The most neglected aspect of personal finance is how to save money.
In 2012, a survey was conducted by Credit Donkey, which revealed the shocking fact that almost 50 percent of Americans have less than five hundred dollars in their savings accounts. This leaves nothing for most people to fall back on in the event of an emergency, and leaves people unable to cover unexpected expenses.
What follows are the top 10 mistakes Americans make when they try to save money.
1. Not Creating a Budget
Many people find the idea of gathering their bills and bank statements and creating a spreadsheet stressful and overwhelming. This is understandable, especially if you have never created a budget before, but it is one of the worst financial mistakes you can make.
If you find yourself “living in the moment” and not creating a budget, the most minor emergencies can put you in debt. Creating and sticking to a budget will make sure that things like car repairs, or needing a plumber, won’t put you in the hole financially.
2. Not Saving Enough
People often underestimate how much money they will need during an unexpected financial crisis.
The typical advice for how much you need in emergency savings is to aim for three months’ salary, or six months’ worth of expenses, including mortgage/rent, utilities, and car payments.
As an example, in 2013, the average American made around $42,000 before taxes. After subtracting income tax, the average individual earns about $32,000 each year. After dividing this by twelve, it is determined that an average person will then need at least $8000 in an emergency savings account.
3. Not Setting Concrete Goals
Having specific goals for your savings is very motivating for most people. It helps you stay within your budget, and is very rewarding when you are successful.
For example, your goal may be to save money for the down payment on a new car over the next six months, by promising to save $200 each month.
4. Not Tracking Small Expenditures
Creating a budget for your large monthly expenses, like your rent or mortgage, utilities, and car payments is essential if you want to save money, but it is also very important to keep track of your small expenditures. There are online spending trackers, or you can just keep a notebook or spreadsheet.
5. Living Paycheck to Paycheck
When creating your budget, always leave yourself about $100 of “breathing space” to cover small expenses that pop up every month, like unexpected dinner invitations. Not including a buffer zone in your budget sets you up for the next big financial mistake–
6. Overdrawing Your Account
If you’ve overdrawn your account, it’s usually because of a combination of other financial mistakes, and those overdraft fees really add up. If your bank account is empty, that four dollar cup of coffee and ten dollar grocery stop can end up costing you over $70!
Simply speaking, overdrafts are money wasters and completely avoidable if you stick to your budget.
7. Claiming the Wrong Tax Withholding
Many Americans make the mistake of claiming the lowest possible withholding allowance on their taxes. This means that the government takes away more of your income during the year, and you get a larger tax return.
Essentially, what you’re doing is giving the federal government an interest-free loan and you are given nothing in return. Instead, make sure you claim the withholding allowance you qualify for, and save the extra available income in a high-interest savings account. This way, you earn money while you save money.
8. Not Lowering Your Premiums
Another way to save money each month, is to lower your insurance premiums by raising your deductibles. What this means is that you will need to pay more out of pocket if you ever file an insurance claim.
You can lower your car insurance premiums by 40 percent or more, just by increasing your deductible to $1000.
9. Buying Name Brands
Any frugal shopper will tell you to skip the brand names and buy the generics. Some stores’ generic items are even made in the same factories as the name brand products! Compare ingredients when buying generics to make sure you are getting the same products, and look on the lowest shelves in the grocery stores to find them.
One of the biggest mistakes you can make when you are trying to save money is procrastinating about it. Reaching your savings goal might take longer than you expect, so start immediately and give yourself plenty of time. Saving $500 each month in an emergency savings fund means that it would take 16 months for a typical American to save 3 months of income.
If you have never made it a priority to save money, don’t be discouraged. Slow and steady wins the race. Avoiding these ten mistakes will help you make the most of your income, and prepare for emergencies. With a little careful planning, financial stability is within your reach.