There are certain things everyone needs to know about money. High school personal finance classes are still uncommon, and most Americans are financially illiterate and more prone to making money mistakes due to a lack of knowledge. Here are some common financial mistakes you may be making right now and how to avoid them.
1. Not saving or investing
Perhaps the biggest financial mistake you can ever make is not investing for your future. 19% of Americans don’t save any money at all. Not saving puts your financial future and retirement in jeopardy. If you don’t save at all or don’t save adequately, you may never retire or you may be forced to live on Social Security payments. The younger you start saving, the more time your dollars have to work, but it is never too late to start saving more for your future. Even if you are close to retirement and realize you didn’t save enough, every little bit saved for retirement helps.
2. Paying off debt too early
Paying off debt isn’t what you would normally call a mistake, but prepaying low-interest debt when your Army of Dollar Bills would be better used elsewhere could be a costly mistake. Certain low-interest debt, like auto loans, should be paid off in a timely manner since vehicles are typically fast depreciating assets. If you are young with lots of compounding growth ahead of you, it may not sense to pay off your low-interest mortgage as quickly as possible when those dollars could instead be saved in a tax-advantaged retirement account and multiply many times over. Follow our “Financial Order of Operations” and make sure every dollar is working as hard as you are.
3. Not properly covering your risks
Don’t let unexpected events make or break your financial future. Having your risks properly covered is a vital part of any solid financial strategy. All it takes is one car accident or one visit to the hospital to completely derail your financial life. In such uncertain times as this, it’s even more important to make sure your risks are covered. If you don’t have a full 3-6 month emergency fund, work on ensuring you have enough liquid savings to cover your highest deductible. Adequately covering your risks will help keep you from making other financial mistakes in the future, like racking up high-interest credit card debt.
4. Racking up too much debt
Not all debt is bad, but it is unfortunately easy to reach a level where you are in over your head with debt. For students going to college, student loans may be necessary to get an education, but keep your student loan debt below your expected first year salary. Know how much mortgage you can afford; your total housing-related payments should not consume more than 25% of your gross monthly income. Car loans are sometimes necessary to ensure you have reliable transportation to work, but follow the 20/3/8 rule when taking out an auto loan: put 20% down, pay the car off in 3 years, and your monthly payment should not exceed 8% of your monthly gross income. If you are purchasing a luxury car, you should have it paid off within 1 year. With your deductibles covered and an emergency fund, credit card debt shouldn’t exist.
It’s hard to have any financial success at all when you can’t control your spending. Overspending can be a problem for any level of income, no matter how much money you make. There will always be someone out there who has nicer things than you, and there will always be things to spend your money on. Instead of focusing on what others have and what you don’t, try spending time volunteering. A little generosity goes a long way, and focusing on what truly matters can help curb any bad financial behaviors like overspending.
6. Not knowing your “why”
Financial success alone will not bring happiness. Many people who pursue financial success become extremely unhappy when they reach what they thought was the finish line and realize there isn’t enough money in the world to make them truly happy. No matter where you are at in your wealth-building journey, take some time out of your day to think about why you do what you do. Accumulating wealth for the sake of accumulating wealth will not make you truly happy, and may in fact make you unhappy.
In our latest episode, we discuss “5 Things Every American Should Know About Money!” This is your chance to refresh your memory on some of the basics of building wealth. We discuss the power of deferred gratification, why everything you know about money is wrong, the value of time, and more. Watch it now on YouTube below.