Personal Finance Basics

Do you want to retire with a certain amount of money?  Good news, you do not have to stare down a life sentence of working at your job!  You simply need to make sure you avoid some common mistakes.  We will review some personal finance basics and mistakes people make.

After reading articles and blog site posts online you might begin to think that the most significant issue threatening your monetary goals are subscription boxes, coffee at a premium coffee house, and keeping up with the Joneses!  In our research we have found that there are even more considerable dangers that can undermine your financial goals.

It is possible to develop wealth with a modest earnings.  However, it takes a bit more preparation and time than it would a high-income earner.  Lower income earners, need to be as efficient as possible, use a bit of creativity, and know and prevent these ten common mistakes below.

FYI, High-income earners make these mistakes also, and we all should avoid them.

Here are the top 10 cash mistakes individuals make:

1. Not Optimizing Your Tax Return.

Among the biggest errors people with modest earnings make is not developing an earnings tax plan and budget tax plan.  The most common belief is that tax planning is just for the “wealthy”.  However, tax preparation when you have a modest income is vital.  Tax rates range from 10% to 30% of your income, even for the middle class!

For numerous families, income taxes are their 3rd or fourth largest home expenses.  One of the easiest methods to maximize cash is to produce a tax strategy.  The IRS offers a number of tax deductions for people and families with a modest income, such as the Retirement Savers Credit, the Premium Tax Credit, the Child Tax Credit, and the Earned Earnings Tax Credit.  A number of these tax credits are refundable, meaning you don’t have to pay to get these credits.  A refundable tax credit is free income from the federal government!  Keep in mind: When you qualify for a refundable tax credit, and you decrease your tax expense through deductions, then the government might possibly pay you more money than what you paid into the government.

Decreasing your gross income might also help with:

  • qualifying for the income-sensitive student loan repayments,
  • improve the approval of college financial aid for you and your kids
  • might minimize the amount of self-employment taxes you pay.

Should you qualify for the income-sensitive programs, the end result might be a lot more considerable than you might believe in your tax savings.  The issue is a lot of people with modest incomes either postpone tax planning or wait till tax season (Mid-January to April 15Th) to review their taxes.

You can’t do anything to lower taxable income or increase your deductions after December 31st.  Taking part in tax planning throughout the year will assist you in a spending plan and strategically timed purchases.

Tax planning does not need to be overly complex.  You can develop a tax plan using free online tools.  Simply print out a list of any income-sensitive tax incentives you qualify for and compare your expected income for the year with the requirements for the program.

[Editor’s note: This is an excellent point about working throughout the year to make the most of your income tax return the next year.  I trade e-mails with my Certified Public Accountant 3 or 4 times annually as we talk about different things I’m doing/considering this year that will impact my taxes next year.]

2. Paying Down Financial Obligation Too Aggressively.

We have all seen the posts online: debt is awful, and loan interest destroys your financial dreams.

Paying off debt is a great goal.  However, people and families with modest incomes need to be careful not to settle financial debt too quickly.  Numerous monetary gurus such as Dave Ramsey or Suze Orman would encourage you to focus on paying down financial debt before saving for retirement.  While their hearts are in the right place (they do not want their audience to end up being servants to debt), it may not be in your best interest to concentrate on getting out of debt only.

For example:

– Contributions to retirement accounts could be qualified for company matching, which you should take advantage of at least up to the matching percentage.

– Retirement savers credits,  are incentives to save for retirement

– Medical insurance expenses, such as a pre tax Flexible Spending Account FSA, can assist you with tax free reimbursement for medical expenses

As you can see knowing about the personal finance basics is important!

Recently, I came across a household who was paying an additional $10k a year on their home loan and not contributing to their 401k.   In reviewing a tax strategy they realized that contributing $10k to their 401k would save them over $7,500 in income taxes.  Now they are contributing to the 401k and using the $7,500 tax savings to pay down the mortgage.

Paying down debt too quickly may result in more financial obligation.  What?  Lots of “savers” with modest income get trapped into the yo-yo diet version of debt reduction.  They pay debt too aggressively, and they don’t have sufficient funds for emergency situations.  They are ultimately forced back into debt at the first hiccup.

Lots of people and households would be better off by paying off financial debts a bit slower.  Try to get the most affordable payments and interest rates possible.  Every month designate some money to paying down debt and some money towards an emergency fund.   As the financial debt balance decreases and your money reserves grow, then you can increase the amount you pay on the financial debt.

3. Not Participating In Estate Planning.

We are all aware of some star in the news who passed away and didn’t have appropriate estate planning documents.  When you see a celebrity estate such as Prince or Stan Lee in the news, it’s easy to question why they didn’t have proper documents.  However, everyday individuals with modest income have comparable experiences.  This should be a priority for you and your family. The truth is death, special needs, and diminished health complicate not only financial resources but also the family dynamic.

For years, I have actually seen people that insist they have no interest in their moms and dads’ finances.  Also, the majority of parents insist their estates will be handled without issues because “everybody is in agreement”, and “absolutely nothing could go wrong”.  Without fail, these families end up having the most significant disasters due to the fact that the kids don’t know what the parents want.  Even the best of families can be ripped apart when faced with unclear or non-existent instructions about how to look after an incapacitated loved one or distribute an estate.

Do yourself and your family a favor and contact a professional estate planning attorney and go over a living trust and any additional options.   Make sure you understand the different kinds of trusts and what works best for your assets and your wishes should something happen.  Trust me, you don’t want your kids dealing with state probate courts, most of the time the courts get most of the assets and your kids are left with nothing.

4. Not Taking Part In Property Protection.

When you go to the estate planning attorney, you must talk with them about asset protection.  If you have a side hustle, small service, or own rentals, you should speak to a qualified professional about asset protection and the appropriate business structure.  Having the best business structure could protect your personal life savings from claims and potential creditors of the company.

Over and above protecting your individual assets, establishing correct organization documents for you might have significant financial advantages.  Setting up an appropriate business entity for your endeavors can help with building credit and might even aid with tax planning.

Also, building business credit may help get rid of personal loans from your personal credit, therefore improving your credit rating.  Additionally, if your organization relies greatly on credit, having developed business credit helps ensure the business does not get closed down if the primary owner passes away.

5. Purchasing To Little or To Much Insurance.

Most of the time, people either have to much or to little insurance coverage.

Any insurance coverage, such as life insurance, disability insurance, property and casualty insurance, and liability insurance is a “rainy-day” preventative measure.  Essentially, it’s a waste of money until you need it.  Yet not everyone wants to view it through an economic perspective.

Let me explain.  Higher-income earners and those with more modest incomes typically have several threats, and therefore various insurance for handling those threats.  As such, they will need to view insurance in a different way.  An event that would trigger a financial issue for one kind of person, might be financially devastating for another.

An example is a guy was vacationing with his family, when he tripped and broke his leg.  He is a truck driver and has actually been unable to work for over four weeks.  Since the injury wasn’t work-related, he was not covered by employer-sponsored insurance to cover his wages.  Now consider this, the very same injury that puts a truck driver out of work and exhausts his savings emergency fund would have minimal effect on an IT expert, developer, or someone who works at a desk, as they could still go to work, therefore not financially impacted like the truck driver.

Individuals should evaluate what threats they might face and make sure they have adequate insurance.

Each year you need to consider all your insurance plans, inspect the limitations and deductibles and make sure they are within what you can manage financially.  Make sure to shop your insurance coverage with different insurance companies to ensure you are not overpaying for protection.  I will caution you however, make sure you are comparing apples to apples when you shop insurance.  Many insurance companies will quote you lower, but you don’t have the same coverage.  Keep in mind that having more insurance than you require can be costly.  With that said, not having insurance when you need it can be much more financially devastating.

6. Getting Advice From the Wrong People.

Everyone has their way of managing financial resources.  Therefore everyone will have an opinion on how you should handle your financial resources.  Typically, the suggestions are what they do themselves.  Social media and the internet have afforded these opinionated people not only the capability to share these opinions with the world but also get paid to do so.

The upside, is individuals now have access to all sort of financial options and opinions; nevertheless, it also results in a lot of noise.  All this noise makes it hard to determine ulterior motives, as well as the precision and importance of the opinions.

We are now residing in an age of fake news, fake followings, and fake specialists.  Just Recently, Drew Cloud, the media’s darling trainee loan expert, ended up running a corrupt loan servicing company.  Also, Corporations pay “influencers” to promote their items.  There is a number of individuals who offer phony reviews and social media followings and get paid to do this.

Anyone looking for financial guidance should be hyper-vigilant about who they rely on for information.  Make sure anybody you are considering listening to is who they say they are!

7. Making Decisions Based Upon other People’s Objectives.

Everyone needs to know they’re making the right choices with their finances.  So often we turn to friends, family, colleagues, or neighbors for guidance.  However, be aware there is no “one size fits all” monetary plan.  Everyone has various monetary objectives and resources.  Utilizing someone else’s monetary strategy could result in monetary disaster.  A financial strategy should be personalized to consider your health, your goals, and any dangers that you face.

For example, your neighbor with no kids and a large pension may have the ability to be a lot more casual about financial dangers than somebody who has a family to support.

8. Failure to Develop a Backup Plan.

No matter how well you plan, life has a way of throwing us curve balls.  A high-income earner with a high savings percentage of income, who has actually been saving for a few years, likely has the security net.  This security net can give them the ability to take a lower-paying job if the economy crashes.  The middle/low income employee tends to be more susceptible to changes in the job market, as they aren’t able to save enough to cover a cut in pay.

An organization may cut back on hours or overtime, or perhaps conduct a lay off in reaction to an economic crisis.  Those with more modest earnings might not have the same capability to take a job at a lower rate of pay without disruption to their lives.

The best strategy is to develop a backup plan.  Keep your resume updated and continue with professional development. Investing in yourself is one of the best investments you can make!  It increases your earnings in good times and helps provide security in bad times.  The very best time to pursue any certifications or extra training you might need to reenter the labor market is before you are forced to do so.

9. Allowing the Family to Derail Your Plan.

It is possible to save for retirement making an average income and even retire young so that you can enjoy your retirement. However, your family can prohibit you from reaching your financial objectives.  The very best financial assistance you can offer your loved ones is to motivate them to have a healthy relationship with debt and develop a financial disaster readiness plan.

Throughout the financial crisis, we learned it wasn’t the market crash that caused so much devastation.  Instead, it was civilian debt casualties.  The stock exchange was in a freefall, banks were cutting credit lines or refusing to provide credit, and companies were cutting back on spending.  The labor market was bad, and lots of adult children or grandchildren were turning to their moms and dads and grandparents for monetary assistance.

Motivating your family to establish a monetary catastrophe preparedness strategy can help eliminate the requirement to liquidate your financial resources in a bad economic time.

Teach your kids about cash and saving.  Motivate adult kids to keep an emergency fund, save, and to get proper legal files, including prenuptial or post-nuptial agreements.

10. Being Overconfident.

A little bit of worry is in fact helpful for your finances.  When you are overconfident, you frequently ignore the signs.  Preparing for every circumstance is hard.  Nevertheless, you can and should analyze what could go wrong.  The best planning starts with asking yourself what could fail and what can you do to guarantee you are safeguarded.

Ask yourself these questions:

What would happen if you were injured and could not work?

How would death or special needs impact family earnings?

What would happen if your hours were cut or you were laid off?

If you had to enter the labor market, what would you need?

Are your certifications current, and do you know what companies today would be looking for?

Should the market decline, how it would affect your short-term goals?  How would it change your long-term goals?

Having answers to what could go wrong is not about working well into your 70’s age 70.  Instead, being prepared, allows you to retire faster and provides you with assurance that you know if something goes wrong, you will have a strategy to handle it.

Looking for ways to make more money? 


In 2009 I quit driving a truck to take care of my kids full time. I went from driving across America to building one of the largest web design companies to building affiliate sites.

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