Most people find it difficult to save money for a large purchase, a college education, or retirement. While proper budgeting can make the savings process easier, it is important to learn what mistakes to avoid. Understanding the most common mistakes involved with saving money can help people meet their goals just as much as knowing the basic strategies for reducing monthly spending. Some of the mistakes that people frequently make include the following:
Shopping for price rather than value.
When people are trying to save money, they frequently look for the best deals and the cheapest purchases. While this instinct is not inherently wrong, people often regret prioritizing price over value.
Saving money means looking at value and thinking long-term rather than short-term. Purchasing cheap tools that need to be replaced every year or two will ultimately cost more money than investing in more expensive tools that last a lifetime. Similarly, purchasing a cheap cereal that is full of sugar can save money in the short run, but that decision could cause health problems down the line. More nutritional food costs more money, but individuals need to see it as an investment in their health. When shopping, individuals need to learn to consider more than just price. Looking at how long the product will last, including warranties, is just as important.
Believing that saving money is painful.
While many equate saving money with self-deprivation, saving money does not mean stopping all activities that make people happy. This mindset causes individuals to drag their feet when it comes to savings and wait until the last possible minute or until a crisis strikes. In the meantime, their financial situation simply becomes worse and worse, which ultimately means that it will take more time and effort to get back to normal.
In truth, most people spend more money than they need to on the products and services they enjoy each month. Saving money means making easy lifestyle adjustments and shopping around for better deals, not giving up the little joys completely.
Keeping all savings in a single account.
When saving, individuals should create multiple accounts and contribute a set amount to each of them. Every account should be earmarked for a very specific purpose, such as an emergency fund or a vacation fund.
When people put all their savings into a single account, they can end up spending—either consciously or accidentally—money meant for emergencies or other purchases. Having savings divided into different accounts makes it easier to see what is feasible and what is not. For example, if an extravagant destination wedding is coming up, it can prove tempting to dip into a savings account to pay for it, but when people have to empty an emergency fund or vacation fund to do so, they may reconsider this idea.
Putting savings in low-performing accounts.
In general, people should never have more than a few hundred dollars in cash lying around because idle money does not generate returns. That being said, putting savings into a low-performing account does not always make sense either.
For example, using a certificate of deposit (CD) requires individuals to keep money in the bank long-term with only slightly higher interest rates than a basic savings account. Taking money out early can come with a significant penalty. Therefore, it’s a better idea to keep emergency funds in a savings account, which has complete liquidity. If individuals are saving for the long run, then there are a wide range of options that will keep risk low while offering higher rates of return than a CD.
Avoiding saving money to pay off debt.
While it might seem logical to prioritize paying down high-interest debt instead of putting money in an account that generates more modest returns, failing to save can push individuals further into debt if an emergency situation arises. Therefore, people should consistently put away at least small amounts of money—in addition to paying down their debts—to provide some sort of cushion. Once they pay off their debts, or at least reduce them, individuals can reconfigure their budget to focus more on savings, but an emergency fund should always be a priority.
Purchasing financial products that seem confusing.
Often, financial professionals pressure novice investors to purchase annuities and other complex financial products as a good savings technique. However, individuals need to fully understand what they are getting into prior to handing over any money.
In the finance world, nothing comes without risk, and products like annuities often have excessive fees. Also, some products significantly reduce one’s liquidity. Even basic investment accounts can come with shockingly high fees. Before buying any financial products, individuals need to read the fine print and ensure that they understand the commitment they are making and the risks they are taking.