The most frequent financial mistakes – and how we can try to avoid them.
We admit we may not be the best at budgeting, but there are a few money traps it pays to not fall into. By slightly changing your money habits you can avoid these common mistakes and save you some serious cash.
1. Making minimum repayments
When you have a credit card debt – especially when it’s so hefty it can feel impossible to shift – it’s tempting to pay off just the minimum amount each month. But this head-in-the-sand strategy means you’re left paying interest for longer, resulting in a much higher overall bill. Clearing the debt by more than the minimum can save you hundreds of pounds in the long run.
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2. Not checking bank statements
Now that you can check your bank statements on your smartphone, there really shouldn’t be any excuse not to keep track of your finances. Despite this easy access, many people still just check the big number at the top to find out much cash they have left.
It really is such a good idea to take a look through and see where your money is going. That way, you can see the obvious things like unknown transactions, but you can also use it to check what you spend your money on, where you could cut back and work out what you can save if you did so.
3. Not cancelling subscriptions you don’t use
There aren’t many things more annoying than discovering that you’ve been paying £7.99 a month for an audio book subscription for the last 2 years after forgetting to cancel it once the free trial ended.
Make sure you keep an eye out for these pesky payments that can so easily go under the radar. That cash won’t stop going out the door until you cancel it.
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4. Not having an emergency fund
However good you think you are at living within your means, just one unexpected bill or dramatic life change can devastate your finances. From the boring stuff like a broken washing machine or your car failing its MOT to the good-but-bad surprises like your best friend’s decision to get married in the Caribbean, it’s worth trying to put money aside to cover these potential costs.
In theory you should aim for a few months of living expenses tucked away in a safe and accessible account. In reality, anything you can put aside may help. Without an emergency fund, you’ll have to borrow money – and that catapults you into an even worse money mistake.
5. Saving money when you have debts
While an emergency fund is a good move for financial security, your absolute priority should always be to get rid of your bad debts as quickly as possible. It makes no sense to squirrel money away (with paltry savings rate returns) while the interest on your credit card, store cards and high-interest personal loans will be higher by 18% or more.
6. Not switching around
In the old days there may have been some benefit in being a long-term customer who was recognised by the trusted local branch bank manager. Those days are gone. Now you are more likely to be penalised for being passive, with automatic renewals adding hefty sums or the discovery that you’re paying higher rates than someone who opened an account yesterday.
From your bank to your broadband provider, it pays to regularly check how your current choices are performing using price comparison sites.
If you’re not satisfied with your providers, call them and explain why you’re thinking about leaving – it’s extraordinary how many are suddenly able to agree a dramatically cheaper deal. Yes, this is dull but a few hours on a wet Sunday afternoon can reap hundreds of pounds in savings – and a warm glow of satisfaction.
7. Slipping into an unauthorised overdraft
It’s so easy to do. You get a bit carried away on a shopping trip or on a holiday and suddenly you’re in the red and past the arranged overdraft limit set by the bank.
An unauthorised overdraft is one of the most expensive ways to borrow, with penalty fees and high interest charged. It can even damage your credit rating, making it harder to borrow in the future when you may be applying for a mortgage or small business help.
If you realise you’re heading for an unauthorised overdraft before pay day, contact your bank to see if you can have a temporary extension on your overdraft. Do not be persuaded into moving your overdraft into a personal loan, with higher interest rates.
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8. Agreeing to unnecessary insurance
Being under-insured can leave you financially exposed when you’re most vulnerable, but there’s another mistake we make, over-insurance. This is when you pay for more cover than you need and can leave you wasting a substantial monthly sum for absolutely no benefit.
For example, you may not need mobile phone insurance if it’s covered by your home contents insurance. Often your current account comes with a package of benefits, like travel cover, so make sure you don’t spend on extra and unnecessary travel insurance.
This is just one of many occasions when it pays to read the small print – and to keep easily accessible copies of financial agreements to double check when you need to.
9. Applying for financial products that aren’t suitable
A common mistake we make is to decide we need a loan or credit card and make several applications at once to see what rates are offered or whether we’ll be accepted. These applications result in multiple searches being carried out on your credit history and that leaves a temporary footprint on your file. If you make more than one application then the footprint can send alarm bells to lenders as you look like a higher risk. You’ll end up being refused or being offered higher interest rates to cover the supposed risk of having you as a customer.
Instead, browse the market by using a comparison site or lender that offers a ‘soft search’ first. This lets you see whether or not you are likely to be accepted and at what rate without leaving a search history.
10. Buying things you can’t afford
This might seem obvious, but when people think about buying things they can’t afford, it’s usually described as a big blow out where you spend hundreds of pounds in one go. While that can sometimes be a money mistake, people often forget about the little things.
For example, do you really need multiple entertainment streaming services? Do you really need that expensive perfume? All these mid-level purchases can add up and if you can’t really afford them, you might need to think about these spending habits.
11. Not taking precautions to stay protected
The 2008 financial crisis revealed how even high street banks can fail, leaving ordinary customers devastated and facing potential financial ruin. The Financial Services Compensation Scheme (FSCS) protects you when financial firms fail.
When you make any sort of financial decision – your bank, mortgage, pension, insurances, savings and investments – you should always check the firm you are using and the products you buy are FSCS protected. You should also be aware that not all financial products are FSCS protected (like payday loans or Christmas Club Schemes). To check that the firm you are using to buy financial products from is UK-authorised, and therefore FSCS Protected, check the FCA Register.
FSCS can pay compensation if a financial services firm is unable, or likely to be unable, to pay claims against it. Funded by authorised financial services firms in the UK, FSCS is an impartial and free service you can trust. You should always check that any financial product you have or are buying has FSCS protection. It just makes sense.
For more information on FSCS and the different financial products they protect, you can visit their website at www.fscs.org.uk