when you get a raise or income bump and immediately buy a bigger house, a new car, etc. Instead of taking the opportunity to get ahead financially, you stay stuck in the same situation, just at a higher price point.
Suze Orman recommends counteracting this common financial pitfall by living below your means. When you start making more, keep your expenses somewhat the same. The goal is to have extra money for saving, investing, and creating margin in your budget.
