The 5 worst money mistakes that will cost you BIG.
Everybody makes money blunders from time to time, so if you've had a few financial regrets of your own, you're not alone. In fact, according to a 2019 study, 126.5 million American people admit to having erred financially at least once in their lives. There are a few blunders that experts say you can easily avoid, even though they are debatably subjective – you might regret having so much student loan debt, but that degree was required to establish your profession. Here are five frequent financial blunders and preventative measures you may take.
1. Lack of an emergency fund
If 2020 taught us anything about money, it's the value of having an emergency fund to draw on in the event of unforeseeable catastrophes like a job loss or unexpected medical expenses. If you don't have any additional money left away, you must employ pricey methods of financing your life. This can involve using payday loans frequently, taking out cash advances, or accruing high-interest credit card debt. Your credit score will also play a role in how easy it will be for you to access several of these lending choices. Lenders use your credit score to determine how much credit to extend to you and what interest rate to impose. It's possible that you won't get the best rates if your score is low.
Start off modestly if you're just starting to accumulate an emergency savings. Even a modest amount of savings, like $25 a week, will result in $1,300 at the end of the year. If you have your basic needs met, other financial advisers advise using any financial windfalls, such a stimulus check and/or a tax refund, to jumpstart your emergency fund. Not all financial gurus concur on what to do if you're trying to prepare for an emergency fund while managing high-interest debt. Building an emergency fund before paying off your credit card debt, according to some experts, is bad advice. On the other hand, others advise prioritizing your emergency savings before accelerating your debt repayment.
Many people are motivated by their desire to be entirely debt-free and detest consumer debt. Although achieving that goal is excellent and commendable, it shouldn't come at the expense of being ready for a crisis. By assuming they won't experience a financial emergency during the time it takes to pay off that debt, they are essentially making a wager.
2. Settling the incorrect debt first
It can be challenging to decide what to prioritize first when you have a mortgage, a car payment, student loans, and credit card debt. However, financial gurus advise you to exercise prudence when choosing which debts to pay off first.
Instead of paying off their student or auto debts, which frequently have significantly higher interest rates, I find that many people choose to make extra payments toward their mortgages with 3% interest rates. Write down all of your amounts and the related interest rates before beginning to develop your debt repayment strategy. The debt with the highest interest rate, such as credit cards, should be paid off first before moving on to debt with a reduced interest rate, such as a mortgage.
I advise everyone to approach credit card debt seriously, sometimes even suspending retirement contributions while they reduce their balances. Paying them off not only raises your credit score but also leaves more money in your budget for investments and savings. Your savings are increased in numerous ways when you pay off your high-interest debt. When you are paying more in interest on your debt each month than you are saving, it is impossible to save money.
3. Not receiving employer matching contributions
This is a typical financial blunder that younger people make, claim financial advisors. Make sure you contribute at least up to that amount if your business offers a 401(k) match program in order to fully benefit from it. By allowing you to make pre-tax contributions out of each paycheck, employer-sponsored retirement savings accounts can provide tax benefits to assist you in funding your retirement. You are essentially leaving that free money on the table if you don't contribute. Any contribution, no matter how small, is helpful, and the sooner you begin living, the better.
Additionally, if you are able to, think about contributing more. Often, once they achieve 100% of their employer's match, people may believe they are contributing the maximum to their 401(k) plan. However, the actual annual maximum contribution for any individual is $19,500, plus an additional $6,500 in catch-up contributions for individuals over 50.
4. Absence of a credit monitoring or alarm service
Today, opening an account in your name, committing identity theft, or making unauthorized charges to your accounts are all as simple as they have ever been. A credit monitoring service that does the work for you and promptly warns you of any potential danger will help you catch any fraudulent activity in your name while also protecting you. There are many resources available for free credit monitoring.
5. Allowing for "lifestyle creep"
It's not uncommon if you find yourself indulging more frequently than you used to when your income rises; this is known as lifestyle creep. When you have the money, prioritize your short- and long-term financial goals first rather than splurging on pricey new items. It is much simpler to not realize what you are missing if you have never experienced money.
We've all heard the argument before: "I can afford it since I make more money now." I earned this pay rise because I worked hard for it. While celebrating victories might help you achieve long-term objectives by creating a positive feedback loop, this way of thinking can also cause you to blow your recent windfall. Make sure you have a strategy in place for any raises in pay or bonuses, such as boosting your savings or paying off debt. Any additional funds can then be utilised to raise your standard of living. Most importantly, having a plan gives you justification for saying "no" so that you can later say "yes" to something.