As with many things in life, when it comes to money, no one is perfect. We all make financial mistakes. The key is to catch them early and correct them often so that they don’t develop into bigger problems with long term consequences.
It’s usually the case that unnoticed financial problems tend to have a larger and longer-lasting impact. The key to mitigating such an escalation is teaching yourself to recognize warning signs or problem areas. While not exclusive, the following are five common money mistakes and what you can do to avoid them.
Putting off Saving for Retirement
For many, retirement seems like an event that will never occur. It’s easy to do when you’re in your twenties or thirties; you think retirement is four or five decades away and put it off until “next” year so you can focus on other obligations. You might even tell yourself that you’re young enough, and investing can wait. The problem grows when next year turns into multiple years; before long, you’ve given up the most valuable component of investing – time.
According to the Center for Retirement Research, if you start saving for retirement at age 25 vs. waiting until 45, you have to save one-third less for retirement. The simple reason for this stark difference lies in compound interest. By saving for retirement earlier, you give your money time to make more money for longer. If you don’t know where to start investing, look into your employer sponsored 401(k) or open an IRA. Even if you start with a small amount, it’s better than putting it off until later in life.
A recent report shows that nearly two-thirds of Americans couldn’t handle an emergency of $1,000. This is largely because many Americans are living paycheck to paycheck. When you have no money left at the end of the month, it extends the payment cycle and opens you to more risk. “If your money is spent before it hits your account then it’s on financial life support,” says Paul Durso, President of Durso Capital.
It may be a challenge, but the key is to start cutting back and commit yourself to living on a budget. Write down what income you’re earning each month and compare it against what you’re spending. “It’s the best way to figure out where you can cut if you are in over your head and spending too much,” adds Durso, pointing out that automation is often one of the best ways to manage your finances and get back on track towards positive growth.
Not Buying Enough Life Insurance Coverage
We think we’re invincible and that the resources our family might need will be there when the time comes. In many instances, that may not be the case. This is where life insurance comes into play, aiding during the loss of a loved one. Consider some of the following statistics from LIMRA:
- 6 out of 10 Americans have life insurance coverage
- 30 percent of Americans know they need more life insurance coverage
- 65 percent of Americans believe life insurance is too expensive to purchase
Those statistics reveal a lack of knowledge about life insurance. Many know they need more, but believe it’s too expensive. In many instances, especially when you buy young, life insurance is quite reasonably priced. The last thing you want is to die unexpectedly and not have the coverage to provide for the needs of your family.
If you don’t know where to buy coverage, speak with your employer’s Group Benefits department to learn about the possibility of Group Term coverage and seek out Term Life on top of that, depending on your needs, as both can be very reasonable.
Thinking Credit Cards are Free Money
We’re a society consumed with debt. In fact, Time reports we’ll have a total of $1 trillion in credit card debt this year. That is a staggering number, and it’s almost assured that someone knows an individual struggling with credit card debt. Credit cards can be a great financial tool when used wisely, though they’re not free money.
When abused, credit cards can have ruinous effects on personal finances. If you’re currently struggling with credit card debt, consider putting the cards away and use a cash-only budget, or avoid situations that tempt you to spend unwisely. It is possible to overcome credit card debt, but it must be done with a plan.
Spending for Someone Else
Trying to keep up with the Joneses is a common mistake many fall into. We see friends or neighbors with shiny new toys, and we want to purchase the same things. If you have the purchases budgeted for that’s one thing, but what happens if they aren’t?
It can lead to debt, which impacts your long-term net worth. “Rather than trying to keep up with your neighbors, you should manage your spending based on your personal needs and and keep your goals consistent with your budget. No matter how much you make, the only way to consistently increase your wealth is to live below your means,” explains Benjamin Sullivan, EA, CFP® Portfolio Manager at Palisades Hudson Financial Group. Having something shiny and new is fine, but it must be done in concert with your budget so as not derail your overall financial goals.
Financial mistakes are inevitable. It’s what learn from them that can put you on a course to significant financial growth.