Mistake 2: Becoming a human ATM for family and friends
According to a survey conducted by The Washington Post, the Kaiser Family Foundation, and Harvard University, 60% of African Americans—more than whites or Hispanics—said they or a family member had loaned money to family or friends. There’s nothing wrong with helping others. But if you lend money that should go toward your bills, emergency fund, and retirement accounts, you’re jeopardizing your financial well-being. If you find yourself putting the needs of others before your own:
Give, don’t lend. A litmus test to help you decide if you can afford to lend is to ask yourself if you need the money back. If the answer is yes, then you don’t have the dollars to lend. Although loved ones may have every intention of paying you back, “Think of the loan as a gift, because it’s unlikely that you’ll ever see that money again,” says Alexandria M. Cummings, a financial adviser with Polaris Wealth Management in Chicago. Also, learn to say “no.”
Lend from discretionary income. You should use only those dollars left over after you’ve made your regular contributions to your savings, emergency fund, and retirement plans, as well as paid all bills and expenses, Cummings says. Savings accounts and money from lines of credit should be off-limits. “What if you have an emergency the following week and you’ve already given the money out of your nest egg?” Cummings asks.
Offer a lesson, not a handout. There’s wisdom in the proverb, “Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.” There are better alternatives to becoming a human ATM. If a friend is regularly having trouble managing finances, buy him or her a personal finance book, suggest a free financial course or seminar, or provide information about a qualified financial professional. By doing so, you will help your friend develop money management skills and break the cycle of dependency.
Mistake 3: Mindless spending
Most cases of random spending result from being unaware of your daily spending habits, says Jesse Abercrombie, a Dallas-based financial adviser with Edward Jones Investments. To get your spending under control:
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