At some point in time, everyone is going to have one or more of these common financial problems. I have fallen victim to them myself. One of the best ways to ease the financial challenges in your life is to learn more and try to implement as many good habits as you can as fast as possible.
This is probably something you’ve heard but is always worth repeating. So if you’re starting to see that you may need to shape your financial situation a little bit, let’s go through some of the most common financial problems and work out how you can overcome financial problems starting today.
The Top 10 Most Common Financial Problems and Challenges
Spending Too Much Money
Not Starting Soon Enough
You Don’t Have a Plan
Trusting the Wrong People
Poor Risk Mitigation
Inadequate homework
Too Much Debt
Emotional Investing
Getting Sold On a Financial Sales Pitch
Focusing Too Much On Money
Spending Too Much Money
Spending too much money is one of the easiest “common financial problems” you can fall into. With so much of our world advertising and new platforms for products showing up all the time, it’s easy for your financial problems to become financial struggles.
Many people struggle financially because of overspending even if they have a high paying job. It almost becomes easier to overspend when you have a high paying job. You make more money and think that because you make more you can spend more and money issues won’t arise.
Fundamentally our overspending problems come from an unfulfilled need that you may have. CNBC shows that people who tend to overspend, spend $7,400 a year on things other than rent/mortgage, bills, etc.
Here are a few tips to work toward not overspending and creating a financial crisis;
Think about when you spend money
Do you spend most of your money while you’re on the couch with your phone? Are you a frequent store shopper? Identify “spending triggers” and work to change those habits. Actually thinking about spending habits is the first step to spending less and saving more money. You probably spend more time than you think looking at thing to purchase, I know that I do.
Think about when and what you look at and try and find out why you spend that time looking at things to buy. Are you bored? Anxious? Actually, need something? It makes a big difference.
Only use cash
Having only cash can be a good strategy to spend less. If you don’t have the money you won’t spend it. Also when you are holding cash you have a better sense of how much is being spent. Using only cash will also make you think a little bit more about how much you’re spending because you need to “hand over” the cash to pay for it.
Leave your credit card somewhere safe outside of your wallet
Take your credit card and put it somewhere inconvenient. If you need to go get your card to pay for something you are much less likely to spend money. This also includes the internet.
Take a few minutes and remove your credit card information from your computer and phone. By taking the 5 mins to do this you will create an extra step that you need to do in order to spend your hard-earned $$$$!
Start a budget
Starting a budget can be a great way to track your spending and start saving more money. You can find some amazing resources for free on how to start a budget online. Budgets aren’t for everyone though, Strict budgets especially!
There are more people who have a hard time with a budget than not and ill tell you why!
People build a budget based on “what they NEED” not what is ideal. If you are going to build a budget make one that is YOU friendly! What would be a good budget for YOU! Not what people recommend. They don’t know you and they don’t know your situation.
Make a budget based on what you think is a good place to start and from there mold your budget continuously until you are saving more, investing more, and getting closer and closer to financial freedom!
Print out your bank statements and look at them
There’s nothing quite like looking at your bank statement and seeing the financial difficulties you need to overcome. But be cautious, seeing financial problems can be disheartening. Use your bank statements and a drive, a motivation to overcome any money issues you find.
There’s a certain tranquility in seeing what you are doing. It can help you in so many ways but most of us just skip on by and never actually look at what we spend money on. You will be surprised I promise! The first time you start to actually look at your bank statements you will go “WOW! I didn’t even realize it!”
Getting your spending under control is the start and to help here are 10 tips to get you started!
Not Starting Soon Enough
Most people have a goal to retire between 60 and 65. This also means you need to be saving money for when you want to retire. If you start at a younger age you will normally need to be saving and investing around 10% of your income for retirement.
That’s 10% more than most people save. The true power of investing is in the compounding. When you invest in something you want your money to make money. Then you reinvest the income from your investment which in turn creates more income.
You end up creating income on top of income on top of the income and it continues to get bigger and bigger over time. The key here is time. It can take a long time to amass a large sum of money.
Let’s look at a few numbers so you can see how much money investment compounding can make based on time.
The Scenario
You invest $5000 into the S&P500 with an average return of 8% per year.
After 10 years your $5000 will be valued at $11,098.20, that’s a total of $6,098.20 over 10 years.
After 30 years your $5000 will be valued at $54,678.65 that’s $49,678.65 just from compounding.
To show the difference a little bit more if you take the first scenario and divide it into “income per year”.
$6,098.20 / 10 years = $609.82 per year.
Now after 30 years;
$49,678.65 / 30 years = $1,655.95 per year!
$5,000 # of years | 8% compounded | Total interest | Interest / # of Years |
| 1 year | $5,415 | $415 | $415 |
| 10 years | $11,098.20 | $6,098.20 | $609.82 |
| 15 years | $16,534.61 | $11,534.61 | $768.97 |
| 20 years | $24,634.01 | $19,634.01 | $981.70 |
| 30 years | $54,678.65 | $49,678.65 | $1,655.95 |
| 40 years | $121,366.93 | $116,366.93 | $2,909.17 |
You can see how your average yearly income has increased dramatically over time due to compounding. If you haven’t started to save money, now is the time! Remember, time will go by anyway so take advantage and get your piece of the investment!
You Don’t Have a Plan
Perhaps you are one of the many people who have never spoken to a financial planner. That’s a lot more common than you might think. There are a lot of people who are turned off by financial planning and never end up making a plan on how they can get themselves into a better position.
Somehow “things work out” or “it’s too hard” whatever the case may be people don’t plan for their futures. This is a huge mistake! You may not need to invest a ton of time making a plan but you do need to have a plan in place.
A plan that is moving you forward rather than just constantly doing the same things over and over. Because in reality 30 years from now you won’t want to be working 50 hours a week to live. You are going to want to probably enjoy your time and see family and friends. I always recommend going and speaking with a financial planner and just listen.
Remember you don’t have to do what they say but, you should think and ask questions to help you plan your future. Here are a few things than a plan will need to take care of:
- Reducing debt such as consumer debt, mortgage, car loans, line of credit, etc.
- Active investing for retirement.
- Emergency funds.
- Insurance needs
- Children and your spouse.
- How many years your investments “will last” in retirement.
Properly making a plan gives you direction and actionable steps you can take to complete your long term goals. Your plan should never be set in stone. It needs to be mouldable and dynamic so as your life changes you can adapt and continue to work towards your goals.
Trusting the Wrong People
Too many people today are trying to take your money. Even more, people are giving advice for their benefit, not for yours. You might think that these people are there to help but you need to be able to separate the correct information from the poor advice.
When it comes to your finances and any other aspect of your life like fitness you need to work to broaden your own knowledge. By doing this you will be able to notice when the information you are being given isn’t right or only partially correct.
For example, if someone said you need to go to the gym and push yourself to the point you can bench press 280lbs. That would be awesome but, some problems come with that much weight.
Being able to Bench press 280 lbs is hard on bones, joints, and the muscle themselves. There is no practical reason to be able to bench press that much weight. Similarly, if someone is trying to convince you that you MUST own your home, they may be wrong.
Homeownership is hard and expensive. Becoming a homeowner may overextend your finances and make you “house poor” which would be counter-productive in your long-term efforts. Besides, if you can afford a house costing $2,500 a month but you can rent a place for $1,300 why not use the difference and invest it?
Learn to think for yourself and try not to make snap decisions that lead to financial problems or challenges.
Poor Risk Mitigation
The riskiest part of investing is investing without the proper information. Something that you and your financial planner will go over is risk assessment. This will help you to gauge how to go about investing and what types of investments you should be making.
Beyond just your investments there are other aspects of risk management such as insurance obligations and your emergency fund. If you lose your job tomorrow, what would you do?
If you got into a car accident on your way to work and had to be off for the next 6 months, what would you do? These types of questions are a vital part of personal risk management. You should have a part of your overall plan to cover your basic needs. This includes roughly 3-6 months’ worth of expenses saved and sitting in a separate account like a CIT Money Market Account. You will get the security and a higher interest rate than a normal savings account!
You won’t make a lot of money off of your emergency fund but that’s not what it’s there for. Don’t fall into the trap of trying to make money with your emergency fund. You will be adding risk to something that is supposed to hedge or lower risk. This is why a Money Market account is great. It provides one of the highest interest rates while maintaining very low risk.
Have a full risk assessment done with your financial planner and be sure to cover all risk areas including medical and job loss. You will thank yourself if something happens.
Inadequate homework
Yes, back to school. You have homework to do on anything you think you want to buy. You’re probably one of the people who like to do some research before you buy a product. Typically people will do some research before buying a TV or a new phone.
But when it comes to making long-term investments people end up skimping out on the research or they get sold on something that isn’t what it’s supposed to be.
I want you to be able to make GREAT investments and have long term success. This might mean for now you only invest in the S&P500 and stay away from individual stocks or things like crypto. For most people, that really is the best option in the long run anyway.
If you want to be able to understand what you’re investing in you will need to do a little homework yourself. This means you need to brush up on some skills you may not have learned yet. That’s ok though, there are amazing tools out there to show you what to look for and help you on your way to understanding where your money is.
You can get the beginner’s guide to understanding financial statements and finally be confident in your investments. You will be able to KNOW the investments yon the competition to get better returns!ou have and have an edge
After all, one of the scariest things I can think of is giving your money to someone and not knowing anything about where your money is or what it’s doing. If you get a book like The Beginners Guide To Analyzing Financial Statements you get a resource that goes through some of the most important aspects of investing.
You will also go through several case studies on ACTUAL businesses step by step to see how everything works together to show you the business. Putting in the leg work and doing research is how you avoid this common financial problem.
Too Much Debt
Debt is bad. Debt can also be good but, that’s another subject. For now, having debt is not helping you. If you have money on your credit card, it’s not helping you. If you have money in a line of credit, it’s not helping you.
Your Mortgage isn’t helping either. Some people will disagree but Mortgage debt is one of the common financial problems that gets overlooked a lot. You have to pay constantly for that financial challenge. Every month for years you pay your mortgage and when it’s all done, you have paid roughly twice the initial purchase price!
Imagine if you bought a $200,000 house and after 30 years it cost you $400,000. That’s what happens to virtually every mortgage owner.
For now, let’s focus on consumer debt. USA Today says the average American has $6,194 in Credit card debt! That is quite a chunk of money and it’s only credit card debt, there is more debt elsewhere. With the average credit card rate between 14% and 19% paying off that much debt becomes difficult.
Let’s assume the interest rate is 16.5% and you are going to pay $100 a month onto your $6,194 balance. It would take 140 months (11.5 YEARS!!) and cost $7,780 in interest!
Buying on consumer debt such as Credit Cards or a line of credit “encourages” people to spend more than they can actually afford. Then the common financial problems start to grow and it becomes harder and harder to get out. Stop using your credit card and start building an emergency fund instead. When catastrophe strikes you can pay for the expense without creating long-term debt.
Emotional Investing
A very dangerous investment strategy is to allow your emotions to influence your decisions. When you get emotionally involved several common financial problems can arise. You may have made a poor investment and you won’t know until it’s too late.
If you lose the money you will be emotionally involved and this will compound the stress of investing. You CAN lose money when you invest. That’s why tools like The Beginners Guide to Analyzing Financial Statements or using a Robo-Advisor are excellent.
A Robo-Advisor has strict rules it needs to follow to provide you the safest and highest returns possible. They also have extremely low fees! (0.25%-0.5%) This is important because fees take away from your investment returns and over time can really affect your overall portfolio. Here you can check out some of the best Robo-Advisors and have an investment set up and going in no time.
By taking emotions out of the equation and making fact-based decisions you have a MUCH higher chance of making money AND you will have less financial stress.
Getting Sold On a Financial Sales Pitch
Working in sales is a great way to make money but it also means that people are trying to sell you things all the time. When you go to the bank the tellers are trying to sell you their bank’s products. When you get on the bus there are ads trying to sell you the latest gadget.
Some things are great but others aren’t. You need to make sure that any time you are going to be purchasing something you have done your homework and haven’t let your emotions take hold. The act of buying is purchasing based on emotion.
Salespeople know this and use it to their advantage. It’s natural to want something and if it’s presented in a wonderfully exciting way you may find yourself owning shares in something that is garbage. Work to understand what you are investing in and realize that every business is trying to sell you their product. This doesn’t always make it a good product.
Focusing Too Much On Money
If money is the root of all evil focusing on it can lead you down a path that you may not like. Besides, one of the common financial problems that can arise from focusing too much on money is lack of money, I’ll explain.
If you have $1,000,000, that would be pretty amazing right? But, what if you have $1,000,000 that produces no income? You go to retire and you need to start pulling from your funds. You have lots of money but every year it would go down and down.
You don’t just need money, you need Cash Flow. By having Cash Flow you can keep your $1,000,000 and live off the income it produces. This is the true retirement goal. Keep your accumulated wealth and live off the income it produces.
Another one of the common financial problems that can happen when you focus too much on money is that you lose out on the rest of life. Some people spend every waking moment trying to earn a dollar that they lose their life, family, health, or more.
Roughly 50% of marriages end in divorce, and overall money tends to be one of the biggest factors involved in arguments throughout the US. There needs to be a balance created between you and your family. Your happiness will not improve just because you accumulated a great deal of wealth.
Build strong relationships and enjoy your time as well as plan for your future.
Don’t Fall Into These Common Financial Problems
Take some time and focus on creating a plan for your future. You will be surprised at how easy it can be to make small changes and build huge results. Get a good financial planner and focus your efforts on freeing yourself from financial challenges associated with debt and investing.
Set up easy ways for you to win at the investing game like an emergency fund or automatic transfers to your investments. These two little things can set you apart from the many people who will be struggling during retirement.
I know I don’t want to HAVE to work when I’m 70, plan ahead so you don’t have to either.
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