Top Four Personal Financial Mistakes to Avoid
Whether you just recently graduated, have entered the workforce, or are well into your career, it’s imperative to keep track of your personal finances. It’s hard to stop and think about saving for retirement, but the sooner you start, the richer you’ll be.
After all, the more money you save and the sooner you start, the more money you will have in the long run and the better prepared you’ll be for retirement. The most common mistake people make is waiting to start saving for retirement, which can mean losing out on thousands, even tens of thousands earned on interest. On top of that major one, here are four of the other most common personal financial mistakes that you’ll want to avoid.
1. Misunderstanding Credit Cards
Before the advent of the Internet, credit card purchases were limited to business hours. That all changed with the click of a mouse. Online businesses are now open 24 hours a day, 365 days a year. And, services like “PayPal” and “PayPass” are making it easier than ever to use credit cards.
In 1968, consumers’ total credit debt was $8.0 billion (in current dollars). Now, the total exceeds $850 billion. (Source: “Credit Card Debt Statistics,” Hoffman, Brinker & Roberts, last accessed December 21, 2012.) In 1990, before the Internet age, the average American household’s credit card debt was $2,966. In 2012, it stood at $15,328. (Source: “Why Credit Card Debt Levels Are Rising,” San Francisco Chronicle, November 30, 2012, last accessed December 21, 2012.)
Whether it’s a cash advance or large balance, when the monthly statement comes, there’s a temptation to pay only the minimum. Don’t do it. Making the minimum monthly payments on a $1,000 balance with an 18% interest rate will take you 13 years to pay off and will cost $2,115 in total. Credit card debt is spending future income before it’s earned. And, it can cost you in both the short and long term.
2. Not Sweating the Small Stuff
Some TV commercials suggest that for the price of a cup of coffee, you can buy their product or service. After all, a cup of coffee doesn’t cost much. As an isolated expense, no, it isn’t expensive, but it adds up.
A daily trip to the coffee shop, a pack of cigarettes, or lunch at your favorite restaurant can add up to thousands of dollars each year. One study showed that 50% of all workers purchase coffee at work on a regular basis, which translates to more than $20.00 per week, or $1,000 per year. Furthermore, 66% of employed Americans buy their lunch instead of bringing a lunch from home—an average of $37.00 a week, or $2,000 per year. (Source: “Workers Spend $3,000 a Year on Coffee, Lunch,” Fox Business,January 25, 2012, last accessed December 21, 2012.)
Modifying weekly spending can help you set aside some money for savings, retirement, or even paying down debt.
3. Not Planning a Rainy-Day Fund
Setting money aside for the unexpected could save you thousands in the long run. Creating a fund for a rainy day or emergency is a safety net for unexpected events, such as a job loss, and it protects a household’s cash flow.
Without access to cash, you might be forced to take funds from your checking account or retirement fund, or to charge expenses to your high-interest-rate credit cards, increasing both debt and overall retirement plans.
How much to set aside is up for debate, with estimates ranging from three to six months’ salary to a full year’s. That number will depend on what stage of life you’re at. If you have a big mortgage, loan payments, or an education fund, you will need a larger safety net. If your house is paid off and you’re debt-free, you’ll probably need less.
While it’s not easy to save money, every little bit helps. It also helps to carefully choose where to park your rainy day funds. Because unexpected events are, by their very nature, unexpected, it’s important that the funds are readily available.
Some choose checking accounts for their rainy day fund. The money is easily accessible, but checking accounts don’t generally pay interest. Others put their money in certificates of deposit (CDs). Because CDs pay interest, it can work for you as well as act as a financial safety net. CDs also require locking in your money for months at a time, and early withdrawals can mean penalty fees.
High-yield savings accounts are good options. Online savings accounts (and some credit unions) can offer higher yields than traditional brick-and-mortar banks, since they don’t have the high overhead required to maintain branches and ATMs. With high-yield savings accounts, you can have quick, penalty-free access to your money. And, some accounts provide a greater return than many CDs.
4. Not Asking for Help
Yes, there are some people who can manage their own financial lives. But, not everyone can. In fact, the most middle-class Americans think that planning for retirement takes nothing more than a little guesswork.
When it comes to planning for your retirement, it might make sense to hire a professional. But even here, you need to do research.
Make sure that you know what services you are paying for and how your advisor is compensated. Advisors paid on commission have an incentive to sell you one product over another, even if it’s not in your best interest.
If you’re dubious of their intentions, look to fee-only advisors who adhere to the fiduciary standard, meaning they’re required to act in your best interest.
With Americans living longer, we need to plan for retirements that could last 20 to 30 years or more!