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It's common practice to resolve to do better financially when a new year kicks into gear. And given that 2020 may have been less than stellar for many of us, it's natural to have high hopes going into 2021. But sometimes, all it takes is a few mistakes to derail your otherwise solid efforts. Be sure to avoid these big ones as you navigate the next 12 months.
1. Not following a budget
Many people don't write out a budget because they think it's boring or too time-consuming. But actually, budgeting is pretty easy. And while it may not be the most fun way to spend a couple of hours, it's far from painful.
Just comb through your bank and credit card statements from the past year, see what your various bills cost you, list them on a spreadsheet, an app, or just a piece of paper, and compare your spending to your earnings to ensure that you don't go overboard. Without a budget, you might spend too much in certain categories and fall short on your savings goals, so it's worth taking a modest amount of time out of a weekend to put one together.
2. Using your emergency savings for the wrong reasons
You should be judicious about why you tap your emergency fund. Ideally, you should have three to six months' worth of living expenses in a savings account so that if unplanned bills pop up, you can pay them without racking up debt. Tempting as it may be to use that money to take a vacation or attend a wedding, those don't count as unanticipated expenses, nor are they emergencies.
Is it disappointing to miss a big trip or event? Of course. But you can technically live without those things. Whereas if you need a new car, you can't put that off, especially if it's how you get to work. Build up your emergency fund so that you have something to fall back on when you need it the most.
3. Making your debt more expensive than it needs to be
Sometimes, despite our best efforts to avoid it, we take on debt. It can happen when you're hit with major home repairs or costly medical bills -- things you can't always plan for. But as tempting as it may be to whip out a credit card to cover those sudden expenses, charging up a balance could cost you a boatload of interest.
If you have to borrow money in 2021, aim to do so affordably. See if you qualify for a personal loan, which generally charges less interest than a credit card. Additionally, a personal loan is healthier for your credit score because it won't impact credit utilization. Or, if you're a homeowner, a home equity loan or line of credit could be a more cost-effective means of borrowing. Explore your options -- don't assume a credit card is the way to go.
4. Neglecting your health
Ignoring health issues won't just compromise your physical well-being; it could, in some cases, drive your medical bills up. Often, addressing a health issue early allows a medical professional to treat it in the least invasive and most affordable way possible. Neglect your health, and you may end up needing more complex treatment that hurts your wallet. If a doctor tells you to follow up on a specific issue soon, listen.
We all want the best in 2021, and that extends to money matters. Avoid these mistakes, and there's a good chance you'll close out the year on a strong financial note.
