Making informed choices with your money can make or break your future. Whether your goal is to save for retirement, travel, or buy a home, you will need to make the right decisions with your money to get the best outcome.
Much like there are smart ways to use your money, there are also poor decisions. Here are five of the worst things you can do with your money.
1. Nothing
If inflation for a particular year is 2% and your bank or savings account is only yielding you 1% interest, your money is not keeping up with the rate of inflation.
Because inflation has averaged over 3% in the last 100 years, your money would need to increase in value at a minimum of 3% a year just to keep up with the cost of inflation. Keeping your money in a checking account, low-interest savings account, or even cash can significantly decrease its value over time.
One way to put your money to work is to invest in cheap dividend stocks. See marketbeat.com for a list. This list, for instance, includes stocks that are still yielding at least 3%.
2. Not Having an Emergency Fund
Also called a “rainy day fund,” an emergency fund is a significant amount of assets or savings available to help you during any financial dilemma.
Here is an example: you get an unexpected flat tire during a road trip. Depending on your car, a new tire can cost anywhere from $50-750. If you don’t have the extra money to pay for this tire, you must go into debt to have it fixed.
Having a pool of resources that you can dip into for an emergency can prevent you from falling into a cycle of debt, which is another negative thing you can do with your money.
3. Not Creating a Budget
A budget is a roadmap to achieving your dreams. Just like a roadmap, without a budget, you can easily get lost. Spending small amounts of unaccounted-for money can seem harmless, but every dollar adds up quickly.
Creating a budget allows you to account for every dollar you are bringing in. Start with monthly bills, and be sure to account for expenses like food and clothes. After you’ve accounted for your expenses for the month, you can choose what to do with your leftover funds.
This article provides tips on how to start a necessary budget. Of course, paying off debt is the best thing to do with any leftover funds before you begin saving.
4. Going Into Debt
Spending more money than you are bringing in creates a deficiency called debt. While certain types of debt, like mortgages or car loans, can help build good credit, failing to make payments on time can negatively affect your credit score. A low credit score can affect future financial decisions and leads to higher interest rates on loans, which is not suitable for your money.
If you are already in debt, don’t worry! Just focus on getting out of debt before beginning any significant savings. This New York Times article has tips to help you get out of debt so you can start building your savings.
5. Too Much in Savings Instead of Paying Off Debt
While we do advise building up an emergency fund, your savings should stop there until you are free from debt.
Because debt accrues at a higher rate than savings, it makes logical sense to pay off your debt before saving any significant amount of money. For example, if you are paying 10% on your credit card debt but only making 1% in your savings account, you are losing money.
Any money outside of your emergency fund should go directly to paying off credit card debt before building a savings account.
Making smart decisions with your money can help you build a prosperous future. Here are some benefits to making smart decisions with your money:
- Improve your credit score
- Save for retirement
- Stay prepared for emergencies
- Avoid falling into a cycle of debt
Start by making simple changes in your habits today. If you are trying to save for a big purchase or want to plan for your future, being smart with your money is the best way to build the life you want to live.