I’d really love to say that I am some sort of financial wizard and even to tell you that my “extreme” knowledge about this subject has zoomed me off into great wealth and fame. Well, it’s not that easy and it’s certainly not true, but I have managed to avoid a number of money mistakes in my time.
I have done well enough to make it to age 71 without going down any rabbit holes when it comes to money. And I have a modicum of fame (does this blog count because I am counting it!). But I’m nowhere near the Dave Ramseys or the Suze Ormans of the world (nor do I really want to be). But the point here isn’t about me or them. It’s about you.
It’s a fact that if you are reading this, you have a real interest in your personal finances. Since that is true, then I want to ask you a simple straightforward question:
Why can’t you simply avoid the money mistakes that just about every financial advisor warns you about?
What Are These Money Mistakes That You’re Talking About?
Ok, this is a list you really want to make note of and that’s even if you have heard some of them before. If you haven’t heeded the call, you are already inside a financial twilight zone!
There are numerous, maybe even hundreds of “musts to avoid”—mistakes in finances— some are obvious and some are not. Today, I’m going to hit a few highlights for you. Try to keep them in the front of your mind so you can avoid these money mistakes that affect your financial future.
Mistake #1 – You have out of control spending
Do you spend your money responsibly? If you spend without a plan or budget any money you get your hands on (yes, even your weekly paycheck), then you are out of control!
Don’t use your credit card for everything from cups of coffee to gifts and things like your utility bills, because you are always much more likely to purchase more of what you can’t really afford when you do it. Many people who go OOC (out of control) at holiday time wind up trying to pay that for the whole year that follows!
Mistake #2 – You co-sign loans
When a friend or family member in need asks you to co-sign a loan, the only correct response is to turn them down and say “no”. Don’t be afraid to say no.
You must be OK financially if you ever are to help another, and saying yes all the time means you are probably digging yourself a big hole. If you do sign, it will put you at big risk!
When you co-sign a loan, you become legally responsible for it if it doesn’t get paid back on time. That means if you friend or relative has some monetary setback, you’ll be on the hook to make the remaining payments.
Plus, if the borrower is so much as late on just a few payments, your credit score can take a hit.
Mistake #3 – You sell stocks when markets are bad
When stocks are sinking lower, as they will do every so often, investors tend to drop investments fast. That’s a really, really bad idea. Here’s why in simpler terms:
What goes down will go up!
Instead of dumping stock, just keep investing your regular amount of money that you have been doing regardless of what the market is doing. Using this strategy of dollar cost averaging, a bad month for the market becomes a good month to invest. It’s buy low and sell high, and it’s been a mantra among successful investors forever!
If you train yourself to hold on through the ups and downs of the stock market, you’ll continue to build a solid portfolio with long-term earning potential. Over time, you will see those gains in almost every case.
Mistake #4 – You don’t need life insurance
If you say or believe that you don’t need life insurance, then you may be making a big mistake. About 4 in 10 adults have no life insurance, according to the industry research group LIMRA. But experts agree that all parents of young minor children certainly need life insurance. It’s protection of income if something happens to a parent.
Life insurance provides peace of mind, because it will protect your family if something happens to you and you’re suddenly out of the picture.
And it’s relatively cheap, too. If you look at term insurance: A healthy adult can get large sums of coverage (like even $1,000,000) as a death benefit for less than $75 a month in premiums. And if you buy a more expensive “level term” life insurance policy, the premiums never change.
Mistake #5 – You raid your retirement funds
Making early withdrawals from your 401(k) is the biggest mistake you will ever make with your retirement money, especially if you use the money to pay off debt. A 401(k) loan is always a better choice when you think about withdrawing money from your account.
Early withdrawals bring you a tax bill and a 10% penalty if you’re younger than age 59½. Taking a loan is also better because it has lower interest rates than a traditional loan.
The one negative of a loan is that you may be prevented from adding more money into your 401(k) for six months, meaning you’ll miss opportunities to make pre-tax contributions that lower your taxable income.
Remember, money in your 401(k) grows exponentially over time and that is why you need to start planning and paying into it early and leave it alone to grow until you actually need it in retirement!
Mistake #6 – You take out payday loans
Payday loans are a huge mistake. Yes, they are tempting and convenient when you’re strapped for cash. However, they’re offensively expensive. The typical annual percentage rate is 400%. By comparison, the average APR on credit cards is around 17%. You do the math on that one.
Some U.S. states have capped the APR on payday loans at 36% percent and some have even banned the loans altogether. A lower-cost personal loan at 10-15% is a much better choice.
That brings up another reason that you need to watch your credit score and keep it as a positive part of your financial profile. It will always save you money on loans and the interest rates you pay.
Mistake #7 – You get a tax refund? Why?
If you’re getting a big tax refund, you are making one of the biggest mistakes out there! Why? Because you’ve essentially had too much of your pay withheld for taxes and have effectively given the government an interest-free loan. When you’re owed a refund, you’ve allowed yourself to be shortchanged every week in your paycheck all year long. That is ridiculous!
Mistakenly, Americans love tax refunds and eagerly plan out how they’ll use the money each year. It’s a no-brainer consensus among financial experts that a tax refund is the biggest waste of money that you will ever get from the government because it is your money you are getting back!
Now some people may have irregular income and find that they are better off withholding extra tax to be sure they have covered their obligation. But if you receive a regular income, there’s no reason to over-withhold.
Mistake #8 – Don’t leave us without making a will
Do you have your estate planning in place? If not, you might want to think again.
Everybody needs a will and most Americans don’t have one. Additionally, you should have a revocable living trust, too. That’s a legal arrangement that holds your property while you’re alive and transfers it to your heirs after your death, without the complicated process known as probate.
That living trust is for passing down your house and other major assets, and you draw up a will for your other special possessions.
Doing all of that can avoid most legal fees as well as resentment and fighting. It makes this part of passing smoother and less stressful. You get to decide what you want to do with your estate this way.
Mistake #9 – You put blind faith into just any financial advisor
Yes, you do need a financial advisor, but not just anyone will do. It’s important to have a financial advisor you can really trust.
Remember that they are human and besides being occasionally wrong, they also make some decisions based what is best for them. They don’t always have your best interest at heart.
When selecting a financial professional, make sure he or she is a “fiduciary”, which means your advisor has a legal duty to act in your best interest. You can look for an affordable online financial planning service where all of the certified financial planners (CFPs) are fiduciaries. That’s a great resource.
During your vetting process, ask prospective advisors about how they’ll be compensated for working with you, and about other services they can offer. This will give you a good idea of their motivations when they invest your money.
It’s always a good thing at the beginning of every year to think about what you have done right and what mistakes you have made, particularly in your finances. Now you have a chance to start fixing your money mistakes. Even if you had a really difficult year in 2020 financially, 2021 gives you a new shot at planning and executing new goals and getting better results.
You don’t heave to listen and believe me; try listening to and believing the hundreds of other financial experts that all say exactly the same thing!
Do you read many financial blogs or books about money? Do you follow any one in particular and what have your results been like? What money mistakes have you made and lessons have you learned?