If you’re researching how to recover from financial mistakes, then you’re not alone. A new poll by the Robert Wood Johnson Foundation found that nearly half the American households in America (47%) are facing serious financial pain. Improving one’s finances and repairing one’s credit is now part of the American way of life.
Luckily, people dealing with financial trouble have plenty of resources upon which they can draw. To get you started repairing your finances, we’ve prepared a guide to economic recovery. The article below discusses common financial errors you should avoid, ways to rebuild your finances, and money-making ideas that help boost your monthly income.
Common Money Mistakes
Let’s start by looking at the common errors that people make with money. It applies to people on both ends of the financial spectrum and everyone in-between. Because each category of spending or investing has its pitfalls, we will address each separately. Don’t worry: we’ll discuss recovery from financial ruin once we identify potential problem areas.
Common Investing Errors
Every day, investors make significant blunders when they start trading on the stock market. The main error is believing they can read the market and beat it. Many don’t understand they are amateurs who cannot analyze the trends. Many also don’t understand that intuition about the stock market isn’t an investment strategy.
Experienced traders have an investment plan. They have an entry point and an exit point. They don’t chase after the performance. Instead, they view trading as resource allocation based on a long time horizon. Profitable traders also never lose sight of their risk aversion, and they have a stop-loss order in place.
If you want to invest in the stock market but investing sounds too complicated, consider investing in an index fund. Index funds provide low operating expenses and low portfolio turnover while offering broad market exposure. Studies have shown that index funds outperform trading among people who are new to the stock market. Bad investments are one of several common financial missteps, so let’s look at a few others.
Avoid These Real Estate Mistakes
Buying a home is a part of the traditional American dream. As rental prices increase year-by-year and mortgage rates stay low, homeownership makes financial sense. That being said, homeownership has become increasingly hard for Americans over the years. For millennials, it often seems unrealistic.
If you and your partner are saving for a home, it is crucial to understand that budgeting should be a way of life. Many new homeowners scrape and save for years to make a down payment on a house. Once in a home, they no longer show their frugality to get in the home.
For would-be millennial homeowners, keeping a healthy bank account should not be a tactic but a way of life. Keep the methods in place that you learned while anticipating a mortgage. Once the down payment is made, your monthly payments might be less than your rent. Make sure to budget that difference wisely. Either save for the future or assure that you pay down all credit cards and debts.
Typical Mistakes in Recreational Activities
Recreational activities like concerts, eating out, or even gambling, are significant parts of a person’s discretionary income. You should plan your entertainment and leisure budget the same way you monthly expenses and yearly taxes. It’s easy to forget these expenses because they involve fun, but recreational costs quickly add up!
It is especially true when gambling isn’t a fixed cost like concert or sports tickets. Reactionatial poker with friends is fine, but you can lose your shirt when going to a casino. You should determine your bankroll ahead of time – the maximum amount you plan on betting – and never deviate from that amount. While players might not use money management techniques, they should become familiar with a couple of concepts depending on what they are playing.
The first is a winning goal. This is the maximum amount you’ll collect in winnings before ending a play session. If you set a winning target of $250 and win that much in a session, walk away from the game and lock in your winnings. Many players get lucky, then lose their prize money by continuing to play. It’s more fun to have short winning sessions.
The second concept is the loss limit. This is the opposite of a winning goal, where you determine a certain amount that you’ll lose before walking away from the slot machine or gaming table. If you set a loss limit of $250 and lose that amount, you immediately walk away. Problem gambling works in part on adrenaline, so this allows a cooling-off period between sessions. The biggest mistake gamblers can make is chasing their losses.
Common Mistakes in Consumerism
Running up credit card debt is another common mistake everyday Americans make. Research has shown that shopping addiction has a similar psychological component to gambling addiction – and a person prone to one is inclined to the other.
In many cases, people deal with stress and anxiety by going to a familiar and welcoming place. For many consumers, that place is a department store or retail outlet. Once there, escapism takes over. The problem shopper alleviates stress or anxiety by making a purchase, often fooling themselves that they’re saving money by making discount purchases.
The problem is, when dealing with credit card shopping, it would be cheaper if the purchase was never made. Also, escapism is temporary. Shoppers eventually have to pay off their credit card debts when they can spiral even with a minimal amount of purchasing. The eventual bill is far higher than the cost at the time of purchase.
Frequent Mistakes in Education
Student loans are one of the mistakes many young adults make. Most post-secondary students understand the student loan process is flawed, but they see it as a necessary evil if they want a college degree. When grants and scholarships are unavailable, students must either produce tuition and book fees out of pocket or through a student loan.
When a student can defray costs up-front by working a job during the school year, that helps. The less you must rely on a student loan for college, the better you’ll be for years or even decades into the future.
How to Recover from Financial Mistakes
If you’re reading this article, you’ve probably made some questionable financial decisions already. The point now is to build a plan which corrects your financial mistakes. Below is a guide for creating a long-term financial plan. After that, I provide a few moneymaking tips for those who don’t believe their current job pays enough to make a turnaround. Throughout, I encourage, because people in this position must maintain a positive outlook. That’s where we start.
When you’ve made financial mistakes, it’s natural to feel like a failure. While everyone has their moments of self-blame, avoid dwelling on the past. Don’t obsess about what got you here. For so many people prone to escapism, this leads to procrastination or ignoring the problem.
Understand that everyone makes mistakes. Don’t have the fixed mindset that financial mistakes define you. Instead, have a dynamic perspective. Look at mistakes as a way to learn and grow. Most importantly, deal with the facts before you.
Learn exactly how much money you owe. Take stock of all of your current assets. Calculate exactly how much income you bring in each month. Also, calculate how much you spend. Finally, learn your current credit score.
Collect all the data because this lets you make informed decisions moving forward. Get the good news and the bad news, then make sound financial decisions based on the information.
Set a Goal
Know where you are and know what your destination is. Once you understand your finances, chart your financial course. Set weekly, monthly, and yearly goals. Once you have benchmarks, you can make decisions based on those goals each day of the week and every step of the way.
Cut Your Losses
Don’t tie yourself to “sunk costs.” This is a concept from business investment, where you have expenses that can’t be recovered. If you paid hundreds of dollars on a gym membership, don’t keep paying expensive monthly costs simply because you’re spent already. Stop the financial bleeding.
This is similar to being pot-committed in poker. Just because you’ve spent money on the pot doesn’t mean spending more money is wise. Make each decision independent of your past choices. Ask yourself: is this wise to keep spending now?
Resource allocation is the same in business, investing, or gaming. The quicker you get out of a bad situation, the better.
Reverse Bad Decisions If You Can
Did you make a big purchase and have buyer’s regret? Return the item if you can. If you can’t, then resell the items to recoup some of your lost expenses. Cancel memberships to gyms, publications, and streaming services that you don’t use. Stop buying on credit if you determine it’s one of your problems. This involves hard decisions, but this helps you take immediate steps to help your situation.
Take Self-Stock of Your Life
Don’t cancel everything. Evaluate all your situations with a practical eye. If you use a streaming service a lot and it brings you entertainment or enjoyment, then keep it. If you use a gym membership and it keeps you fit and healthy, keep it.
Reversing bad decisions doesn’t mean you change the right choices. You’re cutting the fat. Keep the positive parts of your previous situation and remove the negative aspects. Financial health helps you create a positive, enjoyable life.
Adjust Your Goals, Correct Your Mistakes
That doesn’t mean your decision making will be perfect. Many people make financial mistakes, even once they’re on the road to recovery. If you have a moment of weakness, don’t let it multiply. If you have a bad day, try to avoid a string of bad days. In that way, personal finance is like a diet or workout program. Any single decision doesn’t ruin you, but a pattern of unwise choices can.
Learn from your experiences. The longer you have a financial plan, the more you’ll learn—the more information you’ll have to assess your situation. Take inventory occasionally. Reassess goals if the plan doesn’t seem to be working – or even if it’s working. Reassess at times when your financial situation changes. Like a pilot, adjust and correct your course when you notice the system has changed.
When in a financial hole, it’s common to get anxious, stressed, overwhelmed, or even depressed. The important thing is to avoid panic. That only leads to more irrational decisions. Instead, resolve to get this situation under control and understand you’ll be in an uncomfortable position for a while. But financial issues are not the end of the world.
Give the plan time to work. You didn’t get in financial trouble in a day, and you won’t solve the problem in a day. Instead, you’ll need self-discipline, patience, and long-term planning. Don’t look at long term goals as a bad thing, though. Instead, it should be good news because panic and worry in this instant won’t help. Get plenty of rest, but also take time to enjoy life each day. Find less expensive alternatives – preferably zero-cost ways to enjoy yourself. In this way, you’ll find new work/life resources.
Personal Credit Repair
Credit repair is an industry in itself. That being said, avoid credit repair agencies: there’s nothing they do that you can’t do yourself. Instead, take steps to pay down your debt. If you have multiple credit cards with spiraling debt, make the minimum payment on all but one – then pay down that other credit card.
Make a plan according to one of two paths. You can pay down the card with the highest interest rate first because this saves money. Two, you can pay down the cards with the lowest amount of debt, which lets you get rid of interest payments the quickest (and gives a sense of progress). Choose one of those two options and begin repairing your credit.
If you need to consolidate your debt, only go to a loan consolidation firm as a last resort. Get a loan from a bank or credit union that lets you pay off credit cards fast. If you have trouble remembering to pay bills, this leaves you with one payment a month instead of many. Shop around for an option that lowers your interest rate, if possible.
Create a Second Revenue Stream
After you calculate all your income, assets, expenses, and interest payments, you might decide that you can’t repair your finances without more revenue. That is not a reason to give up. Instead, you’ll need to create a second revenue stream. Once you start brainstorming, there’s a world of possibilities.
Take a Second Job
In the age of DoorDash, GrubHub, and Uber, anyone with a car and a smartphone app can take a second job. Along the same lines, become an online shopper. If these don’t sound like your style, then find a part-time job to supplement your income.
Have a Garage/Yard Sale
Most people have excess goods in their house, attic, and shed they do not need. Many shopping addicts have a lot of clothing and other household items they can do without. If this describes you, then hold a public sale and use every bit of the cash you receive to pay down your credit cards or other debts.
People can make up to $500 a month by donating blood several times in that span. Find a blood donor center or program near you, see if you qualify, and make this a part of your weekly goals.
Become a Scientific Test Subject
The NIH Clinical Center has the Clinical Research Volunteer Program (CRVP). It’s a program for healthy volunteers to join all kinds of medical research studies. You’ll receive a physical exam, further medical knowledge, the satisfaction of helping medical research, and receive compensation. The NIH has over 3,500 test subjects at any time nationwide and reports compensation of $600 or more to the IRS.
Join Psychological Research Studies
American colleges also pay $10 to $50 an hour for participation in psychological research. Yale’s SOM eLab is an excellent example of these programs, but Harvard, Stanford, the University of Maryland, and NYU also conduct studies. This will vary from region to region but check into psychology studies in your area. Most pay via bank check, gift cards, or PayPal.
Work from Home
Get a second job by working online. Join in e-commerce, become an online teacher or tutor, do freelance work, or take on a consultant’s role. Depending on your resources and training, online jobs can become a significant part of your monthly income. The main things you need are time, a working computer, an internet connection, and marketable skills.
Start an Online Business
I mentioned online commerce before. Many people have become financially independent by engaging in eCommerce these past years. Still, e-commerce is just one type of online business that could help you turns your finances around.
Sell items on Amazon, eBay, or other online merchant sites. Launch a website that sells goods or services. Start a YouTube or Twitch channel. This takes time and persistence, but the critical part of any niche is building your brand.
Get Back on Your Feet Financially
These are just a few ideas. The important thing is you use additional revenue streams to recover from your financial mistakes. When you’re making more cash, that is not an excuse to spend more money. After taxes, use 100% of the money you receive for paying down debts.
Survive Financial Ruin: How to Recover from Financial Mistakes
As you can see, overcoming bad financial decisions is a multifaceted task. Creating a plan and sticking with that plan might seem overwhelming at first. With your current personal finances, you’ll have limited spending options. If you don’t have much money to spend anyway, it makes sense to have a monthly budget and a recovery plan.
Financial planning won’t be much fun at first. If you’re used to spending freely, maintaining a budget will be uncomfortable. Over time, the budget process becomes more manageable. As good habits replace bad habits, you’ll get used to the new circumstances. Over time, you’ll start to see results. That should build confidence and resolve. You’ll see that former financial mistakes don’t have to be lasting mistakes.
Michelle Jones was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Michelle has been with ValueWalk since 2012 and is now its editor-in-chief.