Managing your money is like many things in life; you learn through experience and practice. However, everyone can make a financial mistake, even the smartest people amongst us.
The simplest financial mistakes are usually the biggest ones and can result in dire repercussions down the road. Fortunately, you can avoid them by learning from the mistakes of other people. In this article, we’ll outline the common financial mistakes Canadians make and how you can avoid them.
1. Not Having an Emergency Fund
Did you know that about 26% of Canadians can not be able to cover a $500 emergency without borrowing? Not having an emergency fund is probably the most common financial mistake people make.
Life is hectic and full of surprises, and emergencies happen when you least expect them. Your car can break down, or you may have an emergency medical bill, and without an emergency fund, you may be forced to get a quick loan from My Canada Payday.
While a loan can come in handy in times of need, it’s advisable to set up an emergency fund that can cater to your needs for about three to six months after losing your income. Here’s how you can build your emergency fund:
● Set up automatic transfers. For instance, you can move $100 from every pay cheque into a savings account
● This fund should be untouchable. It should only be used in times of real emergencies, like loss of income and medical emergencies
● Have a target in mind. If your monthly expenses add up to $2,000, aim to save about $12,000
● Be sure to increase it if your monthly expenses increase
● Once you reach your goal, treat it as your baseline and continue saving for growth
2. Failure to Budget
If you want to achieve financial stability, make sure you create a comprehensive budget. Otherwise, you will find yourself overspending, not knowing where your money goes, or struggling with debt.
A comprehensive budget acts as your financial compass; it guides you towards achieving your financial goals, like purchasing a home or a car, reducing your debt, or going on a much-desired vacation.
However, your budget is only as useful as the effort you put into it. If you create a very nice and comprehensive budget, and don’t bother to track your expenses and income, your budget is useless. Here are other common budgeting pitfalls you should avoid:
● Setting unrealistic goals: If you drastically cut your spending or set a very high saving target, you may end up giving up
● Ignoring non-monthly expenses: It’s very easy to forget non-monthly expenses like car insurance and summer travel.
● Failing to include ‘fun money’: If you don’t budget entertainment or leisure, you may end up binging or overspending
3. Ignoring Small Costs
You have probably heard it before: don’t get that snack, cancel that subscription, and you can use the subway instead of taking an Uber. The truth is, a couple of dollars here and there will significantly add up by the end of the month, and will definitely be a substantial amount by the end of the year.
Of course, you don’t need to cancel all of your subscriptions or never get that takeaway snack again. You should be able to treat yourself from time to time. However, it’s prudent that you take a look at these small costs and see where you can cut down.
4. Carrying High-Interest Debt
Having a loan is not always bad. For instance, a mortgage can be an investment through property appreciation and rental income.
However, carrying a high-interest loan like a credit card loan can hurt you. If you only make the minimum payment, most of your payment goes toward interest. Ultimately, you will pay for more than you spend. For example, a $2,000 credit card balance at 21% interest can cost nearly twice as much over time if you only make minimum payments. Here’s how you can break free:
● Start by paying off the debt with the highest interest rate
● Alternatively, you can start by paying off the smallest loans first
● Always try to pay more than the minimum amount due. Even an extra $20 every month can help you pay off the balance faster
● Consolidate your debts if possible by moving credit card balances into a lower-interest loan
● Negotiate with your lender for a lower rate if you have been paying your installments on time
● Freeze or close unused credit cards to reduce the temptation to take on more debt. Every dollar you save on interest is money you keep
5. Failure to invest or save for retirement
You will be retired before you know it. Will you be ready? Don’t wait too long to start saving for retirement or investing your money because you think you don’t have a lot of money, or it’s too early. The truth is, time is your most valuable asset. Investing even a few dollars early can grow significantly over time.
For instance, $25 a month at an 8% return could grow to around $37,259 in 30 years. If you wait five years before starting, the same $25 a month at an 8% return would grow to around $23,781 in 25 years. Be sure to:
● Start investing as soon as you can, even if it is only a small amount. Over time, it can grow significantly through compounding
● Use Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) to help your money grow more efficiently. RRSP contributions can reduce your taxable income today, while your investments grow tax-deferred. TFSAs allow your money to grow tax-free, and withdrawals are also tax-free
● If your employer provides a group RRSP OR a pension match, take full advantage of it. It is essentially free money that can help you build retirement savings faster
● Automatically put raises or bonuses into savings. For instance, you can increase your retirement contribution by 1% each year
● Reinvest any interest or dividends instead of spending them, so your money can continue growing over time
● Do not try to time the market. Instead, focus on investing consistently in low-cost index funds or ETFs. When you start investing and saving early, you build wealth gradually without putting too much pressure on your budget. Over time, consistency and time in the market usually beat risky short-term moves
Endnote
You have probably made some of these mistakes, but you should not worry about them. Instead, focus on turning them around. Be sure to create a comprehensive budget and stick to it, start saving and investing for retirement early, and create an emergency fund. Don’t forget to track the small costs and avoid carrying high-interest debts.
