Are you tired of being worried that you’re making mistakes when it comes to your money? Are you feeling confused about where best to stash your dollars? In this guide, we will unveil the top 6 damaging money mistakes you’ll want to avoid. From overspending, to saving for the wrong reasons, we’ll explore the common pitfalls we have seen over the years as financial advisors and provide you with practical tips on how to avoid these costly errors.
Whether you’re a seasoned investor, or a young professional just starting out, this information is invaluable in helping you achieve long-term financial stability. Get ready to take control of your finances and pave the way for a prosperous future!
Mistake #1: Spending more than you earn
It all starts with properly managing your cash flow. Spending less than you earn is the foundation of financial success. This ensures that you avoid the pitfalls of debt and not saving for important future goals like buying a house or funding retirement.
How to Avoid: Create a spending plan that includes savings for an emergency fund and for retirement. Even small monthly amounts can make a huge difference over time. When your income increases, keep your spending roughly the same and save a large percentage of that income increase for the biggest impact.
Mistake #2: Paying off debt the wrong way
In their eagerness to pay off frustrating piles of debt, people often make big mistakes. It is common for people to pay debt off with the wrong funds and to pay the wrong debts first. Another problem is that when people receive a windfall, like an inheritance, they think, “Now I can get rid of these pesky debts and get that fancy new car I’ve always wanted.” If the proper habits aren’t in place, this could result in paying off debts only to end up with new, similar debts in a couple of years. That windfall can quickly be wasted away.
How to Avoid: Plan to strategically pay off the highest interest debts first to maximize your savings. Avoid using tax-deferred investment accounts as a source to fund debt repayment, even for high-interest credit cards. Taking money from your 401k or IRA is likely to result in large tax bills and means less money for retirement. Be careful using windfalls to quickly pay off debt. It may be better to pay the debts off over time and invest the windfall for the long-term.
Mistake #3: Saving for college instead of retirement
Parents often prioritize saving for their children’s education. It’s understandable–they want the best for their kids. However, saving for college instead of retirement can be very damaging. There are many ways to pay for college (scholarships, grants, work, loans, etc.), but there is only one way to pay for retirement. And that’s building up adequate investments. You can’t borrow to pay for retirement. Also, not taking advantage of tax-deductible and tax-deferred retirement accounts could cost you thousands of dollars of unnecessary income tax bills.
How to Avoid: Make sure your retirement savings are on track to get you where you want to be. Make the most of your employer’s retirement plan to reduce taxes and obtain the employer’s match, if available. Then start setting money aside for college.
Mistake #4: Letting your investments become too aggressive before retirement
It is common for people to make aggressive investment selections for their retirement accounts when they are 40. However, it’s also common for those same people to have those aggressive investments still in place when nearing retirement age. Being aggressive can make sense when you have decades to go until retirement and you’re investing every month. But once this accumulation phase is close to becoming the distribution phase (i.e., retirement), it is wise to reduce risk to avoid an excessive drop in the value of the account.
How to Avoid: When you are within five years of retirement, you should be reducing the risk of your portfolio to avoid a large market drop close to your retirement date. Unless you are an experienced investor, work with a good financial advisor to make the proper adjustments over time to stabilize your account’s value and position it to start producing retirement income.
Mistake #5: Spending too much too early in retirement
One of the biggest risk factors for recent retirees is overspending during the first several years of retirement. This can result in substantially depleting your investments, requiring you to dramatically reduce future spending or return to work.
How to Avoid: Make a detailed and realistic spending plan for the first five years of retirement and stick to it closely. If you have special goals or obligations to fund, consider some part-time work to fund them.
Mistake #6: Not having a plan
As they say, “hope is not a plan.” To maximize your chances of financial success and quality of life, the best thing you can do is to take the time to develop a financial plan. Some people can do this themselves, but many cannot. Finances have gotten tremendously complex over the last several decades, so there is often a great deal of research needed to build your road map to the future.
How to Avoid: Educate yourself on what needs to go into your overall financial plan. Research how to find the kind of financial advisor you need. Get a plan put together with your advisor, follow up on implementation steps, and review it periodically together. A 2016 study by Vanguard showed that having an advisor can improve your returns by 1.5% to 3.0% per year. That makes a substantial difference over the decades!
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