There is a class of “common money mistakes”. A lot of these mistakes fall into the category of “mistakes because you ignore them.” By not paying attention, you commit the mistake but it doesn’t really hurt you immediately. It just impedes your growth or impacts your future in a way that’s nearly invisible. They are the most dangerous types of mistakes because, by the time you realize you’ve made them, the impact has already taken hold.
Today, we’ll address the ten common mistakes, why they are secretly detrimental, and what you can do to avoid them. This is part one.
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10. Carrying Credit Card Debt
When the average family has tens of thousands of dollars in credit card debt, I would be hard-pressed not to hit this mistake early in the list. The problem with credit card debt is that it’s not as painful as it really is. The minimum payments are so small, relative to the larger debt, that we feel like we’re getting a deal. In reality, you’re paying 20% in interest!
How do you avoid this? You need to understand why you’re in debt. If you’re in debt because you don’t understand that the minimum payments are a parasite on your financial growth – start doing some math. Paying the minimums means you’ll be paying off that debt for years. If you’re in debt because you spend more than you earn, it’s about time you start budgeting and understanding that what you spend today will cost you a lot more than the sticker price because of interest.
9. No Emergency Fund
This particular mistake might sound like a broken record nowadays but an emergency fund is absolutely crucial, especially if your general savings is low. No one likes to think about potential emergencies, let alone plan for them. It’s uncomfortable thinking about unexpected medical bills or your car breaking down or a tree falling through your roof. Or you might get fired or laid off. In some cases, you need those emergency funds to front the money on repairs before insurance kicks in. Sometimes there is no backup insurance and those emergency funds are the only way you get things done.
The dangerous part about not having an emergency fund is that if you do need money, you start tapping sources you shouldn’t. You borrow from a credit card you can’t pay back immediately. You raid your retirement accounts. You ask your friends and family (it’s never comfortable to owe money to family and friends). So start saving 6-12 months of expenses into a savings account to prevent yourself from panicking and going to a loan shark!
8. Not Monitoring Credit Score & Reports
You probably don’t think about your credit score or your credit reports on a daily basis (don’t worry, that’s a good thing). You probably don’t even think about it monthly (that’s also perfectly normal). You should, however, make sure you monitor your credit reports at least quarterly or semi-annually for errors and omissions. Your credit score has become one of the most important numbers in your adult life and it’s something that, if there is a problem, takes a long time to resolve. You are entitled to a free copy of your credit report from each of the three bureaus (Experian, Equifax, and TransUnion) every year. You should get your copy from one bureau every four months and review it for accuracy.
A lot of people don’t do this until they feel like they need to, such as right before getting a loan for a car or a mortgage for a house. The problem with waiting until then is that if you do find a mistake, it may take several months to fix it. You write a letter to the bureau, they reply and ask for proof, you fax in proof, it’s probably not perfect so they ask for more, they have to ask the reporting company and then finally maybe they fix it. If you want to buy a house and close within a month or two, fixing a credit report is the last thing you want to hold up the deal.
Keep an active watch on your reports and you won’t be in a panicked rush later on.
7. Not Saving For Retirement
For many people, retirement is such a long time away. When you’re in your twenties, you’re not thinking about retirement in your sixties. You aren’t even thinking about your thirties. You’re thinking about what’s going on this weekend. The problem with not saving for retirement is that you lose all this time. When most people think about their retirement and delaying it a year, they think they’re delaying Year 1. If you start next year, that’s OK because it’s just one year.
Wrong. You’ve actually chopped one year off the end. The last year is the most valuable year because the last year is when you’ve accrued thirty-plus years of compound growth.
If you have a 401(k) plan, make sure you contribute the minimum. If your company offers a match, make sure you’re getting all that free money. Then start thinking about a Roth IRA and contributing more.
6. Using The Wrong Tools
So many times we try to solve our problems with the tools we already have. In other areas, this is called ingenuity. When it comes to money, it’s often a mistake.
A prime example of using the wrong tools has to do with your 401(k) and buying your first home. I’m at the age where I, along with many of my friends, have bought their first “starter” homes. Several of us have moved onto our “forever” homes. One of the discussions that always comes up is whether you should borrow from your 401(k) for a down payment since it’s one of the few non-hardship reasons you can borrow from your retirement. After analyzing all the trade-offs and the math, the real problem I have with borrowing from your 401(k) is that it was never designed for that. You’re using a flathead screwdriver when you should be using a pry tool.
Use your various accounts for the reasons you intended. If you have an emergency fund, don’t invest it, put it in a safe place so you can tap it whenever you have an emergency (and you will).
5. Blindly Trusting Your Advisers
It’s important to have advisers in your life, whether it’s a professional with letters after their name or your parents. It’s also important to take what they tell you and make your own decisions about it. Perhaps it’s an investment you don’t feel 100% confident in or it’s a strategy you don’t think is completely legal. Maybe you don’t trust the adviser or you don’t trust the investment they’re recommending. Whatever it is, it’s your money, your credibility, and your freedom on the line, not the advisers’. If you’re going to agree to something, you have to be willing to accept the consequences as well as the benefits. And remember, rule #1 should always be “don’t lose money.”
The underlying problem in this mistake isn’t so much listening to others, it’s that you listen to others as a proxy for learning it yourself. It’s one thing to listen to a car mechanic, where there is a limit to the potential mistake you can make. If you overpay for a part or repair that you didn’t need, that’s not ideal but your limit is the cost of the work. If you invest in an idea that you don’t fully understand, the stakes are much higher. Don’t abdicate control of your life or your future to anyone.
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4. Not Planning For The Future
As Cesar Millan, the Dog Whisperer, often says, dogs live in the here and now. As awesome as a dog’s life is, we can’t live our lives that way. One of the biggest mistakes we can make is not planning for the future. Everyone needs to chart out a one year plan, a five-year plan, and a ten-year plan (the actual years can vary, the idea is you need a short, medium, and long term plan). The goal of the plan is two-fold.
First, if you are in a family, establishing a plan puts everyone in the family on the same page. Reviewing the plan can be a great bonding and growing experience as well. Second, it can help you establish goals. If you plan on buying a home in five years, you can figure out how much you need to save each month to build up a sufficient down payment. By establishing a plan, you can chart your progress against your goals and be better informed about how you’re doing. You can also pro-actively save towards your goals, rather than leaning more towards using debt as a way to achieve your goals.
3. Violently Changing Directions
Violently changing your plan is when you take whatever path you were on and suddenly change directions, without much regard or planning for the consequences.
This is most often seen in new college graduates who hold degrees in majors that are currently in low demand. Whatever they had envisioned in their plan as a future career simply isn’t possible in our economic times and so they turn towards jobs where their expertise isn’t a differentiator. At first, it sounds like you’re being pragmatic, but you’re in fact violently changing direction. You spend four, five, even six years studying a craft… and in a few months, you’ve abandoned it. That’s pretty violent.
The solution to this is to ensure that you chart out your future plans and build contingencies into the plan. The best-laid plans of mice and men often go awry, so it’s important to build up alternatives and contingency paths along with that plan so you can adjust for the future. Your contingency plan may be to take a job in an unrelated field so you can build up some job skills with the future plan of returning to your field of study when the economy recovers. Having a contingency plan means that your changes won’t be quite so violent.
2. Not Paying Attention
Every month, I add up my net worth and put it in an Excel spreadsheet. The value in doing this isn’t in looking at my net worth increasing or decreasing. The value isn’t in seeing what it is versus my peers. It’s a valuable exercise because it guarantees that I will log in to each of my financial accounts every single month. I will see how it has performed over the last thirty or so days. I will give it a small bit of attention each month and that’s very important.
My wife’s Roth IRA was 75% cash and has been 75% cash for quite a long time. In the last year, it’s gained exactly 0% and it has lost exactly 0%. We were fortunate that we didn’t lose as much as we could’ve if the money were in an index fund, like much of everything else of ours happens to be. However, we didn’t actively make that decision. We didn’t decide that cash was the best option, we simply didn’t decide at all and the default was cash. While it worked out in our favor, it’s a mistake because we weren’t paying attention.
The simple solution is to check in on your personal finances once a month. If that’s too much, check on them once a quarter.
1. Not Budgeting
The most common personal finance mistake, by far, is not budgeting. Having and keeping a budget is probably one of the easiest, cheapest, and most rewarding thing you can do to get your finances on track.
By keeping a budget, you take much of the mystery out of your money. You won’t get anxious because you feel as if you don’t have enough. You won’t spend recklessly because you mistakenly believe you have more than you really do. By budgeting, you not only know where you stand, but you know how much is allocated to each category each month. If you budget $100 on entertainment each month, you can enjoy paying for a $10 guilt-free because it’s in your budget.
If you’ve never had a budget, give it a try. It’s a liberating process and an enlightening one because it shows you exactly how much you can and can’t spend. You can make it as complicated or as simple as you want, the key is to start doing it. I started with an Excel spreadsheet and eventually started using tools to help me track line-item expenses. You can use a pen and pad. It’s whatever you feel most comfortable with.
This concludes our ten tips on how to avoid making money mistakes. Hopefully, you can put these tips into practice in the future. If you are in need of an immediate payday loan, consider getting one from Cash Wizard.