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The 6 most common financial mistakes most people make.

My name is Jose Eduardo Gonzalez Alvarez I am 27-year-old, originally from Tijuana B.C. Mexico.

Intro

Making financial decisions can be confusing and overwhelming. There are so many factors to consider like inflation, taxes, when to take Social Security, when you should start saving for retirement, when to pay off debt, when you should purchase life insurance, etc.

It’s not enough just to have a budget of what you spend every month. You need to have a strategy on how you will spend your money so that you can reach your goals in the future. Here are 6 common financial mistakes people make and some advice on how to avoid them.

Start saving right now

One of the most common mistakes people make when it comes to money is not starting saving early enough. A lot of people don't start saving until they're in their 40s and 50s, and by then it's too late.

What can you do? Take a small percentage - like 10 percent - of your paycheck and put that into an investment account every single month. If you start early, you'll have more time for compound interest to work in your favor.

If you wait until your 40s or 50s to invest, you're going to need a much bigger percentage of your paycheck just to get started. You'll also be competing against all of the younger investors who had the foresight to get ahead of themselves.

Think about it this way: 20 years ago, if someone invested $100 per month with an average annual return of 10 percent, they would have $151,000 today (assuming no other contributions). If they waited until their 40s or 50s and contributed $500 per month with the same average annual return rate over 20 years, they would only have $200,000 (again assuming no other contributions).

Make a budget

The most common financial mistake is not having a budget. It is really easy to overspend when you are not organized with your finances.

To avoid this, you need to make a budget of what you spend every month. This will help you figure out how much money you can spend in each category.

Once you have your budget set up, it’s important to track your spending so that you can see if there are items in your budget that are being exceeded or if some categories are in the red and might need to be cut back on.

It can also be helpful for seeing where there are areas of improvement when it comes to cutting costs. For example, maybe there is an item in your monthly groceries that is more expensive than items in other stores or something that could be made at home instead.

Prioritize your spending

When your budget is too tight to meet various needs, you need to prioritize what you spend your money on. It’s important to take care of the essentials first before spending money on unnecessary items.

To avoid common financial mistakes, calculate your total monthly income after taxes are taken out. That way, you can have a better idea of how much money you have left to spend each month.

Your budget should be flexible and be changed depending on your life circumstances. For instance, if one of the adults in a two-parent household loses their job, the other parent's income would have to increase or some expenses would have to be cut from the budget.

If you're making a conscious effort to keep track of your finances and stay on top of them, then it will help prevent any common financial mistakes that could cost you down the road.

Avoid these 6 common mistakes

  1. Overspending on credit cards
  2. Spending money on things they don't need
  3. Not saving enough for retirement
  4. Making poor financial decisions based on emotions
  5. Not considering inflation when making a purchase decision
  6. Failing to diversify investments
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Save for retirement early

Many people don't understand how much money they need to save for retirement. But the earlier you start, the more money you will have when you retire.

The best way to know how much money you need to save for retirement is to calculate your net worth and then subtract what you owe from that number. The difference is what you would have if you didn't owe any debt. Divide this number by 100 and that's how much of your income you should put into your savings account each month.

If your net worth is $200,000 or less and you make $50,000 a year, then put 20% of your monthly income in your retirement account (or $10,000).

Get life insurance

One of the most common financial mistakes people make is not getting life insurance. This is a mistake because everyone needs some type of financial protection in case something happens to them.

If you die without life insurance, your family will be left with money burdens like paying for funeral costs or college tuition. You should always talk to your family about this and make sure they are aware of the risks associated with not having life insurance.

Many people believe that they don't need life insurance because their spouse's income will provide enough if one of them dies prematurely. The problem is that many spouses also work and, even if they each make $100,000 annually, the loss of both incomes could leave them in bankruptcy because their expenses would be much higher than what they're used to.

Some other reasons why you may want to get life insurance include:

  • You have children under 18
  • Your spouse has a high net worth
  • You take care of your parents’ finances

How to find the right life insurance plan

Buying life insurance is one of the most important financial decisions you will make in your lifetime. Yet, only about half of American adults have some form of life insurance.

The decision to buy life insurance comes down to your individual needs. There are many factors to consider when choosing a plan like: how much coverage you need, what type of protection is best for you and your family, and how long the policy will last (e.g., term or whole-life).

When you purchase a new policy, it's important to be aware of your current needs and changes that could affect your life in the future (e.g., marriage, children, new home). Think about how long you want the coverage to last and if there are any specific situations that would disqualify you from receiving payments (e.g., suicide). If possible, work with an agent who can help you find the right plan for your situation.

Amount of coverage you need

The first mistake is not understanding the amount of life insurance you need.

Life insurance provides coverage for your dependents if something were to happen to you. If you are married, you should have enough life insurance to cover your family's living expenses for two years. You also need enough life insurance if you have children.

If there is someone in your household who is financially dependent on you, such as a spouse or child under 18, then it is important that you purchase enough life insurance to cover their living expenses for at least 10-15 years.

This content reflects the personal opinions of the author. It is accurate and true to the best of the author’s knowledge and should not be substituted for impartial fact or advice in legal, political, or personal matters.

© 2021 Eduardo Gonzalez

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