Whether it’s a last-minute impulse purchase, a forgotten bill, or merely poor planning, at some point we have all mishandled our money. However, there is a significant difference between the occasional over-spend and making a grave financial mistake.
To help you avoid making poor decisions with your money and keep your financial stability intact, we’ve put together a list of some of the worst financial mistakes you could make (and how to avoid them).
Everyone should have an emergency fund of at least three months of take-home pay. Six months is even better.
You never know when your car may need a repair, or your work stability stumbles. If you don’t have any funds set aside, you may have to take drastic measures such as paying bills with your credit card or even relying on your retirement savings to cover your living costs.
Not having an emergency fund could lead to putting your retirement at risk and potentially costing you thousands of dollars in interest charges on your credit card.
The first step in building your emergency fund is building it into your monthly budget. Figure out how much three months of living expenses would be. This includes the cost of
Living expenses don’t typically include any extras such as going out to eat or any subscription services – but if these are essential for you, make sure to add them in as well. Make sure to put as much monthly income towards your emergency fund as you can comfortably afford. Continue this every month until you reach your savings goal.
One of the most appealing features of a credit card is that you can purchase now and pay later. This can get dangerous, though, if you’re spending more than you can afford to pay back at the end of the month. The average interest rate on a credit card is 19.24%. If you’re only making the minimum payment each month, this can end up costing you thousands of extra dollars in interest.
This can lead to many people ignoring their credit, often because they don’t want to face it. This is certainly not recommended.
Despite how bad your situation may be, you will never be able to pull yourself ahead financially if you don’t have a full idea of what you’re facing. Your credit is one of the most critical aspects of your financial life and affects things like your interest rates, your ability to make big purchases such as a home or vehicle, and can even impact your job.
If you’ve been ignoring your credit reports/score, it’s time to pay attention. Once you know exactly what you’re dealing with, you can make a plan to get your financial stability back on track.
When you’re young and just starting in your career, it can seem like retirement is a lifetime away. But the truth is, the earlier you begin to plan out your future, the better. Not only will you be taking advantage of compound interest and allowing your money to grow with time, but you will also be learning healthy saving habits early on in your life.
For example, if you began to contribute to your retirement accounts at the age of 25, your future nest egg could have the potential to be worth more down the road compared to if you start contributing at 40 – even if the monthly contributions are higher when you’re older.
Why? Compound interest. It’s a powerful force that allows you to earn exponentially larger gains on your investments over time since your gains also earn interest. So the earlier you start putting money away in retirement accounts, the more time it has to work and earn you much more money!
If you’re older and haven’t yet started to save for the future, don’t panic. Planswell can certainly help you with the details of your retirement. The main focus is to start putting money away as soon as you can so you’re not haunted by the lack of action years down the road.
This concept is straightforward: if you want to save money, you have to start below within your means – spending less than you make. The earlier you fall into this habit, the earlier you’ll truly understand the power of financial freedom while making better financial decisions throughout your life.
Of course, this doesn’t mean you shouldn’t enjoy your life and your hard-earned money. But if you spend all your money on things that won’t matter down the road, you will rob yourself of the financial independence you’ve spent your entire life working to reach.
This is where having a budget is crucial. How much money is coming in every month? How much are you spending? Making a budget every month will help keep you on track financially while forcing you to be honest with yourself about what you’re spending.
Once you’ve built up your Registered Retirement Savings Plan (RRSP), it can be incredibly tempting to borrow from it – especially if you need a larger sum in a hurry. After all, retirement is so far off that a small withdrawal couldn’t make any difference, right? Trust us, you should think twice before dipping into your savings.
Because an RRSP is a tax-deferred account, you aren’t required to pay any tax on the money until it’s withdrawn from the account. If you wait until you retire to cash out, it’s likely you’ll pay lower taxes due to your lower income bracket. If you make a withdrawal today, you’d pay higher taxes depending on your current income.
Second, even a small withdrawal now could mean a big difference in the total amount you could have in retirement because you lose the effects of compounding interest. That small withdrawal could be the difference that decides whether or not you’ll be able to enjoy the lifestyle you want in retirement.
Another important thing to remember is that if you’ve maxed out your contributions, you won’t be able to put the money back into your RRSP later on, leaving you with a much lower RRSP total in retirement.
The main exception to this rule is the Canadian government’s Home Buyers’ Plan (HBP), which allows first time home buyers to borrow up to $35,000 from their RRSP for a down payment, tax-free. If you’re purchasing with another first time homebuyer, both of you can access that sum from your RRSP, for a combined total of $70,000. Be aware that the HBP is considered a loan, so it must be repaid within 15 years.
Being responsible with your money is all about understanding how the decisions you make today will affect your future outcome. The five mistakes listed above have the potential to derail your financial stability, but as long as you plan carefully, you can avoid them and achieve financial success.
Building a financial plan with Planswell allows you to give yourself the best chance at financial success while living a life that involves the right people, accounts, habits and behaviours. Once you’ve figured out what matters to you and your ultimate happiness, we are here to help.