5. Being Too Restrictive
After juice-cleansing for a week, you might find yourself raiding the kitchen at midnight for Ben & Jerry’s and frozen pizza. The same binges can happen if you’re on a hardcore financial diet.
“Some people become so alarmed when they total up their [expenses] that they…move the needle too far to the opposite end,” says financial therapist Megan Ford, president of the Financial Therapy Association. “Not only does strict budgeting file down your willpower, but it also tricks you into thinking that because you’ve been so responsible you deserve a splurge.”
The key is finding a balance between having fun now and saving for the future. The mix is different for everyone, so play around with the numbers until you find a sustainable combination.
6. Not Leaving Any Wiggle Room
On the same note, while it may sound like a good move to assign a task to every dollar you earn—even if it’s a good mix of priorities and entertainment—this won’t do you any favors.
“People need to allow some flexibility for unexpected expenses, leisure activities and even small rewards,” says Divam Mehta, Certified Financial Planner, founder of Mehta Financial Group in Glen Allen, Va. If you don’t leave yourself a cushion, you’ll be forced to dip into your emergency fund or rack up credit card debt to cover unanticipated purchases. Mehta suggests allocating around 20 percent of your income for variable expenses like these, then saving or investing any that’s left at the end of the month.
7. Trimming the Wrong Things
It’s great to aggressively reduce your spending to reach your goals, but certain cutbacks will sabotage your efforts in the long run. “Often, clients will remove or downgrade their health or life insurance policies, which can have devastating long-term ramifications,” Mehta says.
Another mistake people make when paring down expenses—particularly to pay off debt—is funneling funds away from their 401(k) or IRA. But that torpedoes future wealth accumulation, thanks to lost opportunities for your money to grow. “A portion of your income should go toward debt, and once you have an emergency fund built up, some should also go toward [retirement]—it’s not an all-or-nothing proposition,” Mehta says. “And contributing at least up to your employer’s match in a 401(k) is a no-brainer.”
October 31, 2016
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