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Making mistakes is only human right? Well, try telling that to an air traffic controller. Or the guy packing your parachute. One misstep or lapse in attention can be catastrophic within seconds. Even though we may not have hair-raising jobs like that, we can also make mistakes that are catastrophic to our financial well-being.
The problem is, that we don’t immediately see the problem. We coast along, many times living paycheck to paycheck, assuming we have our entire career to get things together. I mean, we have a roof over our head, food to eat and friends to hang out with on the weekend, right? Retirement is years away.
As Dave Ramsey says, personal finance is 80% behavior and only 20% head knowledge. So, even though most of us know the basics of building a more secure life, we put off putting the pieces into place that’ll do it. More than half of all Americans are living paycheck to paycheck and as a result, are a lot closer to financial catastrophe than they might realize.
So I’ve found six of the main ways we sabotage our finances, and most of them as Dave Ramsey says, are behavior related. See if you agree.
Not Creating a Budget – And a Plan
Think about it. If the only way to succeed financially is to spend less than you make over a long period, then how will you do that if you don’t have a handle on where your money’s going?
It doesn’t matter if you’re working your first job at $10 an hour or are a seasoned pro pulling in $100 an hour, if you don’t know what’s coming in versus what’s going out each month you’ll fall into the trap.
Sooner or later you’ll realize that you’re over extended. And depending on the amount, you could spend several years trying to get back into the black.
What are your goals for the next five years? Or ten years?
Is there a certain amount you want to have saved in an IRA? Or do you want to be able to move to a certain area? Travel? Having a long term plan will give you a target and the motivation. Then your budget will put the steps to get there into focus.
Creating your own budget may be a little work for a few months while you track each expense and assign it to a category. But once you do, you’ll have an awareness of your finances in the bigger picture. You’ll see how seemingly small habits amount to thousands of dollars per year.
But now you’ll be able to adjust your everyday routines and decision making so they align with your long term goals. Creating a budget and sticking to it is the only way you’ll be able to see what you need to adjust, cut back or eliminate.
Not Having an Emergency Fund
When you don’t have an emergency fund it’s very tough to break out of the paycheck to paycheck mode. Because every time you get a few bucks in the bank – wham! You need a brake job on your car, or the clothes washer dies.
So you end up charging hundreds of dollars, paying interest, and having to tighten your belt even more. The most common reason given for not having an emergency fund is usually that someone cannot afford to make a regular deposit into the account long enough to accumulate several months of expenses.
The exercise of creating your budget is very likely to uncover enough money to at least start your emergency fund. Even if you can’t accumulate several months of expenses – if you can save $1000 in an account that’s not touched for anything but urgent situations, you’ll be protecting yourself.
The best way I’ve found to put your emergency fund on autopilot is by using the app Digit. It works for me because it monitors my checking account and keeps track of deposits and payments. Then it moves small amounts over to my Digit account when it appears I can afford it. And then it texts me to let me know. I don’t have to do a thing, but I can easily access it and check things. Here’s a review I posted if you’d like to find out more about it .
Here are a few posts that may help to uncover enough money for you to start an emergency fund.
Buying or Leasing a Vehicle You Can’t Afford
I have to admit, driving off the car lot in a brand new vehicle is a great feeling. It’s immaculate, and you know it’ll start right up in the most extreme weather. Taking a trip a few states away? No problem. Driving a new car also gives you, and those around you the impression that you’re doing pretty well.
But are you? If you realize after a few car payments that suddenly you don’t have the cash to pay for everyday things like clothes or odds and ends for the house, then you probably can’t afford it.
Buying things that appreciate in value makes the best sense, and a new car has one of the fastest depreciation rates of anything you can buy, at about 11% the minute you drive it off the lot.
And consider the opportunity cost of committing to up to five years of payments. What else could you have used that $400 a month for? An emergency fund, retirement, a college fund or maybe a vacation?
A better choice may be to save up some cash and combine that with a trade-in to get a vehicle that’s a few years old but in excellent condition. And if you need to supplement it with a small loan, shop around for the lowest rate which probably will not be through the car dealer.
To generate some extra cash for your “new” car here are a couple posts that may help:
Not Investing Soon Enough for Retirement
The most popular reason people use for not starting their retirement savings soon enough is, “I can’t afford it”. It’s the excuse I used for the first ten years of my career. I was already trying to stretch a low salary to meet living expenses and thought there was no way I could afford another deduction.
The truth is, that you can’t afford not to. Even if Social Security is still viable when today’s millennials retire, it’s meant as a supplement, not your main source of income.
The hardest part about starting a retirement account may be just deciding to do it. If you work for an employer who offers the option, that’s your best bet because it’s pretty likely that they’ll kick in a percentage of what you invest.
A typical option might be that they’ll contribute fifty cents per dollar you invest, up to about 6% of your salary. Where else could you get 3% of your salary handed to you each week?
A great way to start is to open the account and set your contribution to whatever you need to get their maximum contribution. Then each year, whatever raise you receive, commit to bumping up your contribution by at least one percent.
One big mistake also is to delay or decrease your retirement savings in favor of saving for your child’s college expenses. Having a nicely funded 529 plan is great as your child is headed off to college – if you’re also able to fund your retirement savings.
Remember, you can finance college, but you cannot finance your retirement. You either have it or you don’t. Nobody wants to stick their child with huge loans. But the fact is, that there are a lot more options to pay for college and he or she has a long time to pay it back. You don’t have those options.
The key is to get a retirement account opened as early as possible. Once your contributions are set, you’ll adjust to the deductions and your savings will almost be on auto-pilot.
Starting a retirement account in your twenties versus your forties is the difference between retiring with ‘just enough’ or retiring as a millionaire.
Buying More House Than You Can Afford, Assuming it’s an Investment.
My parents bought a house for 29k in the 60’s and sold for 550k about forty years later. Their home became a huge part of their retirement nest egg. I bought a home in 1999 and sold it five years later for double the original sale price.
But suppose you bought a home in 2007/2008? If you’re not underwater, you’ve probably at least lost thousands of dollars in value.
So, investing in more home than you can afford with the assumption that it’ll appreciate enough to reap you a bundle when you sell it is not a safe bet to make.
Your best bet is to first decide if you’ll be in an area longer than a few years. If you will be, then before you even look at a house, figure out what you can afford.
One quick way to estimate a reasonable range for your home purchase is to multiply your annual salary by 3 on the low end and 4 on the high end. So, if you make $80k per year, you should be looking at homes priced between $240,000 and $320,000. Now, this assumes you don’t have a mountain of consumer debt already.
Another quick estimate to see what kind of monthly payment you can afford is to take your monthly after-tax income, subtract all current debt payments and then multiply that number by 25%. For someone making $80,000 a year, that will equal $1200 a month. This may seem low, but it’s a conservative estimate that assumes you’ll have other expenses like taxes and utilities.
Applying for Multiple Credit Cards
Not long after I turned eighteen, my friend and I had the bright idea of applying for a credit card to Macy’s. To our surprise, we were both approved. The first day we received our cards, we drove to Macy’s and each bought a TV and a sound system loud enough to hear from a block away.
We both fell for the buy now, pay later trap. It feels great coming home with a new TV or stereo or living room set. But if you’re locked into high-interest payments for the next few years, that novelty wears off pretty quickly.
Not only are you paying huge interest, but stretching payments over a couple years means you can’t afford other things during that time. And if you start missing payments your credit rating will take a hit that could take a long time to repair.
The more credit cards you apply for, the more your credit score will suffer because of it. You’re much better off saving for discretionary things like a TV or a piece of furniture or using your emergency fund for things you need right away like replacing an appliance.
Unless you’re that one person in 250 million who wins the Powerball, it’ll probably take several decades of methodical steps to accumulate significant wealth. But it’s much easier to lose it. And it’s even more common to coast along until you’re in your 50’s and suddenly realize that you’re not going to be able to retire when you planned and have the life you dreamed of. Not because of external factors, but just because you never took the simple steps to put your plan together.
Remember, you don’t need a finance degree to put some simple steps into place. As Dave says, building wealth is much more dependant on just establishing a target for yourself, then adjusting your lifestyle in a way that enables you to take small methodical steps towards it.
The bottom line is that you can’t just think about it, you have to actually do it.
Have you or someone you know run into a real roadblock in your efforts to save? How did you deal with it, and were you able to move past it?