If you pay your credit card bills on time, have a decent credit score, and are able to resist signing up for a department store credit card, you probably think you’re in good financial shape. And maybe you are.
But even people who are healthy financially make some common money mistakes, and they add up over time. Here are the ones we think you’ll regret the most in 10 years, and how to avoid them…
1. Spending more than you earn
The easiest mistake to make on this list can also be the easiest one to fix. That doesn’t mean it’s easy: You can’t avoid watching your checking account because you’re scared of what you’ll see. You also have to do math and deny yourself some things you want, or work harder than other people to get them.
How to avoid it: See No. 2.
2. Not sticking to a budget
To stick to a budget, first you have to make one. Then, you have to be diligent about where your money goes. Not sure where to draw the line? Use the 50/20/30 guideline, where:
- 50 percent of your income should go to your fixed expenses, like rent or a mortgage, transportation, and utilities
- 20 percent goes to financial priorities, in this order: debt, emergency savings, and retirement
- 30 percent should go to flexible spending, like groceries, eating out, entertainment, and gifts
They try to break things into categories like Food and Dining, Travel, and Miscellaneous so you can literally see where your money is going, but may not get everything right — and if they don’t, you can’t be sure which categories are going over budget. But it beats pen and paper by a long shot.
3. Becoming financially dependent on credit cards
Placing too much reliance on credit cards — a form of “revolving debt” — can cause serious problems for your financial health, including No. 1 above.
There are two reasons for that: You can’t always predict how much of your income will be eaten up by a credit card bill at the end of the month, and making the minimum payments on your debt is an easy way to rationalize that you’re getting out of debt. That can lead to higher interest, an inability to make payments, and damage to your credit.
How to avoid it: Don’t make excuses for yourself, and don’t procrastinate. Saying things like, “My credit card debt isn’t as bad as my brother-in-law’s” or “I’ll just make the minimum payment this month; next month I’ll pay my balance off” are really good ways to keep yourself in an ever-increasing cycle of debt.
4. Not doing the math before taking out student loans
If you’re planning on funding higher education with student loans, you should have a plan to pay it back.
That doesn’t mean working all during college and saving what you can, though that helps. It means, before attaching your signature to anything, take the time to read the fine print and attend a meeting with a financial aid counselor. Don’t blow through the entrance counseling usually required to take out a loan.
How to avoid it: Fill out the Free Application for Federal Student Aid if you’re a student or a parent of a student to find out if you qualify for any grants, which don’t have to be repaid. Seek out every scholarship opportunity you can. If that’s not enough, then start shopping around for, and reading up on, student loans.
Go for subsidized federal loans first, then if needed unsubsidized ones, and lastly, private loans. The difference is this: Federal loans usually have lower interest rates, and subsidized ones don’t charge you interest while you’re in school. Federal loans also come with more options for repayment, including income-based repayment plans.
Bottom line: Student loans are a tricky business, so make sure to research everything and ask questions if you aren’t sure what’s going on.
5. Failing to make an emergency fund
Learn to expect the unexpected. Getting sick, having a car break down, or needing a home repaired are all expenses that you are pretty much guaranteed to have within the next ten years. That’s why an emergency fund is so important — not just to have for a “rainy day,” but to use in case you or your spouse lose your job or there’s a death in the family.
How to avoid it: If you’re budgeting carefully, you’ll find at least a few dollars to tuck away from every paycheck. Make it a goal to save a month’s worth of expenses. Then two, then three. It’ll sting at first, but make your life less stressful in the long run.
6. Buying new when you can buy it used
Cars, yachts, RVs, electronics — these are just a few of the large purchases that lose value quickly. A new car loses thousands of dollars in value before you can even get it in the garage. Sure, new should mean reliable. But it’s a really expensive shortcut, especially if you take out a car loan.
How to avoid it: Most things lose value over time, but usually the rate is fastest when they’re new. Waiting a year is usually enough time to get long-lasting value — especially if a new version has come out since then.
7. Not saving for retirement while you can
Even if you’ve spent your whole working life without saving for retirement, it’s not too late to start. Don’t make the mistake of believing that Social Security will pay you enough to retire comfortably, or that Medicare will cover all of your medical bills.
How to avoid it: Many employers offer a matching 401(k) plan where your company makes contributions to your retirement when you do. Take advantage of this as early as possible and aim to get the full match. If you don’t, you’re basically throwing away free money. A MyRA is an easy way to learn about retirement saving, and you can start one with just $25.
8. Spending too much on too little
The little things — coffee, cigarettes, eating out— really do add up. Daily trips to Starbucks will cost you almost $766 a year, and that’s just for black coffee. Americans go out for lunch on an average of two times a week, which adds up to nearly $1,000 a year.
How to avoid it: Brew your own coffee, pack your own lunch, and find free ways to give yourself a little pick-me-up. Like cat .GIFs. The temptation will be strong at first, but once you break the habit it’s easier. And the savings are immediate — every single time you resist, you save a few bucks.
9. Attempting to buy happiness
Speaking of free pick-me-ups…
As Notorious B.I.G. said, “Mo money, mo problems.” It’s true that money can buy you things and sometimes, things can make you happy. It’s also true that an eternal quest for possessions can make you seriously unhappy. According to one study by the Worldwatch Institute, an advocacy group for “a sustainable world that meets human needs”…
The failure of additional wealth and consumption to help people have satisfying lives may be the most eloquent argument for reevaluating our current approach to consumption.
How to avoid it: Usually it’s the things you’ve wanted for a long time that give lasting happiness, because you appreciate them more than impulse buys. But as cliche as it sounds, the best things in life really are free. And if you concentrate on surrounding yourself with positive influences, rather than getting caught up in the consumerist rat race, you’ll live happier and longer.
10. Trying to change everything at once
Financial fitness is a lot like physical fitness — you can’t expect to bench your body weight on the first trip to the gym, or run a marathon when you’ve sat on the couch four hours a day for the past year. Likewise, if you’re in debt and have bad habits, it’s going to take time to start thinking about money the right way.
Let’s say you read everything in this article and were immediately motivated to cut all extra spending, contribute to a 401(k), and start an emergency fund. No more stupid money mistakes. Then you see a sharp decrease in spending money, and instead of adjusting your lifestyle, which would be hard, you will probably stop your 401(k) and emergency savings contributions, which is easy.
How to avoid it: Start small, and start slow. Think of saving like losing weight: there is no lose-weight-quick or get-rich-quick solution that will last.