Although you know financial security is essential, you often make some mistakes while managing your finances that lead to the state of broke. You may believe that only people running from paycheque to paycheque are more prone to be strapped, but the fact is that even millionaires can go broke if they do not carefully manage their funds.
Savings is crucial in case any unexpected expenditure pops up. However, you may need it for planned expenses like wedding, house purchase, and the like, but savings do not indicate financial security. You will need to invest your money to build wealth. However, you need to be careful with your investment projects because they may cause wreak havoc on your finances.
Here are some mistakes you commit that strips you of money in the end.
Not making a budget
You have a high net worth, so you do not need to give a toss to budget, right? No, it does not guarantee the financial security, and therefore you cannot ignore budgeting. If you want to use your money judiciously, you need to know where it is going. You should have a record of every expenditure to make sure that you are not overspending.
High net worth does not ensure that you will never run out of money if you fritter away money.
- You can be impulsive and fail to track your spending;
- You need to frame a budget to avoid being trapped in emotional spending;
- You can forget to ensure what you can afford without budgeting.
It can seem monotonous, but it will benefit you a lot in the long run. Not only does budgeting help you know buying capacity, but it also enables you to whittle down your discretionary expenses. It will allow you to stay on top of your costs.
Not preparing for unexpected problems
Life can throw you a curveball at any time. You may lose your job, you may fall ill, or any other significant expense can come up. What if you do not have a backup to tackle such situations? It is your big mistake if you are solely relying on the primary source of income. Once you lose it, you will come on the edge of financial collapse.
Savings may not be enough to fund your needs. Although you can take out loans for unemployed, they will be enough to meet small expenses only. However, it can be challenging to borrow more money if you have been already handling other debts.
A lender will sign off on your application for unemployed loans if you have something to prove your repaying capacity. It means you need to have an income source apart from a full-time job to borrow money.
No matter how much you earn from your full-time job, you should have a backup plan in case of an emergency. Try to get some work through freelancing, or you should try to generate fixed income sources.
Reckless use of credit cards
Credit cards aim to help you tide over during financial emergencies, but most of the people use credit cards to fund impulsive buys. Credit cards are generally more expensive than short-term loans. If you use them for any reason other than financial emergencies, you will likely get caught up with a never-ending debt circle.
If you max out your credit card, it will increase your credit utilisation ratio that is one of the prominent reasons for a poor credit rating. It may restrict you from taking out a loan at lower interest rates down the road. Sensible use of credit cards is a must if you do not want to run out of money.
Investments are crucial to build wealth, but you need to ensure that you are not bearing risks more than your affordability. Not all investment projects are worth considering. You must estimate the return on investment before throwing money at them.
You should take help of an expert who could guide you on whether to invest money on a project or not by identifying the volatility and your affordability. For instance, stocks seem to be an ideal investment, but they are subject to volatility and hence ensure considerable risk. It is crucial you carefully analyse the position of the company, risk involved and above all your affordability. Though high risk means high profits, it does not mean that you will throw caution to the wind.
The bottom line
No matter how strong your current financial position is, you cannot be reckless with your spending. Since unexpected expenses can pop up anytime, you must have a backup so that you are not running out of money. Make sure that you make a budget, understand your affordability and risk-bearing capacity before investing and have a financial backup for emergencies.