During the past months in 2017, I wrote several blogposts about financial behavior. Let’s reflect on what are the top 5 financial behavior mistakes you should avoid with all means.

The economy in Belgium is growing and new jobs are created every month. Some professions can not even be filled. People have a positive outlook for the future and keep on spending. In the U.S.A. the economy is growing faster,but still plenty of Americans struggle. A Federal Reserve study showed that nearly half of Americans couldn’t come up with $400 to cover an emergency expense. The inflation has grown to 2,2% eating away the savings buying power and the savings rate in the US has decreased to 5%. A very uncomfortable situation if you ask me…

Let’s go in detail how to avoid  screwing up your financial situation.

Mistake 1: Not having an emergency fund

Belgian people are known within Europe as savings champions. In a survey about money at the end of March (see Blog post “Saving Belgian has no appetite for risk …Our reflection.” ) it was concluded that 67% of Belgians are saving money and 33% could not. The average amount is around 200 Euro. But does that mean people have a financial buffer or an emergency fund in place ? Does that mean people have correctly sized their financial buffer ? Not really…15 % said they prefer to enjoy life and spend money. Do you need an emergency fund?  YES, this is a MUST !

How big should it be? How you should calculate your financial buffer, was explained in the bloggpost

How to correctly size your Emergency Fund 

Teach your teenager kids to build that emergency fund as a first buffer to cover any unexpected expenses. We did in our first Financial lesson and will repeat this again next year…

Mistake 2: Not saving for your retirement 

Do you know the size of your future pension ? In below graph you can see the pension for a government employee (ambtenaar) , employee (werknemer) and an entrepreneur (zelfstandigen). You can also see the difference  between a woman and a man. As you can see, there’s a big inequality. The retirement age for me will be 67, but will that be true ? In the next 20 years, the government can still raise the retirement age a few times, right? 

It’s important to boost your retirement contributions as your income grows. If you don’t, it can take a lot longer to build up enough cash to retire. The government wants Belgians to save for their retirement and allows a 30% tax deduction for a 940 Euro retirement saving. From next year the government will offer a second system of 1200 euro retirement saving with a 25% tax deduction. It gives you very little advantage and I personally consider it a trap. It only advantages the banks…

The third way you can do, is saving in a work-sponsored (401k for US citizens) plan. It’s easy to set this up and it’s automatic. By saving a percentage of your income every year, your retirement contributions will increase automatically as your earnings grow.

During the past 15 years, layer 2 in my financial pyramid, my retirement savings have almost outgrown my other investments. The convenience and importance of investing in a work-sponsored 401(k) plan can’t be understated. It is only sad that we as Belgians can NOT control the way those contributions are invested as the banks do a lousy job growing my retirement money.

Mistake 3: Saving ‘what’s left’

Many people wish they could save money but can’t figure out how. So, they approach their finances in the most backwards way possible – they pay all their bills and spend what they want, then try to save “what’s left.” This was also a discussion topic during the FIRE meeting early November.  One couple told us the story where a couple with two kids told them they could not save any money….When this couple asked their friends about how much money they spend, this family could not give an answer…

So they reversed the question and asked about what income sources they had…salaries + any other income. It turned out they earned more than 5600 euro per month and when they realized this was their actually spending per month, they were surprised…. This boils down to two major financial mistakes. Refusing to pay yourself first and to use a monthly budget.

If saving what’s left leaves you depleted month after month, you should try paying yourself first instead. By setting up an automatic money transfer into your savings or investment account on your salary payday, you can ensure you’re saving money and not shortchanging yourself.

Do you know your monthy expenditures? If you’re struggling with money, a budget could be exactly what you need. It doesn’t have to be restrictive, either. Think of a monthly budget as a plan for the money you earn — you’re simply prioritizing what’s most important to you. A monthly budget is there to guide your spending, reduce wasteful spending, and make sure you’re saving first.

Mistake 4: Using debt as part of your spending behavior

Many people need to borrow money to buy a house, a car or any other reliable transportation. Entrepreneurs need to get a loan to get their start-up idea off the ground. But debt becomes a problem when you use it without thinking. If you use credit cards to buy things you don’t need and can’t afford, you can wind up throwing hundreds of dollars in interest payments down the drain every year.

Instead of using debt as an extension of your income, use it sparingly – and only when you must. By avoiding pointless credit card debt and the bills that come with it, you can keep more money in your bank account, where it counts.

Personaly I only use VISA card for expenses with companies abroad. It can be travel expenses (flight tickets, hotel bills,..) or any online courses.

Never spend more than you can afford.

Mistake 5: Trying too hard to keep up with neighbors and friends

Do you compare yourself against friends or neighbors  ? Having friends or neighbors who live large can make it that much harder to rein in your own finances – and that’s especially true if you try to keep up with them. I remember a neighbor who wanted every 3 years a new car. And he did purchase a new one each 2,5 to 3 years…. If you compare yourself and end up in a situation where you’re spending like they do without the income to match, you could easily spiral into a cycle of stress, regret, and debt.

When it comes to money (or anything, really), always try to avoid comparing yourself to others. Doing the best you can with YOUR budget may not leave you with lots of fancy stuff, but it will leave you better off.

And, let’s be honest: There’s a good chance your friends can’t afford their lifestyle, either. Personally Mr and Mrs Dividendcake don’t care what other family members, friends or neighbors have as financial lifestyle as we have our own FIRE gameplan. If you want to learn more about our Financial strategy, read here.

Thanks for reading the blogpost and as always we end with a quote. Thanks for following us on Twitter and Facebook.

Source : TheSimpleDollar