Managing your financial health isn’t always easy. There are so many competing priorities and some are non-negotiable like housing, food and clothing. For every valid need that you can spend your hard earned money on, there is a want that routinely tempts you to part with your income. Regardless of your financial status, there are some key mistakes to avoid at all costs.
As part of trying to live within your means, don’t max out your credit cards buying items that you want but could honestly live without. If you aren’t familiar with Maslow’s hierarchy of needs, look it up. It highlights the basic needs in life. Take a look at your expenses and see if they fall into the need category and be honest with yourself in determining if the spending is reasonable. For example, clothing is a need but a $100 shirt is not practical when shirts are available for $10. Avoid spending sprees or splurges on your credit cards. Your debt will balloon out of control and you will spend hundreds, if not thousands, of dollars in interest on items that you probably won’t own even when the credit card debt is still there.
If you find yourself experiencing financial hardship, temporary or otherwise, try not to dip into your emergency funds or savings to bail you out unless it is truly a onetime expense. Of course you need your car repaired to get to your job and back but perhaps you could hand wash those dishes instead of buying an expensive dishwasher when yours is broken. Continually accessing an emergency fund or savings can become problematic because it prevents you from replenishing the fund to previous levels. When a true emergency or hardship befalls you, the emergency fund/savings account will be a lifesaver and will function as intended but you need to be disciplined about replacing the money.
Similar to the point above regarding accessing emergency funds or savings, it is almost never a good idea to borrow from a 401k or retirement plan. Although most plans have provisions to allow you to take a loan, there are two key reasons why it is not a good idea. First, the money you have removed from the account is no longer a part of your investment portfolio and therefore you will not be maximizing your return on the investment. Secondly, if you leave your current job or are laid off, you will need to pay back the balance of the loan or pay a penalty on your taxes.
Remember regardless of whether or not you are applying for and using credit, you should be aware of and actively manage your credit profile. If any erroneous information appears on your credit report, you should work to immediately rectify it. Incorrect information can negatively affect your credit score and can prevent responsible use of credit from occurring now and in the future.
In summary, you need to be an active participant in your financial health by making responsible decisions about spending and investments. Be sure that you carefully evaluate emergency situations and use savings or investment accounts sparingly. Lastly, use tools at your disposal such as the internet to protect your personal information and ensure your credit score and profile is an accurate representation of your financial situation.
Be sure and come back for next week’s Money Matters Monday. We will be talking about How To Establish a Realistic Budget. Did you miss the first post in this series? You can check it out here.
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