It’s been nearly ten years since I started Bargaineering and in those ten years, I’ve talked about and written about a lot of personal finance. To be honest, I’m amazed I’ve been doing it for this long and you might be amazed that I’ve had no formal personal finance education. I’m not a certified anything. I’ve taken no tests. I’m just a regular person like you and I make mistakes just like you.
That said, there is a class of “common money mistakes” that I see a lot and as a result of seeing them all the time, and their negative impact, I’ve largely been lucky to avoid them. A lot of these mistakes fall into the category of “mistakes because you ignore them.” By not paying attention, you commit the mistake but it doesn’t really hurt you immediately. It just impedes your growth or impacts your future in a way that’s nearly invisible. They are the most dangerous types of mistakes because by the time you realize you’ve made them, the impact has already taken hold.
Today, we’ll address the ten common mistakes, why they are secretly detrimental, and what you can do to avoid them. This is part one.
10. Carrying Credit Card Debt
When the average American family has tens of thousands of dollars in credit card debt , I would be hard pressed not to hit this mistake early in the list. The problem with credit card debt is that it’s not as painful as it really is. The minimum payments are so small, relative to the larger debt, that we feel like we’re getting a deal. In reality, you’re paying 20% in interest!
How do you avoid this? You need to understand why you’re in debt. If you’re in debt because you don’t understand that the minimum payments are a parasite on your financial growth – start doing some math. Paying the minimums means you’ll be paying off that debt for years. If you’re in debt because you spend more than you earn, it’s about time you start budgeting and understanding that what you spend today will cost you a lot more than the sticker price because of interest.
9. No Emergency Fund
This particular mistake might sound like a broken record nowadays but an emergency fund is absolutely crucial, especially if your general savings is low. No one likes to think about potential emergencies, let alone plan for them. It’s uncomfortable thinking about unexpected medical bills or your car breaking down or a tree falling through your roof. Or you might get fired or laid off. In some cases, you need those emergency funds to front the money on repairs before insurance kicks in. Sometimes there is no backup insurance and those emergency funds are the only way you get things done.
The dangerous part about not having an emergency fund is that if you do need money, you start tapping sources you shouldn’t. You borrow from a credit card you can’t pay back immediately. You raid your retirement accounts. You ask your friends and family (it’s never comfortable to owe money to family and friends). So start saving 6-12 months of expenses into a savings account to prevent yourself from panicking and going to a loan shark!
8. Not Monitoring Credit Score & Reports
You probably don’t think about your credit score or your credit reports on a daily basis (don’t worry, that’s a good thing). You probably don’t even think about it monthly (that’s also perfectly normal). You should, however, make sure you monitor your credit reports at least quarterly or semi-annually for errors and omissions. Your credit score has become one of the most important numbers in your adult life and it’s something that, if there is a problem, takes a long time to resolve. You are entitled to a free copy of your credit report from each of the three bureaus (Experian, Equifax, and TransUnion) every year. You should get your copy from one bureau every four months and review it for accuracy.
A lot of people don’t do this until they feel like they need to, such as right before getting a loan for a car or a mortgage for a house. The problem with waiting until then is that if you do find a mistake, it may take several months to fix it. You write a letter to the bureau, they reply and ask for proof, you fax in proof, it’s probably not perfect so they ask for more, they have to ask the reporting company and then finally maybe they fix it. If you want to buy a house and close within a month or two, fixing a credit report is the last thing you want to hold up the deal.
Keep an active watch on your reports and you won’t be in a panicked rush later on.
7. Not Saving For Retirement
For many people, retirement is such a long time away. When you’re in your twenties, you’re not thinking about retirement in your sixties. You aren’t even thinking about your thirties. You’re thinking about what’s going on this weekend. The problem with not saving for retirement is that you lose all this time. When most people think about their retirement and delaying it a year, they think they’re delaying Year 1. If you start next year, that’s OK because it’s just one year.
Wrong. You’ve actually chopped one year off the end. The last year is the most valuable year because the last year is when you’ve accrued thirty-plus years of compound growth.
If you have a 401(k) plan, make sure you contribute the minimum. If your company offers a match, make sure you’re getting all that free money. Then start thinking about a Roth IRA and contributing more.
6. Using The Wrong Tools
So many times we try to solve our problems with the tools we already have. In other areas, this is called ingenuity. When it comes to money, it’s often a mistake.
A prime example of using the wrong tools has to do with your 401(k) and buying your first home. I’m at the age where I, along with many of my friends, have bought their first “starter” homes. Several of us have moved onto our “forever” homes. One of the discussions that always comes up is whether you should borrow from your 401(k) for a down payment, since it’s one of the few non-hardship reasons you can borrow from your retirement. After analyzing all the trade-offs and the math, the real problem I have with borrowing from your 401(k) is that it was never designed for that. You’re using a flathead screwdriver when you should be using a pry tool.
Use your various accounts for the reasons you intended. If you have an emergency fund, don’t invest it, put it in a safe place so you can tap it whenever you have an emergency (and you will).
Part two tomorrow!
(Credit: StockMonkeys.com )