“This post may contain affiliate links. Please read my disclosure for more info.
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. We may not have hair-raising jobs like that, but we can make money mistakes that are catastrophic to the last few decades of our life.
The problem is, that we don’t immediately see the issue. 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 likes to say, managing your money well requires only about 20% money knowledge, and 80% behavior. 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.
Here are six of the most common money mistakes, and most of them as Dave Ramsey says, are behavior related. See if you agree.
The #1 Money Mistake – 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 Maintaining an Emergency Fund
Not making the lifestyle adjustments that’ll enable you to drip money into an emergency fund is one of the most common financial blunders. It’s one of the worst money mistakes because not having cash for emergencies, means one of two things:
- You’ll charge unexpected things on a credit card.
- You’ll use money earmarked for other necessary bills.
Either way, it traps you in paycheck to paycheck mode. And since almost 80% of us never stop living paycheck to paycheck, not maintaining an emergency fund is one of the most common money mistakes to avoid.
I’ve found that automating this was one of the easiest, and yet most valuable adjustments I’ve made. It cured two impediments that trapped me into paycheck to paycheck life.
- There never seems to be enough money left over to deposit into an emergency fund.
- I just tend to forget. It’s like the leak in the roof. If it’s not raining, it’s not on my mind.
I’ve used the mobile app Digit which automatically monitors my checking account and learns the pattern of my deposits and withdrawals. Digit creates an FDIC insured account for you, and transfers small amounts every few days from your checking account into your emergency fund.
I was amazed that after just a couple months of letting Digit transfer what amounts to coffee money, I had $1000 in my account. Since then, I haven’t touched my checking account for any car repair or home emergency. Here’s my full Digit review if you’d like to see it in action.
Buying or Leasing a Vehicle You Can’t Afford
Usually a money mistake to avoid in your 20s, but driving off in a brand new car is tempting at any age. It’s immaculate, it’ll start up on the coldest days, and it’ll give the impression – to you and to those around you, that you’re doing pretty well.
But are you?
The question, “can I afford this” seems pretty straightforward, but as I found out, pretty often misunderstood.
If you can juggle a few bills around, and cut back on things like work lunches and restaurants, maybe you’ll find $400 for a car payment. But if “cutting back” means now you can’t build an emergency fund, you’re putting your employer’s savings program on the back burner, and you need to double check your bank account to buy groceries, then you can’t afford it.
And consider also, the opportunity cost of committing to up to five years of payments. What else could you do with that $400-$500 a month? Put yourself in a position to pay cash for emergencies, pay for some advanced skills training, watch your savings multiply, or even take a trip now and then.
How to avoid this money mistake:
Dave Ramsey suggests a pretty good alternative to tying up $400-$500 dollars a month on a car that depreciates faster than almost anything you can buy:
- Save up about $2000 and buy the best car you can for cash.
- Now, save that $400-$500 a month you would have spent on car payments, for about 10 months.
- After 10 months, use your $4000-$5000 plus the value of your current car to buy something in the $6000 range.
Now you have something dependable, with no car payment. And if you continue to set aside that $400-$500 each month, you’ll be able to supercharge your debt elimination, emergency fund, mortgage payoff, or just give yourself some breathing room every month.
Here are some ideas that’ll help to raise that initial $2000:
Not Investing Soon Enough for Retirement
The most popular reasons people use for not starting their retirement savings soon enough are:
- “I can’t afford it right now. Maybe after we furnish the house”.
- “Maybe after we pay off our cars“.
- “After we save for a larger home“.
- After we save enough into Susie’s college fund”.
I made this mistake for the first ten years of my career. I was 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 in a few decades, it’ll only cover a fraction of what you’ll need to live on.
How to avoid this common financial mistake:
Like with so many other things, the hardest part about starting a retirement account is just making the decision to do it. It’ll probably take about 15 minutes, and with a low initial contribution, the deduction won’t even be that noticeable.
If you work for an employer who sponsors a retirement savings plan, you’ll find that they’re surprisingly easy to open and maintain. And it’s pretty likely they’ll hand you money each month just for participating.
A typical scenario 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 either some or all of it to raising the percentage until you can contribute around 15%.
Remember, your child 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.
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 1960’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 if you bought a home in 2007/2008 you probably watched it’s value plummet over the next eight years or so.
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 Macy’s credit card. To our surprise, we were both approved. The 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 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 dependent on simple behavior. Just paying yourself first, then figuring out a lifestyle with what’s left over after saving.
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?
Join to Receive Your FREE eBook. 50+ Ways to Save All Year Long.