Money makes the world go ‘round, as the old saying goes, but if you’re not careful with your money, you’ll be the one who gets taken for a ride. Most of us inherently know that we need to watch our wallets and spend our money carefully, but that often works better in theory than in practice. In real life, we spend too much, we don’t pay attention to our bank balances, and we make mistakes.
Of course, some mistakes are worse than others. Small errors in handling your finances may make things kind of tight at the end of the month, but bigger mistakes with your money can cast very long shadows over your entire life. If you want to avoid major financial meltdowns down the road, you need to take action with your money right now. Here are ten financial mistakes that will haunt you forever.
1. Not making a budget.
How much money do you have coming in every month? How much are you spending every month? You probably have a general idea of your income and expenditures, but unless you’re writing these numbers down and making sure you’re not sending out more than you’re taking in, you can’t know for sure. Making a budget every month can help to keep you on track financially, and it also forces you to be honest with yourself about what you’re really spending. For example, you may think you spend only $400 a month on food, but you may be forgetting that pizza you order for lunch every Thursday, or those Saturday nights out for dinner with your friends. Writing this all out on paper shows you exactly where your money is going, and it can help you pull in the reins on your spending.
2. Paying too much for your rent or mortgage.
Your housing is probably your largest cost every month, but it doesn’t have to be so large that it breaks you financially. How much you actually should spend differs depending on the person you ask; a longstanding rule of thumb is 30% of your monthly income before taxes, while financial guru Dave Ramsey simplifies things by recommending that your rent or mortgage be no more than 25% of your monthly take-home pay. Whichever one of these two pieces of advice you take, one thing is clear: spending too much of your income on rent or mortgage can leave you with significantly less money with which to buy food, cover your bills, pay for things like transportation and clothing, and just live. Add up the money you spend on high housing costs over ten, 20, or 30 years, and you’ve got a huge chunk of change that could be put to better use.
3. Living beyond your means.
It’s simple, really: don’t buy stuff you can’t afford. Yes, vacations are fun, boats are awesome, that Italian leather jacket looks amazing on you, and regular dinners at the upscale omakase sushi joint are delicious, but if you can’t afford them, there’s nothing fun, awesome, amazing, or delicious about them. Overspend, and you’ll soon find yourself in debt and with no savings. It’s hard to have a successful financial future when you’re in a hole. Live within your means, and you’ll minimize long term financial regrets.
4. Borrowing from your 401k plan.
First of all, if you’re borrowing money from your 401k retirement plan, it’s a good indication that you’re spending too much to begin with. But even if that’s not the case, you still shouldn’t take money out of that plan until you’re fully retired. That’s because you’ll pay income taxes on whatever you take out, plus you’ll get hit with a 10% penalty on top of that. It works out to a very expensive loan, and in the end, you’re only shortchanging yourself, since you’re taking away from your retirement cash.
5. Not taking advantage of compound interest.
When you invest in stocks or mutual funds, any money you make is interest. Reinvest that interest, and you can earn interest on it — what’s known in the financial world as compound interest. Put off investing or avoid it altogether, and you lose this incredibly powerful wealth building tool. To avoid being haunted by this financial mistake, start investing early. Even if you have just a little bit to invest, you’ll be able to take advantage of compound interest, which will make your investment grow much more than it would just sitting in a bank account.
6. Not investing in yourself.
Building your income often requires more education. Sure, it’s an expense, but it’s also an investment in yourself. Think about it: you may be young and working a minimum wage job, but you’re probably not making much money. To make more, you’ll need to get a better paying job, and that will most likely require some kind of degree or certification. Sure, it’s an upfront expenditure, but it pays off in the long run; according to a recent study from Georgetown University, an individual with a college degree will earn 84% more than an individual with just a high school diploma — and that’s over the course of a lifetime. Simply put, if you want to make more money, you’ll need to hit the books. “An investment in knowledge,” said Benjamin Franklin, “pays the best interest.
7. Paying too much for your education.
While improving your education is worthwhile, what isn’t wise is spending too much for it. That private college may look like a wonderful and intellectually stimulating place, but at a cost that’s several times that of a public university, it’s not a wise choice from a financial standpoint. Shop around for education options before you settle on a school. You’ll get a comparable degree that will increase your earnings just as much as one from an expensive school, and you won’t get buried in debt or overpay for it.
8. Not staying up to date on your student loans.
If you take out student loans to finance your education, you absolutely have to pay them back. Even if you file for bankruptcy, you can’t eliminate student loans from your life until you pay them off in full. Just one late payment will cost you in late fees, plus could tarnish your credit rating for seven years. Default on your student loans, and you face a laundry list of punishments, like losing eligibility for deferment, the entire balance being called due, and referral to a collection agency.
9. Buying a timeshare.
We’re not saying you shouldn’t take vacations, but we are saying that buying into a timeshare is a very poor investment. For starters, you’ll be handicapping yourself with payments for a long time, typically at least a few years. And then, you may not even be able to use it the week you want, as there are other owners who also want to get in. All in the extremely low market resale value of timeshares, and you’re just better off getting a hotel room or renting accommodations at your vacation destinations.
10. Not saving for retirement.
Eventually, you’re going to want to retire, but how will you pay for things like bills, food, and more if you no longer have an income from your job? Planning and saving for retirement should happen sooner rather than later, and it’s really never too early to start. Look into Roth IRAs, find out if your employer offers matched contributions to a retirement fund, and consider finding a job that offers a pension. A financial advisor can certainly help you with the details of retirement planning, but you can do it on your own as well. They main thing is to start putting money away for retirement now so you’re not haunted by your lack of action years down the road.