Winning the lottery or inheriting a fat stack of cash are two ways to get rich quick but if you’re like most people, the odds are against you. This means most of us will have to focus on hard work, discipline and smart decision-making to build wealth. Whether you make a lot or a little, what you do with it that has a big impact on your financial outlook. If getting rich is your goal, avoiding these common money missteps can help you move from the red to the black.
“Spend less than you make” is an oft-repeated mantra in the personal finance world but this seemingly simple concept is often one of the most difficult for people to grasp. If your expenses consistently outpace your income from month to month, the extra cash has to come from somewhere. When you turn to credit cards to cover the gap you’re creating yet another financial obstacle in the form of high interest debt. As the debt becomes more unmanageable, you may find yourself falling behind on other bills and before you know it, you’ve become trapped in a vicious cycle.
If you’re trying to pay down debt but the balances only seem to go up it’s a good sign that you’re overspending. Keeping track of every penny that goes out is a step in the right direction if you’re trying to turn your financial situation around. When your dollars and cents are accounted for it’s easier to see where the spending leaks are and what you can afford to cut out.
2. Not Saving Enough
Unless you’re blessed with extremely good fortune, it’s probably not likely that you’ll wake up one day with a hefty bank account balance. One of the first steps towards building wealth is developing a solid savings habit. If you’re not a natural saver starting out small can help you ease into it. Even if you’re only setting aside a few dollars out of every paycheck it’ll provide the seed your nest egg needs to grow.
If you’re already saving money on a regular basis you need to ask yourself whether you’re saving enough to meet your goals. For example, if you’re interested in retiring a few years early you should consider whether your current savings rate generates enough income for you to live off. If your calculations have you coming up short then you probably need to make some budget adjustments. When it comes to your long-term outlook, it’s always better to plan to save more rather than less.
3. Letting Debt Hang Around
Debt can be categorized as either good or bad, depending on what type it is. “Good” debts are those obligations that tend to improve your financial situation, such as a mortgage or student loan. Even though you’re paying interest on the debt, you’re gaining an asset in the form of a home or an education. “Bad” debts, on the other hand, are those debts that serve no real purpose other than to drain your wallet in the form of high interest. Credit cards, payday loans or a high-interest line of credit all fall into the bad debt category.
When you’re burdened with debt, it detracts from your ability to reach your other goals, including saving money. If your interest rates are sky-high it becomes that much more of a struggle. Developing an aggressive strategy for paying down your debt can help you keep more cash in the pocket in the long run and help you get that much closer to your financial dreams.
4. Saying No to Free Money
Socking away money in an employer-sponsored retirement account such as a 401(k) is a no-brainer but far too often, people fail to take full advantage of this savings option. Depending on your plan, you may be able to chip in anywhere from 3 to 15 percent of your income to a tax-advantaged account. Even if you’re only putting in the minimum it’s worth it if your employer offers matching contributions. You can effectively double your money and it doesn’t cost you anything.
Your 401(k) isn’t the only place you may be missing out on some free dough. Using a rewards credit card to earn incentives on your purchases is a smart move but not if you don’t redeem those free miles or cash back bonuses on time. Your tax return is another spot where you could be overlooking free money. Taking the standard deduction, for example, certainly simplifies things but taking the time to go over your itemized deductions could yield a bigger refund or a lower tax bill.
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When it comes to get-rich-quick schemes, if it seems too good to be true it probably is. Typically, wealth isn’t something you can achieve overnight but you can do it. It may mean a major lifestyle adjustment or simply a change in attitude with regard to how you view your money. Knowing what not to do can make it easier to clear the path towards to your goal.
Photo Credit: Billiga Lan