We all make mistakes when we start. It is natural. But, if you are smart, you will learn from other people’s mistakes and not make one yourself. So, read on learn what financial mistakes one may make as newbie investor.
We get to hear only negative news all across the globe in 2020. It’s a difficult phase we need to cross. Everyone thinks this is the new normal but it will be gone soon. Just be patient and hopeful.
Healthcare folks are burning midnight oil for the recovery to treat patients with Covid-19 pandemic. In this regard, it’s quite natural to have a bad economic situation. Most people are facing job losses or facing reduced work hours or pay cuts per hour to ensure the business can keep running. As a result, we may soon enter into the recession territory. It is already obvious but not yet official.
We absolutely can’t control the pandemic or elections. But, what we may control is our own finances and avoiding making financial mistakes in the midst of Pandemic financial emergency situation.
Just make sure to avoid these financial mistakes and you may come out with flying colors
Fulfilling All Wants To Escape Boredom
Have you lately been browsing to purchase a lot of things and killing time? Online e-commerce websites are a big distraction, now that with Amazon Prime, you can get anything you want within a day or two. Are you buying just to beat your boredom or is it something you really need?
In the initial days of shelter in place, people were piling up groceries and toilet paper. Now, the focus is more on buying discretionary spending items like entertainment stuff, books, clothes and much more. So, people mindlessly overspend when pandemic requires you to be diligent with respect to spending.
But, we all know this is not the time to make that financial mistake. Rather, one shall try to increase savings rate as much as you can. Read on to understand “how to save more”?
Are you feeling bored? Develop an inexpensive hobby and try to get better at it. This is the time to do those things you always wished to do, but never had the time to do. Once you develop skills, try to get some online freelance jobs on things you’re passionate for.
Following Same Pre-Pandemic Budget
You may pat yourself on the back for following the budget. But, you may have forgotten to actually update the pandemic to cut down on discretionary spending.
You may tell me following old budget itself is tough. Yes, it is! But, you have to aim for the sky to make sure you’re not making the same financial mistakes as others.
It is necessary to reassess your post-pandemic plan having projected income and estimated expenses for a month or more. With the Covid-19 pandemic striking the economy full scale, make sure to do adjustments to your budget. Already did it? You’re awesome, move on to other financial mistakes.
If you are still fortunate to hold a job unlike others, it is time to save like a pessimist. Get your saving rate above 50%. As a result, you can fully equip yourself for rainy days in the future.
You may not constantly worry about losing your job, if you build up a strong emergency fund of a year worth expenses or more. You will become more confident of sustaining yourself with the funds to get over with the uncertainty.
Practice minimalism to save even more. Frugal budgeting does not necessarily mean you will compromise on things in your life. But, it just means to cut non-essential expenses and to bolster your savings.
Overspending Beyond Budget
It is good if you can avoid buying any big ticket item during this pandemic year. Trying to delay fulfilling your wants is the most prudent thing to do.
To highlight the above message, let us take a look at the results of a real survey. This is a survey from Jan 2020 in Nebraska. It shows that around half of the people in the US live paycheck to paycheck lifestyle. So, it is tough to make both ends meet in the case of a sudden job loss, which is happening everywhere during the pandemic.
Therefore, you may want to bolster up your cash reserves. To accomplish that, you have to get your savings rate up and deposit the fund into a high yield savings account. Look out for the Doctor of Credit list on HYSA.
See if you also commit the same financial mistakes by overspending on these
- Stop restaurant food excessively and prepare healthy home cooked food
- Make a plan of what exactly you need and stick to it when you are doing grocery shopping
- Switch to put your spend on debit cards if you feel you are not responsible with credit
- Cancel gym membership. Start working out at home
- Check your magazine and streaming subscriptions and keep only one or two you highly need
- Bundle offers where ever possible
- Envelope budgeting helps save more
- Save electricity in whatever ways possible to reduce your electric bill
- Clip coupons to save more
Utilizing Emergency Fund In Basic Necessities
Emergency fund is for a rainy day. But, never touch if the situation is manageable.
Periodically check the amount you have in your emergency fund and keep increasing it gradually. Can you sustain more than 6 months minimum without paycheck? If not, you need to make your emergency fund whole soon.
Don’t touch the fund unless you have an emergency. And, even if you use it by chance, refill the emergency fund as soon as possible.
Every month, save a fixed amount in emergency fund. And, the emergency fund account needs to be always liquid to withdraw funds at the moment you need.
Of course, pay things with emergency savings fund, if it comes to not being able to pay the bills.
Not Utilizing HSA Fund For Medical Expenses
Don’t make the mistake of using emergency fund for everything. In case of medical expenses, tap the pretax Health Savings Account. You have the HSA account available if you opt for the high deductible plan in your health insurance.
Your money goes in before tax and you never get taxed again on your growth, if you use it for qualified medical expenses. Don’t forget to use HSA fund for any medical expense including Covid-19 testing and treatment. You are free to use the funds for therapist consultations and mental health is also fully covered.
Only Making Minimum Payments On Credit Cards
If you are only making minimum payments on credit card bill, it is a huge financial mistake. In that case, you will have to shell out the
Interest is the charge for borrowing money and not paying it by due date. You pay a certain fixed Annual Percentage Rate (APR) interest on your outstanding balance from credit cards. Therefore, it is sane to pay it off in full before due date kicks in. So, next time when you swipe credit card, understand if you will be able to pay off fully in the next payment cycle.
Also, use up your reward points to not have any outstanding balance. Otherwise, look out for shop with points discounts in Amazon or other places.
If you want to take an extreme step, then consider going the route to take
However, don’t close the card right after the promo ends, if you don’t have a lengthy credit history. If you close cards, your average age of account (AAOA) will drop heavily. Also, your credit limit changes and credit utilization ratio changes abruptly, which reduces your credit score.
Panic Selling Stocks
Panic Selling stocks immediately after the decline in stock market is a major financial mistake. Don’t keep changing your portfolio with every movement of the market.
They instantly sell stocks with a small downward movement. But, generally going by past statistics over a long time, it is going to recover eventually. Best is not touch your portfolio and re-balance occasionally.
If you look back at even the worst depression of 1929 or the great financial crash of 2008, the markets clearly come back up in the next few years. All you need to do is just patiently wait for those important years with alternative side hustle income.
You need to buy low and sell high to realize huge profit. For this to happen in real life, you need to advantage of these major crashes and be a contrarian. So, don’t sell at this important point.
Just make sure to rebalance your portfolio to achieve your desired asset allocation. Having professional help is easier to instill discipline into your financial future.
Premature Withdrawal from Retirement Account
Premature withdrawal from retirement account in now possible after CARES Act. There is no penalty after Covid-19 pandemic if you want to withdraw from retirement accounts.
There are two types of retirement accounts in the US
Withdrawing funds at this hardship time may have a few advantages
- You’ll be able to borrow a max of $100K from employer retirement
- You have three years to replenish the amount you took out into the same retirement account and make it whole
If you start investing early, you let the magic of compounding to work wonders on your portfolio. However, withdrawing will reduce the compounding benefit to a great extent. So, don’t make this major financial mistake, unless you are in real financial hardship and need to withdraw necessarily.
Not Assessing Financial Health with Financial Advisor
If you are not a do it yourself financial guy like me, you should avoid skipping your meetings with financial advisor. Actually, it is only much more important at this pandemic time than ever. Thus, it helps you to get a pristine financial view of your situation.
Discuss deeply with financial advisor on your risk tolerance and asset allocation and comfort levels. There a lot of investment asset classes to invest into. Just make sure you are comfortable with them. Always, make sure reward is higher than risk you take.
Financial advisor may make your life better with professional advice. They help you see what you don’t see with your portfolio from an expert lens. Make sure you are explicit about financial goals and what your high level plans are to achieve them.
Taking Excessive Debts Without The Plan To Manage
Mortgage rates are comparatively low compared to the historical rates. You may think you’ll be able to manage everything. Remember, the real estate market is at all time high with really high valuation.
But, think if you have a stable job situation and you have covered all your basic necessities. Also, Mortgage is a long time commitment to the physical location and debt. However, it is better to not take excessive debt if you cannot handle them.
But, if you face difficulty to manage existing debt in life, then debt consolidation loan may be the last option. All these options are now available fully online with you not having to leave your home and manage your financial situation.
Restrict Screen Time
Finally, we are all not able to lead our normal life going out amidst pandemic. So, it is important to maintain our mental and physical health in top shape. Try to reduce stress and addiction in life.
Restrict screen time if it affects your productivity. Try to have more me time, if it helps you. Develop a side hustle out of your hobby or things you like. Make sure you spend quality time with friends and family.
Read more and develop new skills that will help you in the future. Help your friends and family to not make the financial mistakes you made in your life. Let’s help everyone to have a great financial future with financial independence or financial freedom.
I am a data analyst by profession who loves to crunch numbers at daytime and come home wondering how my passive income numbers for the day look like. I believe in being rich rather than looking rich. Follow me for Cryptocurrency, FIRE, Personal Finance, Credit Cards and Digital Nomad updates