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Feelings of stress and anxiety are all too real when it comes to finances. A recent study from FINRA found that 60% of individuals feel anxious when thinking about their finances. Some 50% feel stressed discussing their financial situation.1
Stress and uncertainty can sometimes lead to common financial mistakes or poor decisions. But even if you feel on top of your finances, busy lives and schedules mean things can sometimes fall through the cracks. Mistakes happen — no one is perfect — but it's what you do after you realize the mistake that matters.
Here's a look at three common financial mistakes as well as several strategies for recovering from them.
- Paying off credit card debt is crucial for maintaining a good credit score. It's important to pay more than the minimum balance and consider strategies like the snowball method or low-interest-rate transfers.
- Start saving for retirement early to allow your money to grow. Opt into employer-sponsored 401(k) plans, contribute to an IRA if available, and seek guidance from a financial professional.
- Living beyond your means can hinder saving and lead to financial difficulties. Create a budget, use online tools, cut unnecessary spending, and explore ways to increase income.
- Recover from financial mistakes by assessing your situation, setting achievable goals, creating a strategy, taking action, and regularly reviewing and adjusting your progress.
1. Not Paying Off Your Credit Card Debt
Your credit score is a number that can rule your financial life. An excellent score means you're more likely to get better rates on a mortgage, car or personal loan. A lower score may cause you to struggle to get loans when you need them or require you to pay higher interest rates.
A key part of your credit score is your debt utilization. It's a ratio that measures how close you are to your credit card limit. In general, the lower, the better. If you are only paying off the monthly minimum on your credit cards, your credit utilization may remain high, which could impact your score. A study from the National Foundation for Credit Counseling found that 62% of Americans carry credit card debt over each month.2 Accordingly, these individuals' credit scores could be negatively affected.
If you have high credit card debt, it's wise to develop a plan to pay it off. Here are a few ways to do so:
- Try to pay a little bit more than the minimum balance each month.
- Consider paying off the card with the lowest debt first and then rolling those payments to the next card, and so on. This is called the snowball method.
- Think about taking advantage of a low-interest-rate transfer offer that can cut the rate (but make sure you watch for fees).
2. Falling Behind in Saving for Retirement
It's never too early to save for retirement. Saving while young can give your money more time to grow. But for many, there are other pressing financial needs to address, ones that end up pushing retirement savings to the back burner.
Unfortunately, if you delay saving for retirement, it can have serious impacts down the line. It may lead you to work longer. Your Social Security benefits might not be enough to pay your bills. So it's something you generally want to address as soon as you can.
Here are some approaches to help you get your retirement savings back on track:
- If you have an employer-sponsored 401(k), consider opting into it. If your employer matches contributions, that's even better — it's basically free money for your retirement.
- If you don't have access to a 401(k) through work, look at your budget and see where you may be able to save a little bit extra each month. Those excess funds can be put into an Individual Retirement Account (IRA).
- Speak with a financial professional about your retirement needs and concerns. They can work hand in hand with you to set goals and develop a plan to address your unique needs.
3. Living Beyond Your Means
Today, it's easier than ever to shop and spend online. But if you don't have a budget or account alerts set up, you may be in for a shock when your monthly statements come in. That could impact your ability to save for retirement, pay off debt or build an emergency fund. That is currently a reality for the 36% of Americans who report they'd have trouble paying an emergency expense of $400.3
As hard as it is, if you find yourself living beyond your means, you may need to make some difficult financial choices. These can include getting a more affordable car, cutting unnecessary spending and limiting your credit card use.
If getting ahead of your spending is a goal you're working toward, consider these strategies:
- Revisit your budget if you have one. If you don't, now is a good time to create one.
- Leverage online tools and apps for help. For example, many free budget trackers will alert you to big purchases and remind you if you're going over your planned budget.
- Consider ways to bring in extra income. This may mean a side hustle or an online job doing gig work.
How to Recover From Common Financial Mistakes
If you could benefit from reducing debt, paying off bills and replenishing your savings, a financial recovery plan can help you take control of your situation. It is absolutely possible to recover from common financial mistakes. Here are five steps to help you get started:
- Take stock of your current financial situation. Seeing where you stand can help you figure out the next steps. Identify possible solutions to any challenges you're facing.
- Create goals. Focus on actionable and achievable goals first, and get specific wherever you can.
- Develop a strategy. Once you have established your goals, you can work backward to create a plan that will help you hit them.
- Execute your plan. With the steps laid out, you now have to take action and make sure you're following through.
- Review periodically. Set a schedule to check back in and review your progress and make tweaks where needed. Even the best laid plans need updating occasionally.
It can be hard to look at a mistake and not feel frustrated. But your best approach is to accept that it happened, learn from it and put some plans in place to help ensure it doesn't happen again. If you think you might benefit from personalized advice relating to your individual situation, don't hesitate to reach out to a financial professional for assistance.
- Pierce T. and Williams A. Large Number of Americans Reported Financial Anxiety and Stress Even Before the Pandemic. FINRA. https://www.finra.org/media-center/newsreleases/2021/large-number-americans-reported-financial-anxiety-and-stress-even. Published April 28, 2021. Accessed March 1, 2022.
- NFCC Financial Literacy Survey Highlights Areas of Most Urgent Concern as COVID-19 Reached the United States. NFCC. https://digital.nfcc.org/media-resources-center/nfcc-financial-literacy-survey-highlights-areas-of-most-urgent-concern-as-covid-19-reached-the-united-states/. Accessed July 5, 2023.
- Grover M. What a $400 emergency expense tells us about the economy. Federal Reserve Bank of Minneapolis. https://www.minneapolisfed.org/article/2021/what-a-400-dollar-emergency-expense-tells-us-about-the-economy. Published June 11, 2021. Accessed March 1, 2022.