The Top 10 Money Mistakes People Make
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There’s nothing wrong with making a mistake — even when it comes to your finances. However, it becomes a problem if you keep making the same missteps over and over again. Learning from these common money mistakes can prevent headaches and position you for a solid financial future.
- Spending more than you earn. Millions of Americans live above their means and struggle financially throughout their lives. Getting your budget under control isn’t only about creating a solid plan from which to launch your financial future. Having enough money left at the end of the month to add to savings or pay off your debts can lift a huge psychological weight.
Often, correcting overspending is as simple as cutting back on nonessential expenses such as dining out, shopping or other entertainment. If you can learn to trim down impulse purchases, you can likely free up some needed cash at the end of the month to put toward long-term financial goals. However, if you’re struggling to keep up with your budget and have already cut out all the extra spending you can, it may be time to look into more far-reaching solutions. For example, you might be able to renegotiate certain services such as cable and internet, or reach out to your lenders about altering the terms of your monthly debt payments.
You can also read our related article about freeing up extra space in your budget.
- Putting off financial planning until tomorrow. The problem with the “I’ll get to it later” philosophy is that by the time you do get around to it, you may have missed some financial planning opportunities or made things more difficult for yourself. Putting off your financial chores only means that the to-do list grows ever longer, and when it comes to time-sensitive things like retirement planning or paying off debt, delaying the process could cost you more money in the long run.
To keep procrastination at bay, try breaking your finances into bite-size pieces that are more manageable. You don’t need to get your finances in order overnight, but ignoring your to-do list doesn’t make it go away. Try setting aside time once a week or even once a month to check in on your finances and accomplish important goals.
- Failing to save for emergencies. Almost 60 percent of Americans don’t have enough money in their savings account to pay for an unexpected $1,000 expense such as a sudden car repair or surprise medical bill. Millions of people are without a safety net, and even one accident could be devastating to their finances.
It’s generally recommended to have enough cash set aside to cover all of your family’s expenses for three to six months. A good rule of thumb is to save 10 percent of your net income. If that amount seems impossible in light of your monthly expenses, try starting with 5 percent and increase that amount by 1 percent each month until you’ve reached the 10 percent threshold.
Our resource center has related articles if you’d like to learn more about building an emergency fund.
- Postponing retirement saving until later in life. Many Millennial and Gen Z workers entered the job market more concerned with paying off their student loans than saving for retirement. Age 65 can seem like a long way off, especially to someone in their early 20s, but money saved early will grow into a much larger nest egg as the years pass.
For example, if you have an IRA with a 6 percent annual return, and you start contributing $2,000 per year into that account at age 25, you’ll have a total value of $328,095 at age 65 from your $80,000 investment (40 x $2.000). If you wait just five years and start your $2,000 annual contribution at age 30, you’ll end up with only $236,242 from an investment of $70,000 (35 x $2,000). If you have the income available, it’s never too early to start saving.
- Taking a long time to pay off your high-interest debt. It’s hard to save when you’re in considerable debt — especially if you’re losing money every month to high interest rates. If you’re juggling multiple debts that all need your attention, it’s difficult to know where to prioritize. But paying off debts with high interest rates is often a great strategy that can save you money in the long run.
To start digging out, begin by paying off your debt with the highest interest rate, which will often be a credit card account. If you have the cash on hand, pay off everything that isn’t tax-deductible. For example, say you have $5,000 stashed away that’s earning only 2 percent interest. That money would be put to far better use to pay off your credit card debts.
- Always buying new cars without considering used options. The minute you drive a new car off the lot, its value drops by as much as 25 percent. If you need a new set of wheels, consider a used car. Buying used means the depreciation has already come out of the previous owner’s pocket – not yours. The loss of value in a car is far less from years three to six than from years one to three, which means you’ll get more of your money back when the time comes to sell the car.
- Not buying enough insurance coverage. Having the right insurance — including medical, automobile, homeowners, long-term care, life and disability — is key to good financial planning. While it can be difficult to figure out the kinds of insurance and the amount of coverage you may need, not having the right balance of insurance can be disastrous if you’re hit with an unexpected expense.
It’s a good idea to review your insurance coverage each year and determine which policies you may or may not need based on any major life events you’ve experienced. For example, if you’ve purchased a newer, more expensive car, it’s time to reevaluate your auto insurance. If you’ve recently gotten married or added a baby to your household, it may be time to take a look at your health insurance. If you’ve completed a major, value-adding home remodel, it’s probably a good idea to increase your homeowner’s insurance. It’s not enough to have just any old insurance coverage in place; you need to make sure the insurance you’ve bought will cover the full value of your growing assets.
- Not monitoring your credit scores and credit reports. Credit scores can affect you in many ways — from borrowing money, to buying a home and even renting an apartment — so it's important to see a credit score similar to what a potential lender may see. You can easily check your credit profile with each of the three nationwide credit bureaus, and then work with your lenders to correct any problems or errors that you discover.
You can also create a myEquifax account to get free Equifax® credit reports each year. In addition, you can click “Get my free credit score” on your myEquifax dashboard to enroll in Equifax Core Credit™ for a free monthly Equifax credit report and a free monthly VantageScore® 3.0 credit score, based on Equifax data. A VantageScore is one of many types of credit scores.
- Lacking an investment strategy, or not sticking to one. If you invest in stocks or mutual funds as part of your savings plan, it’s important to have a strategy for that money. Too many people let their emotions get in the way and end up buying or selling on impulse. Another common misstep is spending too much time and effort trying to time the market, hunting for the “big payoff” or chasing the investment of the month (or week or day). Instead, you need to decide on a strategy and stick to your plan.
- Not having a will. Suppose the worst were to happen and you die tomorrow. Would your loved ones be provided for? If you pass away without a will, a court will determine who gets what based your state’s laws.
However, when you prepare a will, you’re creating a legal document that clearly defines what you want to happen to your money and other assets after you’re gone. While no one likes to think about their own death, having a will in place not only makes your wishes known but also can reduce the stress of your surviving loved ones who are already facing a difficult time.
Chances are, you’ve made at least one of these mistakes throughout the process of managing your finances — and that’s okay. The key is to identify and understand financial missteps so that you can do your best to prevent them moving forward.