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Common money mistakes and how to avoid them

Whether you’re just starting out or you’ve been doing it for a while, managing your money can be stressful and it’s easy to make mistakes.

While some money mistakes can be easy to correct, a moment of distraction can sometimes impact your financial wellbeing for years. To help you manage your money better, we’ve put together a list of common mistakes you could be making with your money and what you can do to avoid them.

Things to avoid when managing your money

Overspending and impulse buying

This may seem like the most common money mistake you can make, but it’s very easy to overspend and it’s likely you won’t even realise you’re doing it.

How you can avoid overspending

The first thing you can do is make a monthly budget and figure out how much you can actually afford to spend monthly on things you want but don’t need.

Once you’ve settled on a budget, you could even have a separate account to hold any money meant for necessary expenses and make it harder for yourself to take money from that account (by not having a bank card for example).

That way, when you do spend money, you will see it come out of your available “wants” money for the month, leaving you with less to spend.

It can also be helpful to try and get to the root cause of your overspending so you can work out ways to minimise it. Identify when and how you tend to spend impulsively and find alternative behaviours to replace it.

If you’re prone to online shopping when you’re bored, for example, you could take up a hobby that you pick up whenever you feel the impulse to start adding things to your cart.

Find out more: What is emotional spending and how can you keep it in check?

Relying on split payment and pay later schemes

You've likely run into different payment schemes, especially when online shopping, that allow you to split your purchases into monthly instalments or even pay for them in full the next month.

Making use of these schemes once in a while, especially if you have to make a big purchase unexpectedly, isn't necessarily bad. However, relying too much on these schemes is one of most common money mistakes you can make, as you can easily develop a habit of buying things you wouldn't otherwise be able to afford.

The truth about split payment and delayed payment schemes is that you’re still borrowing money, and the more you borrow the more you have to pay back. If you make several big purchases through a “Pay in 3” scheme in the same month, for example, you might end up with no money to spare for the next three months in a row!

How you can avoid split payment or delayed payment schemes

If you absolutely have to make a big purchase on short notice, such as replacing an essential home appliance or furniture, there’s nothing wrong with taking advantage of tools that help you split the cost.

You can also avoid having to use a split payment scheme for an unexpected cost by having an emergency fund.

In any other case, before you hit the “pay in 3” or “pay later” button, ask yourself:

  • Would you still buy this item if you couldn’t split the cost or delay the payment?
  • How long would it take you to save up for it?
  • What would you have to give up to be able to afford it?

Ignoring small costs

You’ve likely heard it before: cancel that subscription, don’t get that coffee and you definitely don’t need that cheap novelty item you saw in a shop one day. The truth is, a pound or two here and there may seem like nothing, but it does actually add up quite a bit at the end of the month, not to mention the end of the year.

Subscriptions alone, for example, can really hurt your finances in the long run. In 2021, people in the UK spent an average of £620 a year on subscription services, and an average of £641 in takeaway food. That’s £1,261 that could have been put away for a house deposit or towards a holiday.

Of course, you shouldn’t cancel all your subscriptions or never order food again. We all need to be able to relax and enjoy ourselves! But it’s worth having a look at how much these small costs are adding up for you and seeing where you can cut down.

How you can be aware of and budget for small costs

This will be different for all kinds of small costs, but the key here is having a solid budget plan that’s straightforward and easy to stick to. A budget rule could be helpful in getting you started.

When budgeting for subscriptions, look at everything that you’re paying for on a monthly basis and see where you could make some cuts. There’s bound to be a few services that you’re not really using or free trials you forgot to cancel that have since started charging you. You can always pick your subscriptions back up if you realise you miss them!

When budgeting for other small costs, such as takeaway meals and other purchases, these will go into your category of things you want but don’t need. If you’re following a budget plan, you’ll know how much you can spend in this category every month. Seeing the money in that pot go down every time you get a coffee might make you more aware of these costs.

Borrowing too much

Most people in the UK have at least one credit card, with a quarter of the country having three to four. And if you’ve started turning to credit cards and loans for everyday expenses due to a rise in the cost of living, you’re not alone, in fact you’re one of 13 million people in the UK to have done so. You could even have taken out a personal loan to get yourself out of a tight spot.

The truth is, borrowing too much money is one of the most common money mistakes you can make, and it's likely that, at some point, you'll feel like you have to do it to get by. Credit cards and personal loans may give you a sense of freedom and relief in the moment, but repayments and interest fees can quickly add up and have the opposite effect in the long term.

How you can avoid borrowing too much money

If you’re using credit cards and loans to cover unexpected costs or simply get through harder months, you could try to build an emergency fund instead. It can take a little while, but once you’ve built up a decent amount you’ll be able to deal with sudden costs or lower income months without going into debt.

If you have to use a credit card for now, try not to spend any money on it that you can’t pay back in full the next month.

When it comes to personal loans, if you don’t yet have an emergency fund and you have to take a loan out to deal with a difficult situation, look for loans with shorter payment terms as these tend to have lower interest rates.

For both credit cards and loans, you should prioritise making extra repayments whenever you can rather than just making your minimum repayments. This will reduce how much interest you’re paying and it will look good on your credit score.

Falling for financial scams and fraud

It’s easy to think we’d never fall for a financial scam, but scammers are getting smarter every day. There were almost three million cases of fraud in the UK in 2022 alone!

There are many ways scammers can get a hold of your money if you’re not careful and it’s worth remembering that financial scams don’t always try to take your money right away. They could be trying to steal your information so they can impersonate you to someone else or simply sell it to companies for a profit.

How you can avoid financial scams or fraud

Stay up-to-date on common scams being used and be wary of phone calls, emails or text messages coming from someone you don’t know.

When getting an email asking you for personal details, bank information or simply asking you to click on a link, always double-check the sender. Scammers can mask their email address, so remember to expand the sender details on any strange emails you get.

When following any links that were sent to you by email or text message, always check the URL for the page at the top of your browser window and make sure it matches the URL for the official page you would have found through Google.

Find out more: How to stay safe online

Not having an emergency fund

Not having an emergency fund is a very common money mistake almost half the people in the UK are making.

Emergency funds are meant to do exactly what the name says, which is to cover you in case of an emergency. This could be anything from having to move house on short notice, losing your income or your car breaking down.

Having an emergency fund is key to protecting yourself from having to take on debt to get yourself out of a difficult situation.

How to build an emergency fund

Emergency funds can take a while to save up for, but they’re worth the time and effort.

The important thing is to figure out how much you’d ideally want to have in your emergency fund and how much you can afford to put aside every month. If something unexpected happens before your emergency fund has hit its goal, you should still use it and put the money back in it when you can.

Find out more: How to build an emergency fund

Not saving for retirement

Even if you’ve been working for a few years and you have both a State Pension and an employer or private pension, it might not be enough to maintain your lifestyle when you retire. This is especially true if you’re self-employed, as it’s likely you’ll only have your State Pension to rely on.

How to start saving for retirement

If you’re working for an employer, you will most likely have a pension set up in your name. You probably have the option to put more money into your pension if you’d like.

If you’re self-employed, there are a few ways you can start building your retirement fund, including a private pension or lifetime ISA.

Find out more: How to save for retirement when you're self-employed

How you can protect yourself from making mistakes with your money

There are different solutions and ways you can prevent making some of the most common money mistakes, but the best way to protect yourself is by sticking to a budget and building up your savings.

If your goal is to buy your first home or save for retirement, a lifetime ISA could help you get there faster as you get a 25% government bonus on everything you invest. You’re allowed to put up to £4,000 each tax year into a lifetime ISA, which means there’s an extra £1,000 every tax year available for your house deposit or retirement fund. Just be careful to only use the money in your lifetime ISA to buy your first home or leave it invested until you turn 60, otherwise you will be charged a government withdrawal fee.

If that’s not what you’re saving for, an ISA could be a better option for you as you can use the money for anything you like without being charged a fee. You can put up to £20,000 into ISAs in your name each tax year.

Stocks and Shares ISA

With one, simple annual management charge of 1.1%, our Stocks and Shares ISA could be a good option if you're looking to invest over the long-term.

Lifetime ISA

If you want to save for your first home or for life after 60, our Lifetime ISA could help as you'll gain a 25% boost from the government on top of your savings, as well as any potential stocks and shares returns.

Our Stocks and Shares ISA and Lifetime ISA invest in stocks and shares. This means they have good long-term growth potential, but the value of your investments could go down as well as up so you could end up with less money than you've put in.

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