Everyone makes mistakes. Some are small while others can have lasting consequences. Mistakes with money generally fall into the latter category.
An astonishing 61% of Americans live paycheck-to-paycheck, spending all of their money between pay periods. That’s up from 52% a year ago according to an August 2022 report from LendingClub Corporation, in partnership with PYMNTS.com.
This is not just a problem affecting low to moderate-income consumers. The biggest rise in paycheck-to-paycheck living last year occurred among consumers in households that earned between $100,000 and $150,000.
So, what mistakes are these consumers making with their money? Financial Literacy Month seems like a good time to pose that question. Robert Johnson, CEO and chair at Economic Index Associates, sees two mistakes – spending too much on a home and something he calls “lifestyle creep.”
“The most common mistake is that people let their spending increase commensurate with their salary,” Johnson told ConsumerAffairs. “For instance, people move into a bigger apartment or buy a more expensive car or home to reward themselves for receiving the raise. What happens is they are unable to improve their financial condition because they spend everything they make. In effect, they move the goalposts on spending.”
He says overspending on a house can have the same negative impact. Spending too much on a house, he says, takes too much of their income and crowds out other investment opportunities and chances to build wealth.
“So people might just decide, ‘yeah, I’ll diversify my portfolio. I’ll live in a rental.’ That is a very sensible thing for many people to do,” he said.
Markia Brown, a certified financial education instructor at The Money Plug, says losing ground financially often is caused by simply a failure to plan and prioritize financial goals.
“This can manifest in several ways, such as overspending, accumulating high-interest debt, inadequate savings, and lack of investment for the future,” she told us. “To avoid these pitfalls, it is crucial to establish clear financial goals, create and follow a budget, prioritize saving and investing, and be disciplined with spending habits.”
Not paying off credit card balances
Einat Steklov, the founder of Kashable, says the biggest mistake most consumers make is not paying the full statement balance each month when the credit card bill arrives. When you pay off the balance each month, you’re using the credit card as a convenient way to make purchases. When you let the balance accumulate you’re buying things you can’t afford.
“This balance accumulates interest that is hard to calculate and adds to the monthly payments a significant amount beyond the actual purchases,” Steklov told us. “Paying off a credit card balance is a good habit that reflects living within one’s means.”
Spending all the money you make and running up high-interest credit card debt can put you behind the financial eight-ball. Jim Wang, the founder of Wallet Hacks, says one obvious result is you aren’t saving any money.
“We often hear about the scary statistic that most Americans can't handle a major emergency expense of just a few hundred dollars, Wang said. “Saving just a little bit each month toward an emergency fund can help protect you from financial ruin over a relatively minor expense.”