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Nearly all of us have made our share of poor financial decisions in our lifetimes, but these mistakes are also an opportunity to improve our financial well-being, by teaching us how to make better money choices.
I’ve encountered so many money mistakes along the way — my own and others’ — and realized that, with a little planning and tenacity, they can be overcome.
From medical debt and credit problems to overspending and under-investing, these are things many Americans have experienced first-hand.
Piles of medical debt
The problem: Medical debt is a common source of bankruptcy-contributing debt, fueled by rising health-care costs, gaps in coverage (or poor insurance coverage) and a lack of understanding of medical debt payment options. Like many Americans, I carried tens of thousands in medical debt at one time, thanks to a lapse in health-care coverage after finishing school and a limited understanding of my medical debt management options.
The solution: Making sure you’ve got solid health-care coverage is essential, so seeking a job that provides quality insurance or budgeting to independently budgeting for coverage is critical. Still, that’s not always possible, and even those of us with good coverage can fall behind on bills due to serious illness.
Know that medical debt can nearly always be paid on reasonable installment plans at zero interest, so don’t use credit cards to pay — that just takes the debt interest-bearing. If you have no insurance, ask for a no-insurance price discount — many providers will oblige. Similarly, many hospitals or large medical associations offer financial assistance based on your income and related factors — in many cases (such as mine), financial assistance can erase all or most of your medical debt.
Failing to budget
The problem: Whether you simply don’t have a budget, or you blow yours off with unnecessary extravagances, failing to stick to a budget is one of the most common (and fixable) money mistakes. It’s also one of the most problematic, since budgeting is at the heart of all solid personal financial plans.
The solution: If you don’t yet have a budget, there is never a better time than now to set aside time to create a realistic and workable one. The key is to be realistic, which means not only being honest with yourself about your income and expenses, but also being frank regarding your spending priorities and how you’ve historically chosen to spend money.
That’s where tracking your spending comes into play. First, you need to assess what you’ve been spending, and only then can you determine when and how to cut. Budgeting is less successful when you create specific spending categories and limits without understanding how much you typically spend in those areas, and whether the budget to which you aspire can be reasonably met. Asking someone who eats out every night to suddenly cut their dining budget down to $200 per month, for example, might be a recipe for disaster.
That leads us to a second point: Extravagances and spending beyond your budget can also be a function of cutting too much all at once. If your budget leaves you feeling deprived, or if you’re frequently making impulse buys, it’s time to assess what’s really behind those expensive choices that exceed your budget. Are they stress-driven? Or, do you really not know how much discretionary income you have at any time? The solution differs based on the root cause.
Not planning ahead
The problem: Failing to plan ahead can take many forms — ranging from not having a will or life insurance if you’re a parent, to not planning for retirement or for any upcoming lifestyle changes, such as having a new baby or switching careers.
The solution: It’s all too easy to fall into a complacent lull if your life is running fairly smoothly and, when that happens, even the savviest among us can fail to plan for the inevitable changes that affect us all. Common money mistakes emerge from not appreciating the changes that may come, and acting accordingly. Take stock of where you are now: Do you have kids, or other dependents? Who will provide for them — or you — if you can no longer work? Are you planning to downsize, switch careers, have kids or retire early? All of these questions can help you plan forward for your needs, and avoid common mistakes, such as being under-insured, not having a will or other legacy instruments, or creating alternative budgets for new circumstances.
The problem: A whopping 78% of Americans live paycheck-to-paycheck, and many don’t even have access to a $400 emergency fund, let alone and investments. But even those Americans who don’t fall into these categories often fail to meet recommended savings and investment targets, and are at risk of under-funding their lifestyle and retirement goals.
The solution: There are three basic categories of reasons why we don’t save or invest enough: First, we might not earn enough. Second, we might earn enough, but choose to overspend on other things. Or third, we might not know enough about investing or feel confident in our abilities to do so well. If your issue is in the first, consider ways to increase your income, since every dollar you earn beyond your living expenses can be used toward savings. Check for employer-sponsored plans, such as matching 401(k) plans or holiday bonuses.
Even the most successful investors had to learn the basics at one time, just like you.
consumer advocate and executive editor of Wise Bread
Consider using your annual tax refund as your emergency fund savings. For those facing the second category, budgeting is key, but so are all the suggestions mentioned for the first category. All too often, however, the real impediment for many middle-class Americans is the third issue: They don’t feel confident investing.
Recognize that you’re not alone, and that even the most successful investors had to learn the basics at one time, just like you. And statistics show that being somewhat risk-averse can actually improve your return over time. Start slow, with lower-fee and relatively diversified investments such as target-date retirement funds in your 401(k) or low-cost index exchange traded funds. Seek out financial education online or in your community. And automate your savings and investments through auto-withdrawal programs from your bank, employer or apps such as Acorns.
Credit card headaches
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The problem: From maxing out accounts to paying late fees on missed payments, credit cards can present a real financial challenge for many Americans. And for reasons aplenty: Americans are awash with credit card debt. In fact, more than 120 million Americans are credit card holders, according to the Philadelphia Fed. Missed payments are also increasingly common, accounting for late fees, punitive interest rates and a decrease in credit scores. Been there, done that.
The solution: First, make the missed payment as soon as humanly possible and recognize that, although there is no guarantee, the late payment often won’t be reported to the credit bureaus until it’s at least 30 days overdue. Next, contact your lender and tell them it was an honest mistake, asking them to avoid applying penalty fees or increasing your interest rate. (Ask to speak to a supervisor if the first person won’t oblige, and emphasize your solid payment history, aside from this snafu.)
Then, create bill pay reminders and spending alerts using your bank’s app, or other budgeting apps which allow you to track when and where your money and bill payments are going. Finally, keep an eye on your credit report — make sure that your missed payment history is accurate.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.