Most of us have made financial mistakes at some point in our lives. For the majority, these have been relatively minor and have not had a long-term impact on our financial health. But for a significant minority, poor judgements made in the past have seriously affected their ability to raise money when they need it or hold on to what they earn.

mistakes and banana skins

But no matter what you earn, the good news is that responsible and prudent financial management is a skill which can be learned and applied at any time of life. So, it’s worth looking at the 10 most common financial mistakes and how you can avoid them:

  1. Not having a contingency fund

Thinking that the unexpected will never happen to you is playing fast and loose with your household’s wellbeing. Many people live payslip to payslip and an unforeseen emergency can only be dealt with by using credit. But most financial advisers believe that a minimum of three months of household expenditure should be kept in a current account where it can be used to cope with emergencies.

  1. Not budgeting

Drawing up a household budget may be time consuming and sticking to it may be depressing. But how will you know if you are living within your means and can afford to save for luxuries like holidays if you are not tracking what you are earning and spending?

  1. Paying the minimum on credit cards

It may be tempting to keep your credit card repayments to a minimum but you would be storing up trouble if you do this. Somebody with £10,000 on a card charging 20% in interest who only makes the minimum 5% repayment each month could be looking at taking more than 60 years to repay the entire balance.

  1. Leaving saving for retirement till later life

Most people do not start saving for their retirement until they reach their 40s or 50s. Even at these relatively young ages, it will be touch and go as to whether they will have enough time to accrue sufficient savings to guarantee a reasonably comfortable retirement. Even with a 7% rate of return on your pension pot. It has been calculated that you would need to save £960 a month from the age of 45 in order to have a pension fund of £500,000 when you reach 65. This may sound like a lot of money, but assuming you live another 20 years this pot could buy you a c.£23,000 annuity. Is this enough for what you want to do in retirement?

  1. Not looking after your decent credit record

It may be tempting to spend like there’s no tomorrow and then not make your payments on time every time when you have access to credit but it is extremely reckless behaviour. If you have a poor credit record, it won’t just affect your ability to get loans and credit cards, it may mean you can’t get a tenancy agreement, have to have pre-payment meters for gas and electricity accounts and may be refused a landline.

  1. Pretending everything is fine

Never ignore what comes through the post – particularly if it is in a brown or windowed envelope. Deal with all of your bills as and when they come in otherwise you won’t stand a chance of realistically assessing your financial situation and being able to make plans to repay and/or manage your debts successfully.

  1. Maxing our credit cards

Lenders will see you as a potential risk if you have a number of credit cards on which the credit limit has been reached. This indicates a borrower who is experiencing financial difficulty, make it less likely that you’ll get offered more credit and leave you no room for manoeuvre should an emergency happen.

  1. Keeping up with the Joneses

There will always be somebody richer than you, driving a better car, living in a better house or enjoying a more glamourous lifestyle. Knowing that, it should be self-evident that attempting to keep up with everybody else puts you on a hiding to nothing and will quickly empty your bank account. Concentrate, instead, on sticking to a budget, saving for the things that you want and not mistaking stuff for happiness. You may not end up in a superyacht, but you’ll enjoy sustainable contentment.

  1. Not reducing costs by consolidating debt

Having a lot of debt on credit cards and loans is one thing. Not seeking to reduce the amount you pay in interest on them is another. Rolling all of your debts into a single loan with a single monthly repayment and a lower interest rate is a prudent financial move when you then close the accounts that have been settled and concentrate on drawing up a long-term financial plan.

  1. Using your retirement savings to pay off debt

On the face of it, it’s a no brainer. Your debts are charging an average of 19 per cent in interest while your pension is only growing at about 4% a year. But once you’ve paid off your debts, the temptation would be to think everything was OK and continue spending at the same rate. But some or all of your pension savings will be gone and you will have nothing to fall back on.