Everyone knows that it’s important to save money. Indeed, the recent recession has driven that point home for most of us. However, sometimes we fail to save money as we should. Here are the top 6 savings mistakes that can derail progress to financial freedom:
1. Ignorance of Your Spending and Saving Habits
First of all, knowledge is key. If you don’t know how much money you have coming in, and where it is going when you spend it, you are making a mistake. In order to save money effectively, it is vital that you have a good idea of what money you have coming in, and that you keep track of your spending. That way, you can determine how much money you can set aside for savings, and set more realistic financial goals.
2. Failure to Change Your Spending Habits so You Can Save More
Just knowing what you are spending your money on is not enough. You also need to be willing to prioritize your expenses, and cut back on things that are not important. If you want to save more money, you need to modify your spending habits so that you have more money to set aside. Failure to move saving money to the top of your spending priorities list is a big money mistake that can cost you down the road.
3. Failure to Set a Specific Financial Goal
Many people just say that they want to save more money. They don’t have a target dollar amount for their emergency fund, and they don’t have a specific dollar amount in mind for retirement savings. This mistake can be costly, since it leaves you generally rudderless. Create a plan for your savings, and have a specific target. You need to be able to have a goal that you can break down and achieve. Plus, having a specific savings goal allows you to more accurately track your savings progress.
4. Buying Something Because It’s on Sale
We talk about “saving money” when we get a good deal on something, or get something because it’s on sale. But are you really saving? Spending money is still spending money. If you are buying something because you think it is a bargain and you might want or need it for some mostly unknown reason in the future, you aren’t really saving. Only buy something on sale if you had planned on it. Don’t get something just because you “can’t beat the price.” This goes for using coupons as well. Don’t buy something just because you have a coupon.
5. Failure to Take Advantage of Free Money
A company match for retirement plans is one of the best ways to save money. This is because you are actually offered free money. Whenever possible, you should take advantage of a company match. Also in this category are the bonuses offered by many banks these days when you open savings accounts and other types of accounts. ING regularly runs promotions where you can get a bonus for opening an account. Other banks offer these bonuses as well. Look for ways to boost your savings with free money.
6. Cashing Out Your Company Retirement Plan
When they leave a job, many people cash out their retirement plans. However, that results in a tax hit, as well as a possible penalty. Instead of cashing out a retirement plan, roll it into an IRA, or roll it into the plan offered by your new employer.
Bottom line: You need to have a plan to save money. Without a plan, you are likely to waste more money, and you can slow your progress to financial freedom.