We all know living beyond your means and not having an emergency fund can wreck your finances. While most money flubs are obvious, some mistakes start with good financial intentions. Here are some savings habits that can backfire and end up costing you.
Making An Unrealistically Tight Budget
Yes, most of us could probably stand to spend less. But don't force yourself to stick to an unrealistic budget that leaves no breathing room for entertainment or indulgences. As personal finance writer J.D. Roth explains:
The third rule of budgeting: Make plans based on your real life, not how you wish life would be. Don't budget for possible salary increases and ideal spending habits. If you spend money on coffee every day, make that part of your budget. If you haven't received a raise at work, don't count that in your income. Budget for reality, not wishful thinking.
Of course, it's important to cut back, especially if you live above your means. But making a too-tight budget usually backfires. Eventually, your desire to spend will catch up with your desire to save. If you don't have any guidelines established, you risk completely overspending and busting your budget.
It's best to give yourself a little breathing room so you don't risk blowing up later.
Buying Stuff Because It's On Sale
Ever bought something you didn't really need or want just because it's on sale? Most of us have given into the allure of a good discount. Even the most frugal people make this mistake, because a good deal is tempting. But if the item you're buying won't get any use, there's no point in spending money on it in the first place.
Buying in bulk is a good example of this. If you're going to use all of the bulk item, then it's worthwhile. But if you'll just toss out the excess, then it has little value, and you're throwing money away. Frugality is about value, not consumption. A good discount can give you a thrifty rush, but it's not always the best financial decision.
Keeping Too Much In Your Emergency Fund
While saving too much for an emergency won't exactly wreck your finances, many personal finance experts agree that it doesn't do much for you, either. For example, President of Financial Planning Services' Larry Rosenthal told Bankrate:
"If you need $5000 per month to live on, that's $30,000 you'll need to have for a six-month emergency fund. That may be too much money to put aside someplace that's earning as little interest as you do in a savings account."
In other words, maybe $30,000 is too much to sit on. That money could be earning more somewhere else.
Hoarding Your Money And Oversaving
Saving money is wonderful when you have a goal in mind. But saving just to save can cost you your happiness. The point of financial independence is freedom, after all, and hoarding money can keep you from doing things you want. Consumerism Commentary recently wrote about the phenomenon of money hoarding:
Putting aside the noble, selfless acts of passing our assets to charitable causes and descendants, the point of accumulating money is not to have a large bank account; the purpose of saving is to do something with the money...If your approach is causing you to miss out on aspects of life that you find important and will later regret, you may be saving too much money.
Overall, it's about finding a balance between making your present and future self happy. Most people end up hoarding money later in life, if they have accumulated a lot of it. But oversaving can be a problem, too.
Here's a personal example: When I first decided it was time to get my finances in order, I became obsessed with saving. I paid myself first — which is great, except that I paid myself too much. I overestimated my savings and made an unrealistically tight budget for everything else. The result? I over-drafted on my checking account (my saving account was with another bank).
It was a pretty silly mistake, despite my good financial intentions.
The key to making a smart spending decision isn't always price — it's value. And sometimes better value means spending more. Buy a cheap pair of boots, for example, and you'll have to keep buying boots every year or so. Buy a decent pair of boots that are a bit more expensive, and you may not have to buy boots for another decade. In fact, some frugal shoppers determine the value of clothing items by calculating "cost per wear."
The Street explains how to stop the habit of putting price before value:
Price is just one factor that you need to consider when making a purchase. Other important factors include how long the item will last, what type of warranties it comes with and how often it will be used. Learning to shop value rather than price will save you a lot of money in the long run.
Of course, not everyone has the luxury of buying the more valuable pair of boots. But if you can afford the choice, it's better to choose value.
It's great to be enthusiastic about getting your finances in order, but watch out for good money intentions that may backfire. Overall, a steady and balanced mindset will help keep you in the right direction.