So you’re earning a decent salary but for some reason your bank account balance never seems to increase. This situation is all too familiar for many people. We all know someone who earns a six figure salary but doesn’t have a dime to show for it.
Here’s a scary statistic, studies have shown that approximately 44% of lottery winners go broke within five years. This is an insane scenario for me to imagine. If you earn millions in the lottery and invest it properly you shouldn’t have to work another 9-5 job the rest of your life. The reason this scary statistic holds true is because of poor money management and planning.
Here are 3 common money management habits to avoid if you want your bank account to grow every month:
Not having a budget
If you don’t have a set budget, start one right now! A budget is important to have because it helps you to determine how much money you can potentially save each month and how much money you can afford to spend on various things. In figuring your budget start with determining how much money you earn each month. Then determine your monthly expenses including housing, utilities, car payment, gas, food, insurance, cell phone, and any debt you may have (student loans, credit card, etc). Subtract all of these expenses from your monthly take home paycheck and see how much is left over. The amount left over is how much you can save each month.
If there is very little money left over for you to save each month consider finding a way to lower one or more of your expenses. Housing, utilities, insurance, and debt are difficult to lower in the near term, but your car payment, gas, and food have more flexibility.
To decrease your car payment consider selling your car to buy a less expensive car. If you live somewhere with reliable public transportation, consider getting rid of your car altogether.
To decrease your gas expenses consider selling your car and buying one that is more fuel efficient, but make sure this doesn’t increase your monthly car payment. If the place you are traveling is close enough for you to walk, then by all means walk and save the gas.
To decrease your food expenses eat out less and be a smart shopper. Buying groceries is an unavoidable expense. That being said, you can still limit this expense by being a bargain shopper. Try to do most of your shopping at discount grocery stores as opposed to high-end stores like The Fresh Market and Whole Foods. Additionally, don’t buy so much food at a time that half of it ends up expiring before you can eat it.
Related: 7 Ways To Save Money Each Month
Spending too much money on a car
I touched on this above, but I think this matter deserves it’s own section because this is a financial mistake all too many people make. Unless you live in an urban area with reliable public transportation or the ability to easily walk or bike to everything, you will likely need to purchase a car, so that expense is unavoidable. That being said, you should make sure the monthly payment for your car fits within your budget.
As with anything else, when you’re shopping for a car always shop around to get the most for your money. What you want in a car is something that’s reliable, inexpensive, and practical.
To determine the reliability of a particular car check out car reviews online or consumer reports (my personal favorite). Try to avoid cars that have low reliability and low overall ratings. If you have the budget to buy a new car in the $15,000-$20,000 range you can often get a long term warranty. Several inexpensive car manufacturers offer 10 year 100,000 miles powertrain and 5 year 60,000 miles bumper to bumper warranties. I highly recommend looking for brands that offer these types of warranties. Warranties like these give you a sort of guarantee that you won’t have to make any major repairs to your car for the duration of the warranty.
Purchase a car that is inexpensive. When I say inexpensive that is relative to the amount of money you make. For example, an inexpensive car for someone who makes $100,000/year will likely not be considered an inexpensive car for someone who makes $50,000/year.
Let’s say you make $35,000/year and want to purchase a car. Purchasing a car that is $20,000 or more is probably too expensive even if it’s brand new. If you want something brand new with a long warranty look for something around $15,000. At this price you will likely have to make monthly payments, but if it’s brand new and has a long warranty you won’t have to worry about paying for repairs for the duration of the warranty.
If a new car doesn’t fit into your budget consider something slightly used with good reliability ratings. Unless you absolutely have to, try to avoid buying an old car that may be unreliable. Although it may cost less initially, you run the risk of having to invest major money into repairs and it could ultimately end up costing you more money in the long run than buying an inexpensive new car with a warranty.
Choose a car that is practical for your needs. What’s practical for a banker might not be practical for a farmer. When I say practical I am not referring to money, I am referring to what you will be using the car for. For example, a sports cars might be practical to get a banker to and from work but a pick-up truck might be more practical for a farmer who may have to haul supplies around his farm.
In choosing a car that is practical determine how you will be using the car most of the time. If you are just driving to and from work choose something small and fuel efficient. If you have a family, choose something four door and fuel efficient. If you have to haul stuff regularly that won’t fit into a small car or if you live in an area that receives snow regularly choose something like a pick-up truck or SUV.
Not paying off your credit card in full each month
There is nothing wrong with charging things to your credit card. In fact, I recommend doing it to help build a good credit history. Plus, many credit cards offer cash back rewards that aren’t available if you pay with cash. The one caveat that outweighs all of these benefits is not paying off your credit card balance in full each month.
Paying off your balance in full each month is important because it prevents you from having to pay interest on your remaining balance. The average interest rate on a credit card is around 15%, but can be as high as 25%. This means if you don’t pay your balance off in full each month you are literally paying interest on everything you purchased with your credit card for that month or even past months if you had a remaining balance.
Use your credit card wisely. Before you make a major purchase on your credit card always ask yourself if you would be willing and able to pay cash for this purchase right now. If you answered yes, then you can likely afford to charge it to your credit card. If you answered no, you should reevaluate if you can actually afford this purchase. By sticking to this strategy you should never have to worry about not being able to pay off your credit card in full each month.