Everybody messes up with money now and then. Ask anyone: If they’re honest, they’ll tell you their regrets.
Maybe they moved their 401(k) savings into cash accounts after the stock market crashed in 2008, missing the market gains since then. Or they bought a house they couldn’t afford. Or they waited until age 40 to start saving.
Here are some of the most common mistakes, and how to fix them and keep learning:
Mistake 1: Keeping up with friends
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One of the fastest ways to get into money trouble is trying to match the lifestyle and possessions of people around you. Status matters to most of us. That’s the culture we live in. But playing when you can’t pay? That’s financial suicide. Genuinely successful people are more independent.
Better idea: Creating the life that fits you and you alone takes guts. Get your financial life under control by tracking your spending. Fortunately, doing so is easier than it ever has been, thanks to free online tools. Try software from YouNeedABudget, Mint.com or other money-tracking products on the market.
Mistake 2: Letting indulgences become habits
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You can rationalize a small luxury because it’s cheap. Spending $5 on haute coffee isn’t a bad splurge once in a while. But do it every day, and that $5 treat is a $150-a-month expense — that’s $1,800 a year — just for your daily cup of joe.
Better idea: Track your spending, daily or weekly if possible. It’s the hands-down best way to control it. A simple budget is easy to make and gratifying to use. By all means, treat yourself once in a while to a goodie you can afford — and then stop.
Mistake 3: Putting subscriptions on autopilot
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I gave someone a six-month subscription to Netflix a while back. Many months after the six months had passed, I realized I’d forgotten to cancel the subscription.
Many merchants enjoy streams of income from customers who sign up for ongoing monthly charges and then forget to monitor the charge. Remember to cancel that extra tier of cable or phone service you no longer need, or the free credit monitoring trial or premium channel preview period that starts charging your credit card after 30 days. These small charges really add up.
Better idea: Read bills carefully to spot services you no longer use. Call the customer service folks at your phone and cable companies twice yearly to review your accounts for better deals or features you can drop. For more tips, check out “You Probably Pay These Charges Without Realizing It.”
Mistake 4: Buying a new car
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As soon as you leave the dealer’s lot with a new vehicle, your new car or truck starts to depreciate, instantly making it worth less than what you paid for it. Registration and insurance also cost more for new cars than for gently used models.
Better idea: Buy used. Save the money you’d have spent and put it to work. Hang on to your car, and drive it for free after it’s paid off.
Mistake 5: Buying almost anything else new
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Why pay a premium for new books, toys, clothes, cars, tools and sports gear when you can get them for a discount used?
Better idea: Before shopping retail for a new purchase, see what kinds of deals are available on used goods. You can often find furniture, jewelry, clothes, appliances and electronics that look and work as well as new. And you will get them for a fraction of the price. Of course, there are some things — mattresses, shoes, digital cameras and stuffed toys, to name a few — you should never buy used.
Mistake 6: Paying interest on credit cards
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If you are paying 20 percent interest on credit card balances while your savings are earning just 0.2 percent, you’ve got things upside down.
Better idea: Rates on credit card balances are insane. Why pay hundreds of dollars monthly to borrow money to buy something when your savings are earning far less? If your job’s safe and you have some money in savings to spare, use it to pay off high-interest debt. Then, rebuild your savings and pay off the entire card balance every month. Never borrow money at those rates again. Before signing up for a credit card, comparison shop. Check competing savings account rates, too.
Mistake 7: Ignoring your employer’s 401(k) match
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You’re throwing away free money if you aren’t claiming every dollar your employer is willing to contribute to your retirement plan or 401(k).
Better idea: Never turn down free money, or that nice tax deduction you get by contributing to a traditional 401(k) plan. You’re allowed to pay as much as $18,500 a year into a tax-deferred retirement plan such as a 401(k). Are you over 50? You can make an additional $6,000 in catch-up contributions. Think you can’t afford to put enough in to get the company’s matching funds? Think again. You can’t afford not to.
Mistake 8: Borrowing to buy stuff that loses value
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A new car may be your biggest depreciating purchase, but there are plenty more. When you take out a loan or use a credit card to buy toys — big-screen TVs, audio equipment, video and still cameras, or high-end sports equipment like new skis and boots — you are undermining your financial health.
Better idea: Pledge to pay only cash for toys and bling, whether it’s a snowboard or a dress for a special party. Consider dropping expensive mindsets, too: You don’t need to be an “early adopter” every time a new electronic device appears on store shelves.
Mistake 9: Chasing credit card rewards
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This is a tough one. Capturing rewards points is like a game. It’s fun, especially if you are working toward a goal like a free trip. But you may be overspending.
Better idea: Beware of driving yourself into a financial ditch in pursuit of “savings.” The way out? Revisit your financial goals to reinforce how much more important they are than chasing points. The bottom line: If you’re carrying a credit card balance, it’s time to cut up that card and pay it off.
Mistake 10: Living with no emergency fund
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You’re walking a tightrope without a safety net when you have no emergency fund.
Better idea: Build an emergency cushion to cover your net take-home pay for seven or eight months. For example, if you take home $4,000 a month after taxes, your emergency fund should be $32,000.
- Treat this fund like any other bill — contribute to it every month.
- Put your fund where it’s harder to get at — maybe in a savings account (not checking) at a bank you don’t use otherwise.
- Keep saving. After you’ve fully funded your emergency account, use your extra cash to pay down debt or build up retirement or college savings.
- Read “Struggling to Build an Emergency Fund? Try This Instead” for guidance.
For more ideas on saving, read “7 Ways to Make Your Savings Grow Faster Automatically.”
Mistake 11: Letting bank fees drain your accounts
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You’ve worked hard for your money: You don’t want it going to bank fees for overdrafts, out-of-network ATMs and checking account maintenance.
Better idea: Follow some basic rules to avoid these fees. Such guidelines include:
- Keep a cash cushion in accounts to avoid overdrafts.
- Switch to a bank or credit union that offers free checking.
- Sign up for electronic alerts to stay on top of account balances.
- Get cash back when you use your debit card at the grocery store to avoid out-of-network ATMs.
For more ways to keep cash in your hands, read “14 Ways to Avoid Paying Irritating Bank Fees.”
Mistake 12: Raiding your retirement savings
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Your 401(k) can be a tempting pot of money, especially when an emergency strikes or you’re short of cash.
Better idea: Do all you can to avoid raiding your retirement savings. You’ve worked hard to get this far. Besides, it’ll cost you.
Yes, you can borrow from your 401(k) — and sometimes this can be appropriate for a serious short-term liquidity need, Investopedia explains. However, doing so means the money you take out won’t be growing in your account. And if for some reason you can’t repay the loan on time, the money withdrawn becomes taxable.
When you change jobs, don’t cash out the account. You’ll pay a penalty and taxes. Ask your human resources department for help rolling your savings into another tax-deferred account.
What are the money bloopers you wish you could undo? Share them in the comments below or at our Facebook page.
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