According to a Pew Research study done in 2014, the middle class is defined as people who have an annual salary between $42,000 – $125,000. That is a huge wide margin between the low end and the high end.
If you are on the low end of the income level, you are probably struggling to make ends meet, you have little to no savings and you can’t afford any frills. If you are on the high end of the spectrum, you probably have a little bit of savings and can afford some of the nice things in life.
But whether you are on the low end or the high end, you may be making some mistakes that are not good for your future. Here are some topics to consider if you want to improve your financial health.
The first thing that everyone needs to work on is ditching the debt. You want to be in a position where you are totally debt free—no credit card payments, no car loans payments and no mortgage payments. Getting rid of the mortgage is a long term goal but paying off the consumer debt should be priority number one.
If you were going to be charged an extra 15%-21% for everything that you buy would you still buy it? Probably not. But people who use their credit cards and don’t pay them off at the end of the month are doing just that by paying interest. You get absolutely no benefit from carrying a balance on your credit cards and paying interest. It only provides added costs, more debt, and lots of stress when it’s time to make the payment.
The second most common mistake is not having an emergency fund. Personal finance experts stress the importance of having an emergency fund to cover unanticipated expenses to avoid long-term financial damage.
If you were suddenly hit with an unexpected $500 bill, would you be able to cover it? If the answer is no, you’re not alone. Nearly six in 10 Americans don’t have enough savings to cover a $500 unplanned expense, according to a report from Bankrate.com. When the unexpected expense happens and there is not enough money to cover it, the credit cards get whipped out and you go further into debt, paying even more due to interest charges.
An emergency fund is money that has been saved and reserved for emergencies. It needs to be in a liquid account (checking or savings not a retirement plan) so you can access the cash immediately when needed, with no penalty for early withdrawal. The money is never touched except for emergencies.
We encourage people to start with a minimum of $1,000. For most people this is a goal that will take several months to achieve. But even if you only have $400 in your emergency fund when you need it, you will avoid $400 in debt for that emergency. After you get a $1,000 saved in your emergency fund, increase it to one month’s income, then three month’s income. The goal is financial protection from all the unexpected expenses that are looming in your future.
The third mistake people make is spending without a plan. If the money comes in and goes out and you have no idea where it went at the end of the month, how do you know that you are spending money on what is most important to you and your family?
A lot of mistakes can be avoided if you just stop, think and evaluate how, when, where and why you are spending. Proverbs 21:5 tells us “The plans of the diligent are sure of profit, but all rash haste leads certainly to poverty.” Spending without setting priorities is certainly a way to run head first into poverty.
The fourth mistake is not taking advantage of an employer match on retirement savings. To avoid this mistake, invest enough in your 401(k) to maximize your employer match. Always, always save the maximum that your employer will match—it’s free money!
Along with not maximizing your employer match, the fifth mistake is delaying retirement savings until later. You may think that saving for retirement will be easier once the car is paid off, or after the kids graduate from college or when you get that long awaited raise. But the key to a healthy retirement fund is to start early and save consistently, even if it’s a very small amount. That way you can maximize the magic of compound interest, where you’re earning interest on both what you have saved and the interest you’ve previously earned. Compounding the interest on your savings helps your savings grow exponentially over time.
The sixth mistake is spending too much on cars. A car is a depreciating asset and the newer it is, the faster it depreciates. An average car loan these days is five years or 60 months. An average payment on a car loan is $500. If you start when you are 20 and buy a car every five years with a $500 month car payment, over your driving lifetime of 60 years, you will spend about $360,000 on car payments. And that calculation does not include the interest you could have made on the money if you had saved it. We suggest driving used cars, avoiding the car payment altogether, and saving the extra cash for retirement and long term goals.
The seventh mistake is absorbing any extra money into your day-to-day spending. If you get even a small financial windfall or an increase in your salary it will disappear quickly if you just spend it. Instead, allocate the additional money to emergency savings, retirement savings and to a worthy cause.
And that brings us to the eighth mistake, which is thinking you don’t have enough money to be generous. Everything we have is a blessing from God. It is all too easy to bemoan what we DON’T have. When we think this way, it is easy to rationalize why we can’t give any money to charitable causes. Yet if we really believe that everything we have is a blessing from God, then when we are generous we are simply giving back to God what is already his. We need to look for ways to praise God and be grateful for what we DO have, and one of those ways is to be generous.
Taking time to think and plan your spending is the best way to avoid these common mistakes. It’s not glamorous and it may not be fun, but steady plodding keeps you on track. Proverbs 21:20 tells us “Precious treasure remains in the house of the wise, but the fool consumes it.”