5 Common Financial Planning Mistakes to Avoid

Avoiding big potholes is a sure way to arrive at your destination in great shape. It’s just as true about your financial life. Steering clear of financial pitfalls is an important factor to consider if you’re eager to live a life with minimal financial stress.

AFor those launching into “adulting,” taking the time now to get up to speed on common financial missteps can be one of your smartest financial planning moves. Here are five of the biggest financial mistakes to put on your planning radar ASAP.

Having unplanned expenses pop up is more a question of when, not if. Life happens. The deductible or co-pay when you need medical care. A car repair. A layoff. Yet a federal survey reports that 32% of adults in 2021 didn’t have the cash or its equivalent (like a credit card paid off at the next statement) to cover a $400 emergency expense.¹ (And FYI, the same survey reported that, in 2021, 20% of adults had unexpected medical expenses, the median cost of which was between $1,000 and $2,000. That’s a lot more than $400.)

• How to avoid this mistake: The best way to increase the likelihood of being able to pay for emergency expenses is to commit to setting aside money in an emergency fund. Open a separate savings account (online high-yield savings accounts often pay the highest interest rates) and set up automatic transfers – say, weekly or monthly – from your checking account.
  

Right-sizing your spending so you have money each month to put toward important financial goals (e.g., emergency fund, retirement savings) is the secret sauce to building financial independence. Being a conscientious spender today can also instill the discipline required to avoid lifestyle creep as earnings increase. A 2022 survey reported that half of people making $100,000–$150,000 a year say they’re living paycheck to paycheck, and more than four in 10 people making $150,000–$200,000 a year say they aren’t getting ahead on savings and other financial goals.²

• How to avoid this mistake: Consider firing up a budget to help you stop overspending and start saving. There are different approaches to budgeting. Some folks swear by the zero-based budgeting approach, others are fans of the 50/30/20 approach, for example.
  

When you’re shopping for a mortgage or a car loan, don’t listen to the number that the lender is willing to let you borrow. Instead, the goal should be to borrow only what you need. Lenders don’t know whether your retirement savings is on track, whether you plan to have kids, or whether you think you might need to step in and help your aging parents with their living costs. The smaller your borrowing costs, the more cash you have to put toward other financial goals.

• How to avoid this mistake: The payment on a used car will be less than one for a new car. Same goes for the less expensive house that still ticks plenty of must-have boxes. Push yourself to see how little, not how much, you need to borrow to get what you need.

The most cost-efficient way to use a credit card is to be able to pay off the balance in full each month. That said, even if you limit your credit card spending to essentials, there may be times when you can’t pay the bill in full. If that happens, do your best to get it paid off ASAP, or look into the possibility of using a credit card that won’t charge high interest rates.

• How to avoid this mistake: Work on building that emergency fund; that savings stash could be used to pay off a high credit card bill. Or look into whether you can qualify for a 0% intro APR credit card where you won’t be charged any interest for the first 12 to 15 months or so, depending on the card. Already have an unpaid balance on a high-rate credit card? See if you can qualify for a balance transfer to a new card with a 0% intro APR – better yet, look for a card that also won’t charge a balance transfer fee.