Common Money Traps Holding You Back from Financial Freedom

Summary: Financial freedom means different things to different people. But even the most financially secure among us can fall victim to some common money traps. Learn how you can spot these traps and avoid them so they don’t hold you back from your financial goals.

Financial freedom is a goal many people aspire to achieve. Broadly speaking, it means having sufficient financial resources to live the life you want without constantly worrying about money.

But money traps — mistakes that people make around money and financial management — can hold you back from this freedom and trap you in a cycle of poor financial decisions.

A CNBC survey showed that 65% of people say they live paycheck to paycheck.  This statistic underscores the importance of financial freedom for many individuals and highlights the struggle to break free from financial constraints.

In this article, we’ll explore common money traps and offer insights on how to avoid them, helping you move closer to achieving your financial dreams.

What is financial freedom?

The definition of financial freedom varies from person to person, but in essence, it’s about having control over your money so you can live life on your terms and absorb financial shocks with resilience.

Financial freedom opens up opportunities like early retirement, travel, pursuing hobbies, or spending more time with family, but it does not mean an unlimited supply of money. It’s when your assets generate enough income to pay for your lifestyle and you feel financially secure.

Common money traps holding you back from financial freedom

Achieving financial freedom includes both recognizing and avoiding common financial pitfalls. Here are key themes and strategies to help you on your journey to financial independence.

Not investing in yourself

A major stumbling block to financial freedom is not investing in your own financial literacy. Acquiring personal finance knowledge and using proper tools lays the foundation for freedom. Without the elements of a clear financial plan, it’s easy to lose track of your goals:

Budgeting: A budget helps you track your income and expenses, prioritize needs over wants, save for future goals, avoid overspending and financial stress.

Creating an emergency fund: Planning for emergencies is another must-do. An emergency fund can help you handle unexpected costs like medical bills or car repairs. Aim to save three to six months’ worth of living expenses in an easily accessible account to protect yourself from unpleasant financial surprises.

Having good credit: Understanding your creditworthiness is also vital for building discipline. Good credit can help you secure better interest rates on loans and credit cards, saving you money in the long run.

Living beyond your means

It seems obvious, but overspending is perhaps the most common money trap. Overspenders are often lured by access to easy credit. While it’s tempting to buy the latest gadgets or take lavish vacations because your friends are doing it, these habits can quickly overwhelm your finances if you’re not prepared. Some lifestyle indicators of living beyond your means include:

Accumulating debt: Accumulating debt, especially credit card debt and payday loans, can quickly become a financial nightmare due to high interest rates. To avoid this, pay off your balances in full each month and steer clear of unnecessary borrowing.

Lifestyle inflation: Another related issue is lifestyle inflation. As your income increases, it’s tempting to upgrade your lifestyle, but this can hurt your ability to build wealth for the long term. Instead of increasing your spending, consider saving or investing the extra income to bolster your financial security.

Impulse spending: The ease of online shopping can lead to unnecessary splurges that derail your budget.

Putting off saving

Many people are unable to save, often by circumstance rather than choice, leaving them vulnerable to financial and mental stress.

Delaying retirement savings is one such bad habit. The earlier you start, the more you benefit from compound interest. Contributing regularly to retirement accounts like 401(k)s or IRAs and taking advantage of employer matches and tax benefits is crucial.

You can ensure consistent contributions to your savings and investment accounts by automating your savings. This habit helps you build wealth steadily without relying on manual transfers.

Missing wealth creation opportunities

While saving is crucial, simply letting your money sit in a low-interest account might not be enough to secure your financial future. Investing wisely can allow your money to grow over time and help build your wealth steadily.

Educate yourself on various investment vehicles like stocks, bonds, mutual funds, real estate, and insurance. Consider long-term investment strategies that align with your financial goals and risk tolerance. Rather than focusing on quick gains, think about how your investments can grow over time to provide financial stability and security.

Avoid the money trap of missed investment opportunities by taking steps to make your money work for you in a sustainable and prudent manner. Consider consulting with a financial professional to develop a balanced investment plan that suits your needs and helps you achieve your long-term financial goals.

Not seeking professional advice

Shying away from professional advice can negatively impact your goal of financial freedom. A financial professional can provide valuable insights that you may not have gathered from research alone and can help you make informed decisions. Equally important, regular checkups with a professional can help ensure your financial plan is on track.

Achieve financial freedom with confidence

Achieving financial freedom requires discipline, planning and a clear understanding of potential money traps. But with the right strategies, you can sidestep these common money traps, capitalize on financial opportunities and move closer to the financial freedom you desire.

For resources that can help you protect what matters most, head on to our blog section. And if you need more help managing your financial future, contact us at Mutual of Omaha. We are always happy to help.

FAQs

Q1: What is the best way to start working towards financial freedom?

The best way to start working towards financial freedom is to first understand your current financial situation (income, expenses, debts, savings, etc.) and then establishing a comprehensive financial plan to follow.

Q2: How can a financial freedom calculator help me?

A financial freedom calculator can help you by providing a clear estimate of how much money you need to save and invest to achieve financial freedom. It considers factors such as your current savings, expected investment returns and retirement goals to offer insights.

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.