If you’ve ever made a financial mistake, congrats, you’re human like the rest of us. That said, you probably know how hard it can be to recover. Even running up a credit card, like I did in my 20s, can be a pain to fix. But I’ve also realized that recognizing why certain money moves are bad helps minimize some regrets.
Over the years, I’ve seen people make these biggest financial mistakes. Also, get my advice on how to handle each one.
Zero Emergency Savings
I know that saving can be low on your to-do list when you’re juggling bills. But having nothing to tap into will hurt you if some unexpected expense arises. You’ll either likely charge it to your credit card, which usually means a lot of interest, or you’ll have to make hard decisions.
Even if it’s only a few hundred dollars to start, an emergency fund can save you some pain. Ideally, you’d eventually save three months’ worth or more of expenses. I decided to go further and save up a year’s worth. Cutting some expenses and automating makes it easier.
No Budget
Many people hate budgeting, and I understand that. But it’s a big mistake. The problem is you won’t know what’s going on with your money. Bills, savings, debts, retirement, and all. Unfortunately, you can easily spend on the wrong things. That’s bad for your goals.
I always recommend making a simple budget or finding an app. It’s quite easy to start: know your monthly income and usual expenses. Budgeting won’t be a one-time thing, though, so adjust it as your expenses and income change.
Unaffordable Housing
I know affordable housing can seem like a dream these days. Ideally, your mortgage or rent plus utilities would cost no more than 30% of your before-tax pay. I don’t live in a big city. Yet I’ve seen rent in my area that is easily half of people’s income.
Still, I recommend spending as little as possible on housing. Maybe you buy a less fancy home. Or you share with roommates. Either way, there’s less strain on your budget. Eventually, you could move into something nicer.
Lifestyle Inflation
Your income got a boost, so you can treat yourself now, right? Many people, including myself, have fallen into this trap of increasing expenses with earnings. I’ve found that it’s hard to correct lifestyle creep if you don’t recognize it quickly. All it takes is a job loss or other setback to get you into trouble.
I don’t think it’s bad to live a little nicer as you get promotions and all. What I do recommend is putting something toward your goals. This also goes back to watching your budget. You need to know which expenses are rising with your income. Consider changes when they do.
Credit Card Misuse
Unlike some experts, I’m not an anti-credit card person. But I must say they encourage overspending. And their average interest rates are above 20%. Before you know it, you’re in financial trouble. Credit card debt isn’t easy for many people to escape, either.
The right usage matters here. I don’t carry a balance unless I’ll pay no interest. I also don’t thoughtlessly charge things I don’t need. Plus, I set up automatic payments. You don’t want to add unaffordable payments or fees to your budget.
Expensive New Cars
When I recently looked at cars locally, I noticed that neither used nor new cars were honestly “affordable.” Buying a new car can especially be a financial mistake, though. It’s scary that the average person pays over $700 per month to finance one. Then you’ve got all the depreciation quickly cutting into the value of your new wheels.
A cheaper used car is worth considering. I don’t regret buying my first car with cash. It was so nice not having a car payment. But I also recommend paying for an inspection. Unexpected repairs aren’t cheap.
Low Credit Score
Unless you’re applying for something, you might not think much of your credit score. The problem is that this number can hurt you in other ways, like your insurance premiums, utility bills, and even job opportunities. At any age, good credit can save you money and make life easier.
First, know your credit score. Capital One shows me mine online. But you can use Credit Karma or check with the credit bureaus. Then take simple steps to improve it. Pay down debt, avoid late payments, and don’t apply for more credit. Your score should improve over time as you do.
Slow Debt Payoff
Maybe you’re making minimum payments on your loans and credit cards. Great, you’re protecting your credit and avoiding fees. But it’s not enough if you hate interest. The same goes for getting those payments out of your budget.
I always encourage paying more toward high-interest debt. That usually means credit cards. But it’s also smart to pay down personal loans and auto loans faster. I like using USA Learning’s Debt Destroyer.
Neglected Retirement Savings
While I’ve made some good progress in the last few years, this is the one I regret most. In my 20s, I wasn’t thinking about saving for retirement. I hate thinking about how much my money could have compounded back then. Basically, the earlier you invest, the longer that money can grow. And you won’t have to stress and rush to catch up later on.
Whether you have a 401(k) or open an IRA for yourself, investing some of each paycheck is smart. I also recommend knowing how much you need to retire. The 4% rule is helpful for this. You’d save 25 times your planned yearly expenses. Vanguard’s retirement calculator is also helpful.
Wrong Investment Strategies
If you’re overly cautious, you might invest in things that offer such a low return that you barely beat inflation. That was me as a beginner. On the other hand, you might lose money to overly risky investments. Then, you’ve got people who invest too much. They’re stuck with little available cash for emergencies.
My advice here is to keep your goals in mind, understand anything you invest in, don’t lean toward either extreme, and consider a financial advisor. The right strategy will come down to factors like when you need the money, how much risk you’re OK with, and how to best diversify.
Not Enough Insurance
I get annoyed sometimes by how much insurance eats up my budget, especially since my premiums seem to go up every time I renew. But I don’t recommend skipping important coverage. You’ll likely end up regretting it when something goes wrong. After all, illnesses, crazy weather, and car wrecks unfortunately happen.
Not having enough insurance can be more expensive in the end. Take a look at what your policies cover. You might need to find affordable new policies or change existing ones. Get multiple quotes to save as well.
Frequently Asked Questions
What are some common financial mistakes for retirees?
Not having enough saved to last through retirement, spending too much, and not revisiting particular investments are common ones. Many retirees also regret when they started to receive Social Security benefits; those early payments will stay small over the years.
How can you avoid running up debt you regret?
I recommend budgeting strictly and avoiding unplanned purchases, which often seem easy to put on your credit card. Plus, an emergency fund is great for unavoidable surprise expenses.
What should you do if you’re living paycheck to paycheck?
Making extra money will help. Maybe work extra hours or try a side gig. Also, review your expenses so you can cut back where you can. I recommend both options.
Is co-signing a big financial mistake?
It’s risky even if you trust the person. If they don’t pay, be prepared to make their payments or have your credit damaged.
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Sources:
- https://www.fidelity.com/viewpoints/personal-finance/millennial-money-mistakes
- https://usaaef.org/budget-savings/savings/save-for-emergencies/how-much-should-i-save-for-emergencies/
- https://dfpi.ca.gov/news/insights/three-steps-to-managing-and-getting-out-of-debt/
- https://www.insurance.ca.gov/01-consumers/105-type/
- https://dfr.oregon.gov/help/outreach-education/Documents/publications/2860-Wise-investing.pdf
- https://finred.usalearning.gov/assets/downloads/FINRED-TaleofTwoChoices-I.pdf
- https://www.myfico.com/credit-education/credit-scores/how-to-build-credit
- https://www.experian.com/blogs/ask-experian/average-car-payment/
- https://archives.hud.gov/local/nv/goodstories/2006-04-06glos.cfm
- https://consumer.ftc.gov/articles/cosigning-loan-faqs
- https://www.fidelity.com/viewpoints/retirement/how-much-do-i-need-to-retire
- https://ofi.la.gov/ofi-docs/SECTopTenFinancialMistakesAfterRetirement.pdf
- https://www.federalreserve.gov/releases/g19/current/
- https://investor.vanguard.com/tools-calculators/retirement-income-calculator
