None of us are perfect, and there are few if any who will make the best choice when it comes to their money every single time. At the very least, you should be aware and avoid some of the most common, and most costly, money mistakes.
To avoid drowning in debt, or suffering another financial pitfall, don’t make these three huge money mistakes.
Money Mistake #1: You live beyond your means
Your old college friend just bought the most impressive car with all the latest high-tech features, or perhaps your neighbor just got a shiny, new boat. Your eyes light up, thinking about what you could have, or even should have, after all, you’ve worked hard. You deserve it, right? But what you don’t see behind that new car or boat, is the huge monthly payment. In fact, there’s a good chance those people that seem to have everything, are actually living a life of disaster.
You deserve it, right? But what you don’t see behind that new car or boat, is the huge monthly payment. In fact, there’s a good chance those people that seem to have everything, are actually living a life of disaster.
Don’t fall into the trap of thinking you need to fit in with your friends or neighbors. It doesn’t matter what you think you deserve, if you don’t have the money, that debt can eat your financial future away. Put your ego aside, and don’t buy what you can’t afford. If you already have, get rid of it now. Peace of mind is something that endures, new objects quickly become old ones.
Bottom line? If you can’t make a payment without also putting away at least 10% in your savings, and being able to comfortably pay your bills, you can’t afford it.
Money Mistake #2: You have no emergency fund
One of the biggest money mistakes people make is not learning to save. An emergency fund is a must, and most experts recommend having at least three to six months of living expenses saved up. The reality is, many American families today are double income, and they spend every dime that comes in. What happens if one person becomes seriously ill, or hurt, or if one is laid off and unable to find work even after unemployment runs out? It’s a scenario that’s happened, again and again, leaving families in financial ruin.
What happens if one person becomes seriously ill, or hurt, or if one is laid off and unable to find work even after unemployment runs out? It’s a scenario that’s happened, again and again, leaving families in financial ruin.
CNN reports that “half of Americans are saving next to nothing.” Only a quarter save 10% or more, and 18% save nothing at all. Greg McBride, chief financial analyst for Bankrate.com, says “Saving needs to happen before you pick up your paycheck.”
Living and spending like you’re always going to be making the most money you’ve ever had is a bad idea – it’s a must to establish a savings account that is left untouched unless it’s an emergency.
Money Mistake #3: You cash out your 401k
Say you’re leaving your job, and you need to decide what to do with your 401k. You don’t want to leave the money behind, of course, but like many Americans, you don’t have much of a financial education and don’t know how to roll it over and invest it yourself. Or, perhaps, you’ve been living beyond your means and have maxed out your credit cards.
In either scenario, you might think that cashing out that retirement fund is a great idea. But cashing it out is a sure way to destroy future financial security. Unless it’s an absolute emergency, you should never, ever cash out that retirement fund. If you need the money, find a way to make more as a solution to your cash flow problems.
According to Fidelity Investments, data shows that one in three 401k investors has cashed out of his or her plan before reaching the age of 59 ½, often when changing jobs. Doing so incurs a 10% penalty, not to mention that it can be difficult if not impossible to replace those savings for times you really need it, which means the consequences can be devastating.