When it comes to handling our personal finances, we’re all prone to making a few missteps along the way. But which ones can be most damaging in the long run? Here are four money mistakes to avoid at all costs.
1. Borrowing from your RRSP investments.
The current economic crisis has taken a toll on the personal finances of Canadians, and many people have found themselves in a bind with meeting their financial obligations for everything from phone and hydro bills to mortgage payments. Though it may be tempting to withdraw cash from your retirement nest egg, think long and hard about doing so. Tapping into long term retirement savings accounts to pay short term bills can be extremely costly due to penalties for early withdrawals. There are also tax implications and lost investment income. If you borrow or withdraw from your retirement savings, you’ll also lose out on the power of compound interest (where interest accumulated on your principal investment is continuously reinvested in order to generate more earnings), which over time could add up to thousands of dollars in lost income.
2. Creating a budget but not reviewing it.
If you’re good about tracking your expenses on a monthly basis, then definitely give yourself a pat on the back. Perhaps even more commendable than creating a budget is reviewing it from time to time. There’s no use in recording your debits and credits into a monthly spreadsheet if you’re not taking the time to review it. At the end of each month, be sure to look over your expenses a little more closely. This will allow you to see what areas in your life you may be overspending in and you can then make adjustments. By not evaluating your budget, you’re missing out on a key opportunity to identify ways in which you can save money.
3. Opening store credit for a one-time discount.
It’s a situation you’ve likely encountered—you’re at the department store, about to pay for your items, when the sales clerk asks if you’d like to apply for the store’s credit card to receive an immediate discount. It may be tempting to save that 10% or 15% off your purchase; however, be aware that every time you apply for a new credit card, you could be lowering your credit score. This in turn raises a red flag to lenders who view a person with too much available credit as someone with potential to rack up more debt. Having a lower credit score could, therefore, mean being charged a higher rate by the lender the next time you apply for a long term loan.
4. Making impulsive purchases.
A major reason that people accumulate a large amount of debt is because of impulsive spending. If you want to stay out of debt, it’s important to ensure that your shopping habits are under control. Try to avoid going shopping when you’re bored as there is often a tendency to purchase things you don’t need or won’t ever use. You might also want to make a list of the essentials you need, and then make sure to not stray from it. While treating yourself from time to time is okay, be sure to use some discipline and distinguish your needs from your wants so that you have money for life’s necessities, as well as some savings squirreled away for the future and any possible emergencies.