Frugal Tips

The American financial system can be very confusing, which is one of the reasons why so many people are in debt.

Here are the biggest money mistakes which even smart people make:

Mistake#1. Cashing out 401 (k).

According to statistics almost half of the people who change their jobs cash out their 401(k) accounts. Even though it may seem like a good idea at the time, this is a huge money mistake.

If you cash your 401(k) you are going to lose the tax deferral, which you could have kept if you transferred your money to IRA or another retirement account. In most cases, if you cash out your 401(k) there is a 10% penalty, so depending on how much you are taking out, you can lose a huge chunk of your money. You will also have to pay income tax on your withdrawals which is also pretty significant.

Mistake#2. Failure to budget.

It is very difficult to control your finances and live within your means if you don’t know where exactly your money is going every month. Budgeting helped many people to reduce their debt significantly. Creating a budget is easy and it should be done as your first step to control your finances and reduce your debt.

Mistake#3. Underestimating small purchases

This goes along with mistake#2, People who write down everything they buy have a better idea where they stand financially and often think twice before making a purchase, no matter how small the purchase is.

Small purchases can be very destructive. A lunch with friends here, Starbucks coffee there, a candy bar at work, a mid-afternoon cappuccino and you didn’t even notice how you just lost $25. If you spend roughly $25 a week on small unnecessary purchases, it will add up to $1300 a year.

Mistake#4. Not asking for help.

The biggest mistake that the smartest people make is not asking for help when they really need it. Many people have too much pride and are embarrassed to admit that they got themselves in financial trouble. There is nothing to be ashamed of. The majority of Americans are in debt and it is much better and much smarter to ask for help and get out of this debt than to hide your problems until it is too late.