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.
{ 3 comments… read them below or add one }
I especially support people to make sure that they’re getting the full company match that is provided by their employer. Where else can you get a 100%, immediate (depending on how long the company’s vesting period is) return on investment?
Isn’t lack of spending what is keeping us in a depression for the working class (the rich are doing just fine, with record profits, incomes, and historically low tax rates)? Isn’t the consequence of saving instead of spending stagnant economic growth and loss of jobs?
Adam Smith said that rational self-interest wouid, through the divine invisible hand of God, create a collective benefit. But in fact, the rational self-interest of everyone saving (for future crises, for a rainy day) leads to destruction of an economy based on debt and spending. Rational self-interest in the form of saving leads, on a collective level, to
negative growth, loss of jobs, declining wages, and increased government costs with decreased revenue….in short, to economic disaster.
The invisible hand has become an iron fist smashing the economy of those who “wisely” save rather than consuming. Perhaps the simple truth is this: self-interest leads to disaster. The invisible hand is arthritic. The economy is based on debt and consumption; saving subverts the foundation of our economy.
The problem is not with saving; the problem is with an economic system in which money is created by private banks based on highly leveraged debt, in which debt is the means by which consumption is sustained. In the end, such a system must fail.
We need a new system, the old system (capitalism, free market theory, corporatocracy (ie marriage of big business and big government; ie what Mussolini called fascism), globalization—–whatever you call the existing system—–has failed for the vast majority (it works for the top percent very well, as it is based on extracting wealth from nations and workers). We need a new system which is based on rewarding work (instead of punishing it thru taxing it more than passive incomes (like cap gains, with lower rates), which punishes sending jobs to slave labor economies, which engineers extreme inequality, and in which the large and private corporations own the government. We need democracy (rule of the people, not the wealthy) and we need democracy politically and economically. Economic democracy, in which workers (not the corps and not the state) own and control free enterprise, which already works in many contexts (see Alperowitz: Beyond Capitalism for examples and documentation). Beyond capitalism lies democracy, empowered workers, a strong middle class, rising wages, and growth towards equality, the founding principle of our nation.
Fixing a broken and flawed system is not the solution; we need a new deal, a new social contract, a new political economy which benefits not just the rich but everyone.
You are right the present system is so CORRUPT, INEFFICIENT, SELF-SERVING. A new system must SPROUT.