Money expert Nischa has seen countless people — and herself — make avoidable mistakes that damage their bank accounts. In a recent video on her popular YouTube channel, she shares common ways people sabotage their finances. Here are five of her biggest red flags and how to avoid them.
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Comparing Yourself to Others
When people judge their lives based on what others have, Nischa said, they feel frustrated and inevitably overspend. Worse yet, they spend on things that don’t align with their values.
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Instead: Set Your Own Financial Goals
Setting financial intentions and goals is the best way to avoid the comparison trap. Start by defining the life you want to live, from what you do with your day to the type of city or town you live in.
Next, list everything you need to live that life. Include what you already have and what you’re still striving for. Make copies of that list and keep them everywhere you spend money.
Keeping Money in the Bank
Money doesn’t grow in a standard bank account, Nischa explained. A high-yield savings account lets you earn a bit more, sometimes over 5% per year, as reported by Yahoo, but there are even better options if you’re willing to take more risk.
Instead: Make Your Money Work Harder
Nischa shared two ideas for making your money work harder. First, you can invest in yourself by increasing your earning potential. Taking a course on a lucrative skill or self-studying it can increase your income and help you save even more.
For the longer term, Nischa said to invest in low-cost index funds, which typically generate higher returns than savings accounts.
Living on All Your Income
If you rely on your entire income to get by, Nischa said you’ll never break the cycle of earning and spending. You need to budget for investments to generate passive income and break free.
Nischa explained this as “not living on the 90%,” a concept she borrowed from the classic finance book “The Richest Man in Babylon.” If you live on 90% of your income, you can save and invest the other 10%.
Instead: Free Up the 10%
If you currently live on more than 90% of your income, there are several ways to tip the balance:
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Pay off high-interest debt: You might feel like you’re “spending” more, but paying off debt lowers the interest you accrue, leaving you with more in your accounts.
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Plan for large expenses: Make room in your budget for those larger chunks of spending, like car repairs or your annual vacation, so you don’t have to break into your 10%.
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Don’t spend your raise: If you start earning more, Nischa said don’t change your spending habits. Put the extra directly into savings.
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Pay yourself first: Budget 10% of your income for savings and investing before you allocate it to anything else, including necessities. If you come up short, look for ways to make a little extra.
Focusing on Cutting Back Instead of Earning More
People naturally fear loss more than they desire gain. This near-universal phenomenon is called loss aversion and it’s why we think of budgeting as spending less.
But for most people, Nischa said earning more can make a more significant difference in your finances.
Instead: Increase Your Income
Cutting back on spending makes a difference, but there are times when you need to focus on earning instead. Think about the time and energy you spend on saving money. How might you benefit if you put that time into earning more?
For example, say you save $200 a month with little savings strategies like packing your lunch and making coffee at home. If you put that time and energy into negotiating for a raise or finding a higher-paying job, how much more would you have to work with?
Failing To Track Expenses
Nischa explained that money planning without understanding your expenses is like driving without a fuel gauge. You might be overspending and headed for disaster — or over-budgeting and stressing without cause.
Before you do anything else to fix your finances, you need to start tracking your expenses. You’ll see where you need to cut back and where you have some extra financial room.
Instead: Break Free With Budgeting
Commit to tracking everything you spend for a month. Include everything from rent and utilities to the $4 you spend on a mid-day latte break. Consider downloading an expense tracker app or keeping a spreadsheet open on your phone.
At the end of the month, categorize your spending. If you have a budget, determine if you’re spending within it. If you don’t have a budget, create one based on your patterns and where you want to be.
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This article originally appeared on GOBankingRates.com: 5 Ways You’re Sabotaging Your Finances, According to Money Expert Nischa
