There’s nothing
wrong with making a mistake — even when it comes to your finances. However, it
becomes a problem if you keep making the same missteps over and over again.
Learning from these common money mistakes can prevent headaches and position
you for a solid financial future.
Spending more
than you earn.
Millions of Americans live above their means and struggle
financially throughout their lives. Getting your budget under control isn’t
only about creating a solid plan from which to launch your financial future.
Having enough money left at the end of the month to add to savings or pay off
your debts can lift a huge psychological weight.
Often,
correcting overspending is as simple as cutting back on nonessential expenses
such as dining out, shopping or other entertainment. If you can learn to trim
down impulse purchases, you can likely free up some needed cash at the end of
the month to put toward long-term financial goals.
However, if you’re
struggling to keep up with your budget and have already cut out all the extra
spending you can, it may be time to look into more far-reaching solutions. For
example, you might be able to renegotiate certain services such as cable and
internet, or reach out to your lenders about altering the terms of your monthly
debt payments.
Putting off
financial planning.
The problem with the “I’ll get to it later”
philosophy is that by the time you do get around to it, you may have missed
some financial planning opportunities or made things more difficult for
yourself. Putting off your financial chores only means that the to-do list
grows ever longer, and when it comes to time-sensitive things like retirement
planning or paying off debt, delaying the process could cost you more money in
the long run.
To keep
procrastination at bay, try breaking your finances into bite-size pieces that
are more manageable. You don’t need to get your finances in order overnight,
but ignoring your to-do list doesn’t make it go away. Try setting aside time
once a week or even once a month to check in on your finances and accomplish
important goals.
Failing to save
for emergencies.
Almost 60 percent of Americans don’t have enough money in
their savings account to pay for an unexpected $1,000 expense such as a sudden
car repair or surprise medical bill. Millions of people are without a safety
net, and even one accident could be devastating to their finances.
It’s generally
recommended to have enough cash set aside to cover all of your family’s
expenses for three to six months. A good rule of thumb is to save 10 percent of
your net income. If that amount seems impossible in light of your monthly
expenses, try starting with 5 percent and increase that amount by 1 percent
each month until you’ve reached the 10 percent threshold.
Postponing
retirement saving until later in life.
Many Millennial and Gen Z workers
entered the job market more concerned with paying off their student loans than
saving for retirement. Age 65 can seem like a long way off, especially to
someone in their early 20s, but money saved early will grow into a much larger
nest egg as the years pass.
For example, if
you have an IRA with a 6 percent annual return, and you start contributing
$2,000 per year into that account at age 25, you’ll have a total value of
$328,095 at age 65 from your $80,000 investment (40 x $2.000).
If you wait just
five years and start your $2,000 annual contribution at age 30, you’ll end up
with only $236,242 from an investment of $70,000 (35 x $2,000). If you have the
income available, it’s never too early to start saving.
Taking a long
time to pay off your high-interest debt.
It’s hard to save when you’re in
considerable debt — especially if you’re losing money every month to high
interest rates. If you’re juggling multiple debts that all need your attention,
it’s difficult to know where to prioritize. But paying off debts with high
interest rates is often a great strategy that can save you money in the long
run.
- To start digging
out, begin by paying off your debt with the highest interest rate, which will
often be a credit card account.
- If you have the cash on hand, pay off
everything that isn’t tax-deductible. For example, say you have $5,000 stashed
away that’s earning only 2 percent interest. That money would be put to far
better use to pay off your credit card debts.
Always buying
new cars without considering used options.
The minute you drive a new car off
the lot, its value drops by as much as 25 percent. If you need a new set of
wheels, consider a used car. Buying used means the depreciation has already
come out of the previous owner’s pocket – not yours.
- The loss of value in a car
is far less from years three to six than from years one to three, which means
you’ll get more of your money back when the time comes to sell the car.
Not buying
enough insurance coverage.
Having the right insurance — including medical,
automobile, homeowners, long-term care, life and disability — is key to good
financial planning. While it can be difficult to figure out the kinds of
insurance and the amount of coverage you may need, not having the right balance
of insurance can be disastrous if you’re hit with an unexpected expense.
It’s a good idea
to review your insurance coverage each year and determine which policies you
may or may not need based on any major life events you’ve experienced.
For
example, if you’ve purchased a newer, more expensive car, it’s time to
reevaluate your auto insurance. If you’ve recently gotten married or added a
baby to your household, it may be time to take a look at your health insurance.
If you’ve completed a major, value-adding home remodel, it’s probably a good
idea to increase your homeowner’s insurance. It’s not enough to have just any
old insurance coverage in place; you need to make sure the insurance you’ve
bought will cover the full value of your growing assets.
Not monitoring
your credit scores and credit reports.
Credit scores can affect you in many
ways — from borrowing money, to buying a home and even renting an apartment —
so it's important to see a credit score similar to what a potential lender may
see.
You can easily check your credit profile with each of the three nationwide
credit bureaus, and then work with your lenders to correct any problems or
errors that you discover. By law you are entitled to a free credit report from agency credit bureau once a year. You can get yours at freecreditreport.com
Lacking an
investment strategy, or not sticking to one.
If you invest in stocks or mutual
funds as part of your savings plan, it’s important to have a strategy for that
money. Too many people let their emotions get in the way and end up buying or
selling on impulse.
Another common misstep is spending too much time and effort
trying to time the market, hunting for the “big payoff” or chasing the
investment of the month (or week or day). Instead, you need to decide on a
strategy and stick to your plan.
Not having a
will.
Suppose the worst were to happen and you die tomorrow. Would your loved
ones be provided for? If you pass away without a will, a court will determine
who gets what based your state’s laws.
However, when
you prepare a will, you’re creating a legal document that clearly defines what
you want to happen to your money and other assets after you’re gone. While no
one likes to think about their own death, having a will in place not only makes
your wishes known but also can reduce the stress of your surviving loved ones
who are already facing a difficult time.
Chances are,
you’ve made at least one of these mistakes throughout the process of managing
your finances — and that’s okay. The key is to identify and understand
financial missteps so that you can do your best to prevent them moving forward.
