COMMON MONEY MISTAKES WE ALL MAKE AND HOW TO AVOID THEM

Financial mistakes can be expensive life lessons. We look at the most common and how to avoid them.

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Not planning and budgeting
Without a clear idea of what you earn, spend, save and invest each month and a budget to guide you, you simply can’t reach your financial goals.

AVOID IT: Draw up a financial plan listing specific, measurable, achievable, time-bound goals – preferably with a professional financial planner who can help you devise sound investment and savings strategies. Then draw up a realistic monthly budget and stick to it.

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A good rule of thumb is the 50/30/20 principle: allocate 50 percent for needs (housing, healthcare, education, transport, etc.), 30 percent for wants (entertainment), and 20 percent to savings, debt repayment and investments. Download one of the many free templates online or a free budgeting app such as 22Seven or Moneysmart.

Not diversifying your income stream
Solely relying on one income stream is risky, as many have discovered during the pandemic, with job losses and pay cuts. But that aside, it’s inevitable that rising costs and inflation will drive up your expenditure. Things like school fees have a higher inflation level than the consumer price index (CPI), says Samukelo Zwane, head of products at FNB Wealth and Investments.

‘However, your salary will increase closely in line with CPI, with a bumper increase only once every five years or so when you get a promotion or change jobs. Relying on a single income stream will make it difficult to make ends meet.’

AVOID IT: Develop side hustles to supplement your main income, whether it’s baking goods, sewing clothing or tutoring. ‘Some people become sales agents for big brands, even trustees or non-executive directors,’ says Zwane. ‘Make sure to clear any conflicts of interest with your company’s legal and compliance team.’

Spending what you don’t have
It’s all too easy to put items on a credit card and accumulate debt with high interest, thereby digging a financial hole that is hard to get out of.

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AVOID IT: In general, if you can’t afford something, don’t buy it – rather save up for it. Whether it’s an appliance, a holiday or a celebration, break it down and set aside an amount every month.

For example, 50 000 over 12 months will grow to 600 000, and in a savings account, it will attract interest. Use your credit card selectively, track payments and ensure they are never late so you have a clean credit record when you truly need it for a big purchase like a home, car or education.

Not investing early enough for retirement
If you don’t set your money to work for you early in the markets or other income-generating investments, you may not ever be able to stop working.

AVOID IT: Ideally, you should start investing for retirement from your first paycheck – the longer you invest money, the better compound interest will work for you. But it’s never too late to start, with sound input from a professional financial adviser who can plan around your goals and means.

Related article: Understanding the difference between saving and investing

‘If you lose your job or change jobs, using your retirement savings to cover expenses should be your last option,’ says Zwane. ‘Renegotiate your cost of debt. If you’re struggling with servicing debt, you can extend the repayment period. Adjust your standard of living down where possible. For example, instead of going out weekly, maybe go out once a month. And downsize assets – if you have a house with a mortgage payment, you can downsize to release some cash flow.’

Not comparison-shopping for major items
As consumers, we tend to stick with brands we know, but that may cost us. Consider other options and compare.

AVOID IT: When making big purchases, especially for things like cars or medical insurance, which are ongoing expenses, it’s vital to shop around and compare products and services. Today you can do this easily online at sites like Hippo.co.za and Compareguru.co.za.

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