There are a lot of different aspects of personal finance, so it would make sense that you wouldn’t have mastered all of them. Even if you’re comfortable with things like mortgages and stocks, there are still some things to learn. Because of that, I’d like to look at some common mistakes I see people make with their money. Keep reading so that you don’t follow their footsteps.
Five Common Personal Finance Mistakes
Not Using the Company Retirement Plan – Does your job offer a 401k or 403b plan? What about profit sharing or a SEP IRA? All of these plans help reduce how much you pay in taxes while putting away retirement funds. Sadly, not many people are contributing enough to these plans, if they contribute anything at all. They might find the paperwork confusing or not worth the time; who wants to flip through a dozen pages of finance jargon?
Likewise, a lot of companies don’t make enough of an effort to educate their employees about these plans. That leads to poor decision making with retirement plans. This could mean not enough diversity or not contributing an ideal amount. You will want to gather what information you can and sit down with someone who can help you make sense of it.
Not Looking At Your Credit Score – Have you ever been denied a loan only to learn that your
credit score isn’t as high as you thought? This can be avoided by being responsible with your money and always keeping up to date with your credit score. Most scores range from 400 to 850, with a great score being above 700. These scores are useful when you need to buy a house or car, or open a credit card.
A good score can get you a lower interest rate, meaning you pay less to borrow money. You don’t want to check your score right before needing it and finding out how much time it takes to sift through the information and possibly dispute some of that info.
So how do you learn the number? There are websites that offer free credit reports, such as www.freecreditreport.com. You can also sign up for a credit monitoring service, which will notify you when your score changes so that you can make sure you’re never caught by surprise.
Not Staying on Budget – You always want to know where your money is going. You might be surprised if you look at your spending. I’ve known people who spend half their income on eating out and some who spend two-thirds on rent. These should absolutely be avoided.
David Bach, a famous financial advisor, came up with the concept of the “latte-factor”, which refers to buying a $5 latte every day. It’s a great way to think about how little amounts of money are wasted every day.
Getting rid of those small daily habits can make a big difference.
Track your expenses for a few days and see where your money is going. Try to put “paying yourself” into the equation.
Not Saving Money – There are all kinds of studies that talk about the benefit of saving in your 20s or 30s as opposed to your 40s or 50s, because time is the most important factor when it comes to saving for long-term goals.
If you start a new job in your 20s, don’t ignore the company retirement plan because you want to spend money with your friends. Small sums add up when you consider compounding interest, dividends, and capital gains. Start early and watch it build.
Trying to Beat the Market – This is learned from experience. Do you think you can earn more than others by picking stocks? Trying to beat the market is an exciting idea, but not a realistic one. Many people let their emotions dictate their stock picks at market peaks and then sell those picks when the market goes down. That’s why so many people end up losing money. They could have instead used that time to do something like build a business or be with their families.
If you have any questions about personal finance and other related topics, don’t hesitate to get in touch with me and let me know what I can do to help you today.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. David Bach is not affiliated with LPL Financial.