As spring approaches, it’s normal to think about refreshing your wardrobe, cleaning out your home and getting ready for the summer season. Why not set aside some time for spring cleaning your finances?
4 Steps to Spring Cleaning Your Finances:
- Reviewing your financial goals
- Looking at past spending
- Reviewing your credit history
- Consolidating and simplifying your spending
It seems easy enough, but to get the most out of spring cleaning your finances, make sure to avoid these blunders which could hinder your efforts to refresh your finances.
8 Mistakes to Avoid When Spring Cleaning Your Finances
1. Re-using Last Year’s Budget
It can be tempting to recycle last year’s budget, but you should go through every line item to see how your spending has changed and review your budget strategy to know if it is a good fit for your current goals. Your financial needs change from year to year and so should your budget.
2. Making Extreme Cuts to Your Budget
While it’s important to update your budget each year, avoid the urge to make extreme cuts in hopes of saving more. Your budget isn’t a good place for wishful thinking and extreme sacrifices are often too hard to maintain. Set yourself up for success by realistically trimming your expenses.
If you struggle with impulse spending, consider using the envelope method to avoid overspending with a debit card.
Instead of making extreme cuts to your budget, you could pick up a side-hustle to earn extra income to cover debt or certain expenses.
3. Keeping Unused Subscriptions
In a 2018 survey by WMG, 84% of Americans underestimated what they spent on subscription-based services by 197%! On average, participants assumed they pay around $79.74 a month on recurring monthly expenses. Instead, the actual cost was about $238.
Recurring subscriptions are very popular and can be worth it if you need the services or products. It’s a good idea to do an inventory of your subscriptions and only keep the ones you use.
Depending on how many subscriptions you have, you may cancel them manually or find a cancellation service.
4. Closing Out Too Many Old Credit Accounts
If you recently paid off debt or have an old credit card account you no longer use, you may think it’s a good idea to close it. However, closing out too many old credit cards can negatively affect your credit score.
If closing the account will dramatically lower your average credit account age or increase your credit utilization, it might make sense to hold onto the account to avoid this damage. An older average account age indicates to lenders that you are an experienced borrower.
If you are trying to repair your credit, it’s generally better to keep old accounts open, even if you are not using them. If your old credit card has an annual fee, then closing it to save money could outweigh the impact it has on your credit score.
5. Renewing Your Insurance Without Reviewing The Terms
If you’ve had the same insurance for a while, it may seem like a good idea to renew your coverage out of convenience. However, insurance providers may make adjustments to your coverage or increase your premiums year over year.
You should review your terms every year to ensure your coverage is still a good fit for you. Also, you might find that other providers offer incentives to change your coverage which can reduce your premiums and save you money.
6. Ignoring Paper Notices
If you do most of your bookkeeping and bill payment online, it can be tempting to ignore paper notices. However, by neglecting your mail, you might be missing out on important notices like medical bills, insurance statements, coverage changes, or unexpected expenses like parking tickets!
7. Splurging With Your Tax Refund
Tax season is probably not your favorite time of year, but getting a refund makes the hard work worth it! Excitement over getting a tax refund may tempt you to spend that money on splurges or non-essential goodies.
Consider setting aside part of your refund to spend on something fun and using the rest to help you with your financial goals like starting an emergency fund, paying down a credit card or loan, or investing the money for retirement.
8. Putting Off Saving, Again!
Perhaps you think about saving money every year but end up putting it off because unexpected expenses come up, or you give in to temptation. Living paycheck to paycheck seems harmless enough at the moment, but every year you don’t save is money you are losing in compound interest that would greatly benefit you in the future. Instead of putting off saving, commit to setting aside something every month and establish a saving habit that can grow with your income.
Start with building an emergency fund, and then consider investing a small amount of every paycheck to help you build future wealth.
Managing Debt This Year
If managing your debt is a high priority this year, you’ll want spring cleaning to reflect that. Suppose it seems impossible to cut your spending enough to cover your debt or you are already falling behind. In that case, it might be time to consider debt relief options like debt settlement or debt consolidation.