Mistakes can be costly. With that being said, there are two ways to get out of a financial crisis. The first strategy involves assessing the amount of money being brought into a household on a monthly basis and employs a multiple stream of income approach to increase a family’s finances. The second tactic involves a disciplined plan of attack that decreases expenses and pays down debt. Each step is crucial for long-term sustainability.
Without an adequate amount of money coming in, men and women have a tough time sticking to a budget. Items that once were paid for with cash now get put on charge cards which generate interest and cost a person more in the long run. Add late fees, overdraft charges, and penalties and you have a recipe for disaster on your hands.
These financial blunders damage budgets and halt progress economically. Not entirely avoidable in some cases, they are:
- Cashing in your 401K plan early. If you withdraw funds from a retirement plan before you reach 59 ½ years of age in most cases, you are subject to a 10% additional tax on early distributions. This is on top of the taxes you would normally pay on the amount of money taken from the account.
- Not filing your taxes on time. The IRS charges a penalty for filing taxes late to the tune of 5% for each month or part of a month that a return is late. This amount never exceeds more than 25%. The penalty is based on the tax not paid by the due date and disregards extensions. Filing is easy and often free with TurboTax.
- Paying exorbitant interest rates on your credit cards. A lot of people fail to read the fine print. Credit card companies entice consumers with promises of low introductory APRs and rewards programs. Once you accumulate a balance, however, things change rather quickly. Amendments are made on policies and percentage rates slowly rise. Grace periods are shortened and late fees are charged. Rewards points become harder and harder to redeem.
- Not getting a fixed rate cell phone plan. Extras like pay-as-you-go text messaging and internet access add extra costs to skyrocketing usage charges. Choose a carrier with unlimited local and long distance calls for a fixed rate to avoid overages. Know the conditions of your plan and ask for a discount. You can save yourself up to 30% with one phone call to customer service.
- Spending more than you make and living beyond your means. Many people experience lifestyle creep with dual incomes. Bills increase as income increases. Rather than pay off the debt already owed, men and women continue to spend ridiculous amounts of money buying new things. Higher mortgage and car payments are taken on and the amount of money being put in savings remains at a standstill. If one of the dual income earners loses their job, they have a hard time staying financially afloat. Without the recommended six months of living expenses saved, many couples have their vehicles repossessed or lose their homes to foreclosure.
You can avoid making these costly errors by employing multiple streams of income, paying off debt, reducing your costs of living, maximizing your retirement savings, and filing your taxes on time.
A savvy person is one who knows how to stand up to life’s challenges. Overcoming financial obstacles becomes easier with a plan. Make yours today and reap an abundance of rewards including more financial freedom and less dependency on credit.
Thanks for posting this article. There are still way too many people out there who cash in their 401(k) plans early and may not realize the 10% penalty for withdrawals under age 59 1/2.
Spending less than you make is critical also. Easy to say, but hard for many folks to do. Jonathan Chevreau, author of Findependence Day uses the motto - "Freedom! Not Stuff." to define Financial Independence.
Great post, Charissa, especially your points about recognizing mistakes before they happen. These days, many of us are looking to reduce risks. Financial turmoil has made things more and more complicated, and now, more people are looking to get back-to-the-basics. To me, that means spending less than you earn, keeping some cash in a rainy day emergency fund, addressing the common risks that could affect long-term financial security, and recognizing common mistakes that people make. Keep up the good work!
I like that phrase "lifestyle creep," LOL! I know just what you mean. A lot of times people look at the stated cost of something and don't figure in all the extras that will wind up going along with it. "The gym membership is only X dollars a month..." not counting the nicer athletic clothes you'll want to buy, the parking fee or the bus to get there, the drinks you'll buy out of the vending machine, the new bag you'll need to carry your clothes there. After all that, it's not really just X dollars a month anymore. Multiply that by everything you add to your budget, and pretty soon it's way more than you meant to spend.
Spending less than you make ...it sounds so simple yet so many miss this important tip....I've had this problem lately...getting a heads up on the 'extras' that come with owning a home...Good post.
DJ- I totally agree. Not taking advantage of things like financial aid and free money through scholarships is simply stupid... All great points presented. Currently, I am trying to live under my means by cutting a little bit of costs here and there and I think it really helps if you can save say $100 a month or so.
I would humbly submit that paying too much money for a college education by not maximizing your free grant aid and scholarships would be a huge drain on any person's finances, whether you are the parents funding a child's college tuition bill, or a student paying your own way!
Say what you will about the federal government, there are numerous education grants available (both need based and non-need based).
Also, by fully understanding how student loans work, you will maximize your student loan borrowing eg. best interest rates, best repayment terms, forbearance/deferment options.
In my opinion, there is a lot of money lost and needlessly wasted in this area of our financial lives.