The 5 biggest personal finance mistakes you can make

Managing your money can prove a challenge, even if you received some financial coaching at school.

Rising levels of personal debt, the increasing cost of living and being able shop 24/7 on our smartphones means it can be tempting to bury our heads in the sands when it comes to our cash and where it goes.

It’s easy to make financial mistakes, especially when we have so many things to juggle and distract us. To help you get to grips with your finances we’ve looked at the 5 most common mistakes and how you can avoid them.

Such as:

  • Thinking all credit is the same

  • Overcommitting financially

  • Being stung by hidden fees

  • Forgetting to make a budget

  • Not having a long-term savings plan

1. Thinking all credit is the same

Before you borrow any more you need to, consider how you are going to repay it. Next, you will need to consider how long you need it for.

Short term borrowing, especially unsecured – as in not using anything you own such as a property – as security can be the most expensive way to borrow.


An overdraft is quick and straightforward, but if you stray into an unauthorised overdraft, or go above your limit, the fees start to rise. 

In 2020 planned overdraft interest rate rises for those who regularly use an overdraft were introduced by many banks, some now charge up to 40%. 

Overdraft charges for customers who only dip into their overdraft or go accidentally overdrawn were reduced.

Credit cards

credit card can help spread the cost of repaying for a big item over a manageable length of time, but you do need a plan to pay it off.

If you have expensive debt, you can look to switch it elsewhere. For example, if you are paying a high APR on your card or are just paying off the minimum amount each month, it will take a long time to clear the borrowing.

Instead, look for a credit card with a low introductory rate, or one that gives you a long interest-free period, such as a 0% balance transfer or purchase card. Remember to factor in the transfer fee when you are working out how much you are likely to save.

Personal loans

A personal loan may also be a cheaper alternative – if you are using your overdraft on a regular basis.

Find out how to become debt free if you’re struggling with debt

2. You are overcommitting financially 

It’s easy to overstretch your finances when there are so many conflicting demands, and young people aged 16 to 24 years old are often the most over committed according to Guy Rigden, CEO of My Bnk.

He points out erratic income, student loans and the challenges of the gig economy are putting a strain on their finances. 

Guy says: “More than a third of the young people we see have debts of more than £3,000 excluding student finance.”

Broadband, car loans, mobile phone contracts and household bills can mount up to a hefty commitment each month. 

Unfortunately, the coronavirus pandemic hasn’t helped the outlook for young people:  employment among 16 to 24-year olds is at a record low, falling by 174,000 in work between July and September 2020 to 3.52m. 

How to avoid financial over commitment:

  • Try to shop around for essentials like utilities

  • Use comparison sites to make sure you are getting the best deal 

  • Switch to a pay-monthly mobile bill and don’t upgrade your phone unless necessary

  • Unsubscribe from all those retailers who send you daily emails urging you to buy online

3. Being stung by hidden fees

One of the biggest financial mistakes people make is not keeping on top of the small stuff. 

You end up paying hundreds of pounds in fees or penalties that could have easily been avoided.

For example:

  • You forget to pay off your credit card bill because you are on holiday

  • You dip into the red on your current account without asking

  • Your fixed rate mortgage deal comes to an end and you find yourself on your lender’s more expensive Standard Variable Rate (SVR)

How to avoid hidden fees:

  • Whenever you sign up for a financial product remember to ask about the terms and conditions, and the potential charges

  • Set a reminder on your phone or calendar so you know when your contracts are up for renewal 

  • Set aside an hour a month to shop around for new providers and to keep tabs on the terms and conditions of any financial product you take out

  • Go through your bank statements to check you are not overpaying any of your providers

  • Be aware of the cost of ending contracts early – including loans, mobile phones, broadband, and mortgages 

4. Forgetting to make a budget

Even if you can comfortably afford your monthly outgoings, it’s a good idea to set yourself a budget. 

Having a budget means you can keep track of where your money is going, and ensure you spend it on the things that really matter and bring you pleasure, rather than impulse spending that you regret later.

If you are finding it tough to make ends meet, a budget will show you where you can cut non-essential spending. The Money Advice Service has a budget planner that is free and easy to use.

How to make a budget:

  1. List all your outgoings – bills, mortgage/rent, essentials like food and childcare.

  2. List all your income – including any interest you earn on savings.

  3. If you have two earners in your household, consider setting up a bank account for bills and essentials only and set up a standing order to pay your share into that account.

  4. Remember you may need to make sure you budget for long term purchases such as reading glasses, work clothes and the cost of running a car.

5. Not having a long-term savings plan

Having a long-term savings plan or goal can help focus your finances.

It can also help you when it comes to paying everyday bills and paying off debt.

Having a goal can give you an incentive to build up savings. Just under a quarter of adults have savings of less than £100, according to StepChange Debt Charity.

How to start saving:

You need to have a fund for emergencies, equivalent to at least three months’ worth of household bills.

Once you have set aside this amount, in an accessible deposit savings account you can start look to the future, save small amounts in a regular savings account, or an ISA

You should join your workplace pension scheme if you haven’t already. Auto-enrolment means many people who are employed are paying into a pension, some companies will be matching what you pay in. This is free money and is also tax free.

Consider overpaying your mortgage and make sure you are on the lowest possible deal.

16 December 2020