A few years ago, I met with a young man who we’ll call Sam. He asked me a very simple question: “Why can’t I ever seem to get ahead financially?”
I asked Sam to tell me a bit more about himself. He continued: “I’m a college graduate. I have a good job. I pay my bills on time and don’t use credit cards. I don’t spend money on frivolous things. So why can’t I ever get ahead?”
Fortunately, after a deep dive into the state of his finances, I was able to help him find the answer: he made too many of what I like to call, “mental money mistakes.”
What are mental money mistakes? They’re subtle errors in judgement. Basic oversights and miscalculations. As a rule, they tend to be subtle and easy to miss. I’m not talking about big mistakes like taking on a bunch of debt, spending more than you can afford, or being too risky with your investments. No, these are the kinds of mistakes just about anyone can make, even if they’re intelligent, hard-working types like Sam.
To help you identify mental money mistakes, I have decided to write a new series of articles. Each article will discuss a different mistake and how to avoid it. So without further ado, let’s dive into:
Mental Money Mistake #1: Forgetting to Plan for Unexpected Expenses
We all know the line, “Expect the unexpected.” But how often do we actually do it?
The fact of the matter is that many people do a good job planning for expected expenses, like mortgage payments, health insurance, gas, and groceries. But when it comes to saving for the future—whether for your retirement or just that trip you’ve always wanted to go on—we tend to forget about all the unexpected expenses life tends to throw our way. And that’s a mistake, because a plan that assumes nothing will ever go wrong isn’t really a plan at all. It’s more of a prayer.
With that in mind, here are five very common but usually unexpected expenses that many people fail to plan for:
The point of all this is to show that unexpected expenses can come at any time, in many different forms. What’s more, they can really pile up. In Sam’s case, even though he was being prudent with his money, he still had trouble getting ahead because he was always having to allocate more money than he expected to dealing with expenses. And he’s not alone: according to a study by Pew Charitable Trusts, “more than 70% of Americans find it hard to save because of expenses they didn’t plan for.”1
So what’s the solution? Start a rainy day fund! When most people save, they tend to just throw everything into one savings account and withdraw money whenever they either need or want to. Instead, I suggest creating a separate type of savings account: one that can only be touched whenever the unexpected happens. Every month, devote a set percentage of your income to the rainy day fund in addition to your regular savings. Then, when your car inevitably breaks down, you won’t have to worry about it interfering with that vacation you’ve been saving for, because you’ve already set aside the funds to deal with it.
By making a list of possible expenses in addition to the regular expenses you’ve already planned for, you can make real progress in regards to getting ahead financially.
Stay tuned for next month’s article, where we’ll discuss Mental Money Mistake #2 … and learn why not all $20 bills are created equal.
1 Ann Carrns, “Unexpected, but Not Unusual Expenses Thwart Efforts to Save,” New York Times, January 8, 2016.http://www.nytimes.com/2016/01/09/your-money/unexpected-but-not-unusual-expenses-thwart-efforts-to-save.html?_r=0