I’ll be the first to admit, when I started budgeting I made a lot of mistakes. Although I’m naturally frugal, I wasn’t super knowledgeable about money in general and didn’t have a plan. Over the past 2 years, I’ve been on a mission to not only educate myself when it comes to my finances but to set goals, save money, and build financial security.
I can recall the exact moment when I realized something needed to change regarding my knowledge of finance. After starting my first full-time job after college, I had an appointment with my company’s financial advisor. I walked into the meeting to talk about a retirement account and left feeling more confused than before. For 30 minutes, the advisor, talked at me about things I had never learned about. A 403b? Tax advantaged savings? Income brackets? Now is the time to be aggressive and take risks? Aggressive about what?? There was a nonstop stream of questions frantically running through my head but I was too embarrassed to cut the guy off and tell him I had no clue what he was talking about.
I left that meeting feeling ashamed about my total lack of knowledge and fired up to do something about it.
I had a great college education and graduated with a liberal arts degree. Now, this is in no way a jab at liberal arts but I really do feel that college left me underprepared when it comes to important practicalities, like you know saving for retirement and knowing how to manage my own money. Maybe these are common sense things I should know about. Maybe I should have spent more time in college learning about finances and less time hitting the bars on the weekends. You live and learn.
Here are 5 mistakes I’ve made and how I’ve corrected them over the past 2 years:
The Mistake: Assuming I deserve something and treating myself
Something I’m guilty of and have seen friends do is throw hands up in the air and say screw it, I’m gonna treat myself today! Whether this is in regards to a new pair of shoes, a fancy meal, a spontaneous trip, or treating loved ones, it’s all too easy to think, I’ve been working hard, I deserve this! Stop right there. You deserve to live a stress-free life without credit card debt eating up your savings!
The Fix: Know the difference between “treating yourself” responsibly and not going berserk when you have a bad day and throwing the budget into the shredder. Have a list of things or activities you know help you feel better, preferably things that don’t break the bank. For example, I love not having to cook after a long day of work. Instead of grabbing cheap, greasy fast food on the way home (which, by the way, adds up to way too much money to spend on empty calories), I pre-make meals, freeze them, and pop them in the oven when I get home and I don’t have to prepare a single thing.
The Mistake: Not having a budget
I can remember a time when hearing the word “budget” instantly brought to mind images of living off ramen and scraping by to the end of the month to pay utilities. Too many people are conditioned to believe that the word “budget” implies a lack of funds; the opposite could not be more true. How can you expect to know whether or not you money is working for you or against you unless you know where you’re going? Having a budget helps to identify trends in spending habits and track savings goals.
The Fix: I cannot emphasize enough how much tracking my spending helped me realize I was wasting tons of money on eating out and not nearly enough was going into my savings. If there’s one piece of advice I could give to everyone who is looking to take control of their bank accounts, it is to track your spending for a minimum of one month. At the end of the month, you should be able to identify your fixed expenses (rent, utilities, car payment, etc.), variable expenses (gas, groceries, etc.), and savings. I tracked my finances for 1 month in 2015 and was shocked to realize I was spending over $200 a month on coffee alone. Talk about a java overload. Since then, I’ve been religiously tracking my spending in the app Mint (a tremendous app for organizing all of your different accounts) and monitoring my budget in a Google Sheet.
The Mistake: Having a lack of goals
Having a defined list of goals can be a visual reminder to stay on track to help yourself avoid distractions. Without goals, we have no roadmap and can fall into the trap of veering aimlessly. Keeping a journal to track my progress has been life changing. Before, I would randomly work on things without actually accomplishing anything.
The Fix: I used two different methods to help track my goals. One was a vision board that I used as a constant visual reminder to keep my goals in mind. For example, my vision board primarily consisted of places and countries I wanted to eventually see. The other method I used was a monthly planner. At the beginning of every month, I wrote down my long-term goals and then short-term goals that would help me achieve the bigger picture things. Only focusing on the bigger picture can be overwhelming. It’s helpful for me to break things down into smaller segments.
The Mistake: Paying off loans without a plan
When I graduated, I realized I needed to take advantage of my loans’ 6 month grace period. I used this time to pay as much down as possible. Even with that mindset, I was throwing money at different loans without really paying them off in a specific order.
The Fix: I researched more on the snowball vs. avalanche methods of paying off debt and opted to go with the avalanche method in order to spare myself the exorbitantly high interest rate on my Sallie Mae loan. Ever since I paid that loan off, I have been prioritizing my loans according to their interest rates. Some people opt to pay off their loans by starting with the smallest amounts and working their way up. There is a huge psychological benefit to this because you’re quickly paying off loans. However, I would highly encourage people with high interest rates to prioritize the interest bearing loans first. I estimate that I have saved tens of thousands of dollars by paying one loan off 9 years early.
The Mistake: Putting savings last
Picture this: it’s finally pay day, it’s the weekend, and it’s time that you properly treat yourself. Perhaps you’ll go out with friends for a nice meal, or purchase an item of clothing you’ve been eyeing. Before you know it, your paycheck is pretty much gone and you have to scramble to pay all the bills. Then, you wait till the next payday to do it all over again. It’s easy to want to treat yourself and to feel that you deserve to – there’s certainly nothing wrong with that! But like I mentioned in Number 1, you need to find ways to do that responsibly. Otherwise, you won’t have anything at the end of the month to show for all your work. What would you rather have – a bunch of restaurant receipts or a healthy amount of savings in the bank?
The Fix: We constantly hear about the power of automation, automation, automation and it’s like, hey we get it, we need to automate everything! But seriously, to beat a dead horse, the power of automating your savings is more powerful than I realized. When I started my full-time job, I was making approximately $2700 a month. More than enough to cover my bills and expenses. However, after 6 months of working, I had a little over $1000 to show for it. This both shocked and embarrassed me. The luxury of a steady paycheck lulled me into the false belief that I could buy what I wanted, when I wanted. I didn’t even stop to think that just because I could, didn’t mean I should. I now automate 10% of each paycheck to go to savings and I don’t even notice it. That’s the true power of automation – putting away money and not missing it.