In personal finance there are many ways to make mistakes. Mistakes in personal finances can lead to lower equity or bankruptcy directly. That is why today we will talk about the common mistakes in the management of personal finances and what is the right way to avoid them. Without further ado, let’s get started.
Financial advisor Gustavo Mirabal has seen how people with great resources end up in ruin. In our articles we have seen how elite athletes have been ruined after having large amounts of money.
For this reason, Gustavo Mirabal Castro has dedicated his life and the mission of his company to providing financial advice to people. Thanks to him, his clients have excellent financial health. However, he wants financial knowledge to be something for everyone. That is why in this article we will show the common mistakes that people make in the management of personal finances.
There are fundamentals of finance that many people despite the huge amounts of money they can earn do not respect. Personal finances are very important, and we must give it the rightful place in our life.
Today we will learn about the common mistakes in personal finance that most make. We will classify these errors from highest to lowest severity so you can focus on the ones that affect you the most. With this we will bring you closer to your personal and material goals. Success is in your hands and in your personal finances. Let’s start.
Table of Contents.
Common types of mistakes in handling personal finances
There are mistakes that are serious and inevitably lead to financial collapse sooner or later. These are the mistakes of our actions in personal finance.
Other errors are more theoretical. If we have good foundations in our personal finances, even without knowledge of finance we can cope with our life without understanding very well why we are doing well. The problem is that we always run the risk of derailing ourselves because we don’t know very clearly why we’re on track and how to stay there.
The last type of errors is the least serious. This is because the present is good, but we always don’t know what the future looks like. In addition, we all age and as that happens, we need money for our health and our income will decrease. Its gravity is accentuated over time.
That is why we need to prepare for the future. Mistakes about the future have to do with low preparation for changes, unforeseen events and for the natural process of reduced income and increased economic needs.
Next, let’s know the serious mistakes in personal finance.
Serious Mistakes in Personal Finance
Serious mistakes are those that have to do with our immediate behavior. It is what we do today, and it leads us quickly to collapse.
No matter what financial tools we apply, making these mistakes is the worst thing we can do. No financial tool is going to save us if we don’t correct these behaviors.
Here are the serious mistakes in personal finance.
Spend more than you earn:
Whenever you spend more than we earn we are in danger of collapse. We may be able to cover the expenses of our savings or the sale of some possessions for a few months, but this is not unlimited.
Therefore, one of the main keys has to do with balancing income with respect to expenses. There are many people who when they have large incomes do not save.
The worst thing is that, when their income decreases, these same people do not decrease their expenses.
This can lead to them having to sell possessions to compensate for the drop in their income. Not having savings means a problem. But if in addition the decrease in income or the increase in expenses is maintained over time, there will surely come a time when it will be impossible to maintain it.
The time comes when personal finances collapse. We are forced to do without important things, they suspend us services or seize possessions.
That is why it is important to spend less than what we earn, but for this we must know the amount of each of these and that means having and maintaining a budget.
Living to the limit of financial capacity:
This is very similar to the previous error. If our bank account ends every month at zero or very close to that number, then we are not fine.
If we repeatedly must borrow or resort to credit cards to cover basic or superfluous expenses, then we are probably living at the limit of financial capacity.
In this case we are not selling possessions or appealing to our savings (probably in this case we do not have savings) but we are exhausting our financial capacity to maneuver.
If we buy everything on credit, this is a bad symptom. We are committing our future income to maintain a lifestyle that is probably beyond our capabilities.
It only takes an increase in inflation or a reduction in our income to bring us into a situation where we are spending more than we earn.
It is very difficult to know if we are in a situation of living on the edge or spending more than what we earn. For this we return to a key tool, the budget.
The truth is that, if we do not have debts and every day we see more money in our accounts, this is a good indication that our finances are going well, whether we have a budget. This is what we mean when we say that even if we drift, we can go in the right direction.
Living without a budget is like sailing without a compass. We can intuit that we are doing well but perhaps we are a little or very wrong. Likewise, the key is to know if we earn more than we spend and that we can see in the accumulation or not of money.
Ignoring extraordinary expenses
Extraordinary expenses can become a burden on a very tight budget. A person with a good management of personal finances always leaves room to attend to extraordinary expenses.
For the management of extraordinary expenses, two strategies can be used:
- Allocating an item for extraordinary expenses.
- Place a “margin of safety” on the overall budget.
This applies not only to personal finance, but to finances in general. When government works are quoted and carried out by confrontation of offers, the legislations include the possibility of increases.
If the increase of a public contract exceeds what is stipulated by law, the project must make a modification in the scope, which may lead to a new quotation.
In the same way, personal finance requires a margin of safety or an unforeseen budget.
If this is exceeded, we must analyze in great detail what our actions will be. It is customary to manage these expenses in a budget of extraordinary expenses.
Not having a budget of extraordinary expenses or not considering a margin of safety, transmits a false sense of saving. What ends up happening is that we can never meet the savings goals we set for ourselves.
Extraordinary expenses must be included in our budget, and we must also pay attention to these. Our decision-making can increase its incidence.
Maintain unnecessary expenses.
Monitoring our expenses and evaluating their impact can help us determine which expenses are expendable. If we ignore the evaluation of expenses, we may begin to accumulate expenses that become a burden on our budget.
Some examples of these can be:
- Have a subscription to a magazine that we don’t read.
- Join a club we don’t go to.
- Have contracted a service that we do not use.
If this is happening to us, we are spending on something that brings us neither personal nor monetary value. In these cases, we must evaluate if we can do without them or in the future, they can bring us something of value. A magazine may not be read now, but it can be a source of consultation in the future. A streaming service we don’t use is a waste because it’s something we can’t save to use later.
This is one of the common mistakes in handling personal finances. This mistake is enhanced by the need to “not miss anything”, and with which all we do is “lose money”.
Evaluating each of the expenses we make, and their relevance can save us a lot of money. There are many examples of these, but everyone must perform an analysis of their expenses and assess the contribution they make to their quality of life.
Do not save a percentage of the income.
Just as ignoring extraordinary expenses can put us in trouble and give us a false sense of saving, not setting a savings goal can be a big problem.
Saving is the easiest way to deal with unforeseen events. Savings is a source of peace of mind because we will have the resources to face any unforeseen event or extraordinary expenses.
Additionally, saving can, ironically speaking, be a source of savings. When we buy on credit, we end up paying more because we pay interest. If we can buy with our savings, we do not compromise our future income, but we also do not save interest.
It is only recommended to buy on credit when they are goods of great value or when inflation exceeds the financing rate. In this way we would be beating inflation.
On the contrary, if we can save to buy what we need, we make more efficient use of our resources. By saving to buy in cash what we need we are saving ourselves the interest and increasing our real purchasing power in the long term.
Not having savings forces us to buy on credit and pay more for what we need, one of the common mistakes in managing personal finances. Additionally, in case of an unforeseen event, we can be left in a complex situation where we must borrow with high financing rates with lenders and loan sharks. Saving is a shield for our financial stability.
Avoiding common mistakes in personal finance brings us closer to success
If we analyze the common mistakes in personal finance, we can see that in our life we have had stages in which we have committed them.
Many of these mistakes are obvious and common sense when we look from the outside. However, when someone makes a lot of money, they think that they will never run out.
On the other hand, when people make little money, they think there is no way to optimize their expenses or save.
The truth is that you can always exhaust money, no matter how much you earn, and you can always save, no matter how little you earn (with few exceptions).
Raising awareness of this can help us get our personal finances on track. If you intend to improve your personal finances, we invite you to follow the pages of Gustavo Mirabal to learn more tips about finances.