Everybody messes up with money now and then. Honest people will 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:
Mistake 1: Keeping up with friends
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-minded.
Better idea: Creating the life that fits you — and you alone — takes guts. Get your financial life under control by tracking your spending. Doing so is easy, thanks to online tools like Money Talks News partner YNAB (short for “You Need A Budget”).
Mistake 2: Letting indulgences become habits
You can rationalize a small luxury because it’s cheap. Spending $5 on a fancy coffee beverage 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. 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
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.
Mistake 4: Buying a new car
As soon as you leave the dealer’s lot with a new vehicle, that 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, letting a little depreciation take a lot off your cost. Save the money you’d have spent and put it to work for you instead. Hang on to your car, and drive it for long after it’s paid off.
Mistake 5: Buying almost anything else new
Why pay a premium for new books, toys, clothes, cars, tools and sports gear when you can buy them used at a discount?
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. (However, there are some things — mattresses, shoes, digital cameras and stuffed toys, to name a few — you should never buy used.)
Some resale stores are closed due to the pandemic. And where they are open, many shoppers prefer to stay home. Fortunately, there’s a big market for used goods online. We list many options, including consignment stores, in “7 Websites for Selling Your Clutter — Safely.”
Mistake 6: Paying interest on credit cards
If you are paying 20% interest on credit card balances while your savings are earning just 0.50%, 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 is safe and you have some money in savings to spare — beyond what you park in an emergency fund — use it to pay off such 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, stop by our Solutions Center. There you can comparison shop for the best credit card. Check competing savings account rates, too.
Mistake 7: Ignoring your employer’s 401(k) match
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. The IRS says you’re allowed to pay as much as $19,500 a year into a tax-deferred retirement plan such as a 401(k). Are you over 50? You can make an additional $6,500 a year 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
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 that’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. And buying refurbished electronics is a perfectly good way to go.
Mistake 9: Chasing credit card rewards
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 to get the rewards.
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 those points. The bottom line: If you’re carrying a credit card balance, cut up that card and pay it off.
Mistake 10: Living with no emergency fund
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 your expenses are $4,000 a month, your emergency fund should be as much as $32,000.
Here are some steps to make sure you save:
- 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.
For more ideas on saving, read “9 Tips for Starting an Emergency Fund Today.”
Mistake 11: Letting bank fees drain your accounts
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 any cash you need when you use your debit card at the grocery store to avoid fees at out-of-network ATMs.
For more ways to keep cash in your hands, read “12 Ways to Avoid Paying Bank Fees.”