By Alex Thomas Salder, clarkhoward.com
We all mishandle our money from time to time — whether it’s an impulse buy, a forgotten bill or just poor planning.
But there’s a big difference between going shopping and realized you shouldn’t have — and making a serious financial mistake that can haunt you for years, maybe even for a lifetime.
So to help you avoid getting into a situation you may regret, we’ve put together a list of some financial mistakes that come with the biggest consequences.
9 financial mistakes you will regret
1. Putting off saving for the future
It can be difficult to start saving for retirement when you’re young and probably not making much money — especially when retirement seems like a lifetime away.
But the truth is, the earlier you start, the better. Not only does the money you put away have more time to grow, but implementing savings habits early on allows you to really start to see the power of investing.
For example, if you start contributing to your retirement accounts at age 21, your future nest egg could actually be worth more down the road than if you start contributing at age 40 — even if the monthly contributions are higher when you’re older.
Here’s why: compound interest. Compound interest is an extremely powerful force that allows investors to earn exponentially larger gains on their money over time. Here’s an example: You invest $1,000 today and earn an annual 5% gain, so $50. That $50 is added to the principal amount of your investment, and then next year, you earn a 5% gain on $1,050, so you earn $102.50. And so on…
So the earlier you start putting money way in a retirement account, the more time it has to earn you a lot more money! But even if you’re older and haven’t started saving for the future, it’s not too late!
How to start saving for retirement if you’re saving nothing right now:
If you feel like you have no extra money to spare, start by contributing just 1% to your 401(k). The money will come out of your paycheck before you even see it in your account — and 1% is such a small amount that you won’t even miss it. Then every six months, bump that up by another 1%. Then in five years, you’ll be saving 10% of your income toward retirement — and the increases are so small that you’ll be able to adjust your budget over time.
Here are some more ways to help you get started at any point in life:
- Easiest way to start saving for retirement when you’re saving zero
- Saving for retirement in your 30s
- Saving for retirement later in life
2. Taking Social Security early
In the past, it was very common to retire and take Social Security at age 62. But every year you wait after 62, you have an imputed return of 8% per year on your lifetime benefit. So if you wait until age 70, instead of taking it at 62, the amount that Social Security pays climbs dramatically. (Benefits no longer increase after 70.)
So the longer you wait — up until age 70 — the bigger your monthly checks will be! Here’s more on how to get the maximum Social Security check and how to determine when you should start claiming your benefits.
3. Not paying off credit card debt in full when you can
Credit cards can be a great way for you to build credit, but you have to make sure you’re using them the right way. The average American household now carries nearly $16,000 in credit card debt, and it’s crippling many families financially.
So this one has two parts.
1. Only paying the minimum will cost you a lot of extra money on interest: If you don’t pay your credit card bills in full in each month (so the balance is $0 when the next billing cycle starts), then you will end up spending a lot of extra money on interest. Paying only the minimum each month can cost you a whole lot of money over time. Let’s say you owe $5,000 on your credit card that has a 12.5% interest rate. If you only pay the minimum each month, it’ll take you 10 years to pay it off and you’ll end up spending nearly $2,000 extra in interest.
If you can avoid putting yourself in a situation where you can’t pay the bill in full, then do it. If you’re already in that situation, try to find extra money in your budget to put toward that debt each month or find ways to make some extra cash that can go directly toward your debt. The more you can pay off each month over the minimum, the quicker you’ll get that debt paid off and the less you’ll waste on interest.
2. Carrying debt will damage your credit: If you want credit cards to work in your favor, the best way to do it is to charge only what you can pay off in full at the end of each month (or end of each billing cycle). Credit card payments are one of the factors used to determine your credit score, so things like late payments and simply carrying debt over from month to month can impact your ability to get a bigger loan in the future — like a car loan or mortgage.
4. Not investing
Putting money away in your retirement accounts is crucial to ensure you have the money you need when you reach that point in life. But if you’re not investing your money in any other ways throughout your working lifetime, you’re missing out some serious money-making opportunities.
Once you’ve budgeted for your retirement savings, it’s important to make sure you’re putting any extra cash to work, too. Savings accounts are great for short-term emergency funds, since they are easy to access in case you need the money in a hurry. Then once you have your emergency savings built up to a point you’re comfortable with, it’s time to consider investing extra cash — money you won’t need for at least five years or more.
The first thing you need to do is figure out when you plan to spend the money you’re investing. If you’re saving to buy a house in the next few years, that money is better off in a savings account. But if you’re investing money you don’t plan to spend for at least five years or more, there are a few different options to get the most out of your investments.
Here are some resources to get you started:
- Here’s how to get started on investing your first $1,000 to $5,000
- Easy way to start investing from your smartphone
- Clark’s Investment Guide
5. Spending all your money on your kids
While your kids may be able to get a scholarship to help pay for college, there is no scholarship for your retirement! Many parents feel obligated to foot the bill for college, but you should only do that if you already have sufficient savings for retirement.
No one plans to run out of money in retirement, so it’s critical that you plan and save as much as possible ahead of time. There are tons of opportunities to get help with the cost of college — scholarships, grants, in-state tuition, community college and good old fashioned work! If it comes down to either you saving for retirement or paying for your kid’s college costs, your kid can get a job to help with the bills for school!
Here are just a few ways to make college more affordable:
- 9 ways to pay for college without student loans
- 11 ways to find college scholarships
- 5 ways to save money on your college degree
Also if you start early and spread out your savings for your kids’ college over time, that will allow you to continue saving for retirement at the same time. Check out this guide to the best 529 plans to save for your child’s education.
6. Borrowing from your 401(k)
Once you’ve got some good savings built up in your 401(k), it can be really tempting to borrow from it — especially if you seriously need some cash in a hurry.
But it’s a really bad idea — for several reasons. According to a study by Fidelity, nearly half of people who borrow from their 401(k) end up reducing how much cash they stash away for retirement while they’re repaying the loan. One-third of people end up stopping contributions completely during the time they’re paying back that loan.
The fact is, if you borrow from your 401(k), you’re probably going to have a hard time making the payments to pay it back, which just sets you back even further on your savings. This is why it’s so crucial to have emergency and rainy-day savings built up!
Here are a few ways to jumpstart your emergency savings and reduce how much you’re spending each month — so you can save more:
- How to start building emergency savings
- 19 ways to save more money right now
- 7 ways to reduce your monthly bills
7. Investing all your money in your employer
When you take your 401(k) money and put it in employer stock, it’s like putting all your eggs in one basket. You’re getting your paycheck from your employer and you’re hoping to build up a healthy retirement on your employer’s back. Doing it that way ignores the fact that companies have a lifecycle — they do well for a period and then they may lose their way over time.
Similarly, people often think it’s a good idea to invest all their money in the industry they work in, especially if the industry is booming. Things are great and you know the industry inside and out, so what could go wrong? Well, a lot.
“These clients end up with a portfolio with greater risk level than having a diversified portfolio of stocks and bonds from a variety of different sectors and countries,” Brian Antenucci, an investment adviser, told Bankrate.
If you invest everything in one sector, you aren’t giving your money the chance to ride out any downturns in the industry. If you’re invested in several different industries, your investments will have a much better chance of benefiting from ups — and surviving any downs.
8. Buying more house than you can afford
When it comes time to buy a house, what the bank says you can afford (based on how much they’ll lend you) may not actually be what you can afford. Committing too much of your monthly income to mortgage payments is risky — and it’s a bad idea. You only want to spend up to one-third of your monthly income on housing costs, which include mortgage payments, insurance fees and any homeowner’s association fees.
So when you’re figuring out how much house you can afford, make sure to factor in other important expenses besides just bills — things like saving for retirement, emergency expenses (medical, car repairs etc.) and even the cost of furnishing your brand new home. You probably won’t be very excited about your decision if you’re stuck in an empty house for two years because you can’t afford to buy anything to put in it.
9. Not living within your means
The concept is pretty simple: if you want to save money, you have to start living within your means — spending less than you make. Once you get that down, then it’s time to start living below your means.
Implementing this habit early on will allow you to really understand the power of financial freedom and independence — allowing you to save more money and make better decisions throughout your lifetime.
This doesn’t mean you shouldn’t live in the now and enjoy your life and the money you make. But if you spend all that money on things that won’t matter in a few years, or a few decades, from now, you’ll rob yourself of the financial independence down the road that you’ve spent your entire lifetime working to reach.