Everyone makes mistakes. But when it comes to money, even simple mistakes can have a significant impact on your financial health.
With that in mind, here are three of the most common, devastating financial mistakes you can make… with some tips on how you can avoid making them ever again.
Lack of a budget
By far the most common money mistake is overspending. It might seem silly, but a simple budget can have a tremendous impact on your financial situation. Even if you only write down what’s coming in and what’s going out, it will help you get a grip on your finances, and limit overspending.
Budgeting is also imperative for saving for the future. A great way to make sure that you’re saving and not spending is to put a little money away every month before you start spending. Or, to put it another way, spend what’s left after saving. This will ensure money is always being set aside.
Credit card conundrum
Credit cards can be a useful product for managing your finances, if you’re able to pay off the balance every month. The average annual credit card interest rate is nearly 30%, which means even a small debt could spiral out of control quickly. The best way to stop this happening is to avoid credit cards altogether or, if you do use them, pay off the balance in full every month.
If you have any outstanding debt, it’s generally advisable to pay this off before you starting saving. It doesn’t make sense financially to be paying interest on debt if you can afford to pay it off.
Make your money work for you
Budget issues and debt are the most common financial mistakes, but a close third is poor returns.
A strict savings plan is all well and good, but if this money isn’t working for you, you could be missing out on a significant income stream. According to pensions provider Royal London, £100bn of cash is languishing in low-interest cash ISAs today, which shows just how much of a problem this issue is.
There are many different ways to get your money working harder, including investing. Investing might seem like a daunting prospect, but it really doesn’t require much extra effort on your part. Today, there are hundreds of different investment products on the market with the goal of streamlining the investment process, making it easier for novices to get into the market.
And the extra returns available more than make up for the limited amount of extra work required.
Indeed, according to my figures over the past decade, the FTSE 250 has produced an average annual return of around 8%. Over the same period, the average interest rate on offer from most cash savings accounts has been less than 1%. A small investment of £1,000, earning 8% a year, would grow to be worth £2,200 after a decade of growth. Meanwhile, the same starting investment making 1% per annum would grow to be worth just £1,100.
These figures clearly show that the best way to get your money working is to invest in the stock market.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.