At some point in our lives, all of us make money mistakes. But some people make far more mistakes than others, most likely because they lack financial education. These mistakes could cost you tens or hundreds of thousands of dollars over your lifetime. Here we take a look at the top 10 most common money mistakes that you should avoid at all cost. You may have already made at least one of these mistakes, but don’t do it again.
Steering clear of the common money mistakes would help you avoid financial hardships in the future. If you make a major financial mistake, it could take you years to fix and get back on track. These are the ten most common money mistakes people make:
10- Not having health insurance
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Some people choose to go without adequate health insurance to save money. But remember that health problems such as critical diseases and road accidents could arise anytime. Without health insurance, you have to pay the bills out of your pocket. Healthcare is ridiculously expensive in the United States. According to Healthcare.gov, the average cost of a 3-day hospital stay in the US is over $30,000. Do you have that kind of extra cash?
9- Not building an emergency fund
Personal finance experts recommend having enough money in your emergency fund to cover at least three months of your expenses. This money should be kept in an account where you can access it anytime you want. Most people live paycheck to paycheck. The household personal savings rate is merely 3.1% in the US. Your emergency fund will come to rescue when you need to repair your car or you are temporarily unemployed. If you don’t have an emergency corpus, you have to take on more debt at such times.
8- Not taking full advantage of the retirement plan
Do you participate in the 401(k) retirement plan offered by your employer? If yes, are you taking the full benefit of the employer matching contribution? If you aren’t taking full advantage of it, you are missing out on one of the simplest and biggest wealth-building vehicles out there. Your 401(k) contribution is tax-deductible, and you can contribute up to $19,000 per year to your 401(k).
7- Spending too much on a new car
I believe anything that depreciates in value is not an asset. It could be a utility but it’s not an asset. The value of a new car depreciates 10-20% the moment you take it out of the showroom. And its value keeps depreciating over time. On top of that, you’ll be paying a hefty interest, the costs of insurance, maintenance, and other expenses. A car is a utility that is supposed to get you from place A to place B with minimum hassles. The best way is to buy a well-maintained used car and drive it for at least a decade. A used car will cost far less than a brand new car.
6- Spending frivolously
People who don’t have a budget tend to spend a large chunk of their monthly income on things they don’t need. Maybe you spend frivolously because you want to look rich or keep up with your rich friends. Whatever your reason, spending frivolously could ruin your finances and you’d max out your credit card before you realize. Create a budget and stick to it. Once the monthly amount allocated to eating out is over, it’s over. Wait for the next month to eat out again. It’s difficult and it requires some discipline, but it’s necessary.
5- Borrowing money for your wedding
Yes, almost everyone wants a lavish wedding. Weddings tend to be a ridiculously expensive affair, with the average cost of an American wedding going up to $30,000. If you want a lavish wedding, you should start setting aside money in your wedding fund every month. People who don’t have sufficient money saved up for their wedding are tempted to borrow for one of the biggest moments of their lives. And then they spend years paying off the loan with interest.
4- Not investing enough and not starting early
One of my biggest regrets is that I didn’t start investing earlier. I started investing when I was 28, and I wonder why I didn’t start sooner. If you start investing early and invest as much as you can, you’ll be able to take advantage of compounding to create massive wealth. Let’s say you earn $40,000 a year and invest just 20% of your income in an index fund, you would have invested $240,000 in 30 years. But your money will grow to $9,46,934 in 30 years assuming just 8% annual return on your investment.
3- Spending too much on a house
Home-ownership is an emotional decision. Most people want to buy as big a house as they can afford at the given time. But a bigger house also means higher property taxes, insurance, maintenance costs, and utility payments. No more than 25% of your monthly income should go towards housing. Buying a slightly smaller house will save you a lot of money over time.
2- Borrowing money from friends and family
If you haven’t built an emergency fund, you would be tempted to borrow money from your family or friends when even a small emergency arises. Relationships turn sour the moment money gets involved, and things get even nastier when you are unable to pay them back on time. They will think ten times before lending you money in the future. You also risk losing their respect. So, start building an emergency fund right now.
1- Carrying credit card balances
This is by far the biggest and most common money mistake you can make. Using a credit card has its own set of perks and benefits, but you must pay off your entire credit card debt every month. Don’t carry a balance on your credit card because you’ll be paying 15-25% interest based on your credit score. If you fall behind on payments, you’ll end up in spiraling debt. Credit cards are designed to keep you in debt. Don’t get trapped in that cycle. Purchase only things that you can afford to pay in full.