The day in which everyone wants to be Irish, St. Patrick’s Day, is quickly approaching (March 17th in case you need a reminder). The leprechaun in me wishes to tell you that looking for a pot of gold at the end of the rainbow is not the best way to earn your riches. Instead of searching for a four-leaf clover to obtain good luck, you are better off taking the time to create a plan to achieve your financial goals. Discipline is needed to stick to your financial plan and avoid these five money mistakes.
There are an endless number of mistakes one can make with money. For today, however, may I share five of the biggest financial mistakes I have seen in my many years advising a diverse group of clients?Have you ever heard someone say, “Experience is the best teacher?” May I make one slight change to that statement? Experience isn’t always the best teacher. Someone else’s experience is! If we can learn from other peoples’ mistakes, we can save ourselves a lot of grief … “Imagine That™!”
Mistake #1: Living Paycheck-to-Paycheck
To start with, Americans are simply not saving enough! According to a 2017 CareerBuilder survey, 78% of Americans live paycheck-to-paycheck to make ends meet. In case you think this only applies to those in a lower-wage position, 9% of workers who earn over $100,000 or more are in the same boat.
To see a current day example, look back to the stories coming from the recent government shutdown. During the closure, the media “treated” us to a healthy dose of stories about various federal employees who were running out of money after missing just one or two paychecks. And these folks were guaranteed back pay and offered plenty of assistance from banks and credit unions – and yet still were in trouble!
This is not an attempt to minimize the frustration many of them experienced, but can you imagine what might happen during an extended period of unemployment?
Here is what I recommend:
Don’t wait to start socking money away. Pay yourself by stashing away funds after each pay period. Ideally, you should keep three to six months of emergency funds in a money market or passbook savings where it is kept liquid. The rate of return does not matter. You have a broom in your closet, and you don’t care what rate of return you have obtained … you just have it there for when you need it. It is the same idea with having cash available for emergencies or opportunities … you don’t care about the amount of return you obtain. Further, having a line of credit is not the same thing. We’re talking cash! Having a financial house in disorder is among the leading causes of stress. Adequate savings will mitigate the emotional and mental burdens and give you a whole lot better night’s rest.
Mistake #2: Putting Off Saving for Retirement
I have a friend who is in his late 40s. He first began saving money in his mid-20s buying a small rental house. Starting with that and a 25-year Navy career, he was able to retire in his mid-40s. He is frugal, has never married or had any kids … all of which helps! The point is, he was able to retire at an age when most are deeply in debt and working long hours. Because “Paddy” had a plan, began early and kept saving regularly over many years, he was able to step away from a 9-5 job, and today lives life on his own terms.
Here’s what I recommend:
We all know why saving for retirement earlier is better – it’s the magic of compounding. For example, if someone age 25 began setting aside $286/month and earning normal stock market returns – they would have $1 million accumulated by age 65, ignoring taxes on earnings. If someone waited just ten years and then started saving the $286/month beginning age 35, by age 65 they would only have $427,000 – less than half. In fact, … even waiting just one year before beginning to set aside the $286/month costs over $80,000 in lost accumulation in the last year. $80,000! By just waiting one year … Those deposits made in your 20s and 30s will have a lifetime to grow. Don’t waste the chance to increase your savings now. You’ll never get it back. Begin saving now!
Mistake #3: Not Knowing Where Your Money Goes Each Month
Without a spending plan in place which tracks expenditures, you may wonder why there is always more month at the end of your money, and not more money at the end of your month.
One of my closest friends from college can tell you how much he spent on gasoline in March 2001. That may sound extreme, but there are various guidelines you may use when setting up a plan.
Here is what I recommend:
Focus on the essentials – rent, mortgage, and utilities. Leave room for your financial goals – repaying debts, retirement, emergency funds. And have some fun by budgeting for lifestyle choices – recreation, hobbies, vacation, and so forth.
Mistake #4: Amassing Credit Card and Personal Debt
Credit cards are a fantastic convenience and most pay some type of reward. But don’t place yourself in bondage to monthly payments. Pay them off monthly or you will suffer from steep interest charges.
Here’s what I recommend:
If you feel like you’re buried under a mountain of credit card debt, an auto payment, student loans, or personal debt, you’ll need a plan of attack. Let’s talk. It will be the best financial decision you have ever made. Just knowing there’s a roadmap to debt-free living will be liberating. One rather “radical” thought is to stop using your credit cards and start paying cash for groceries, eating out or other places where you would normally use your credit card. Studies have shown that an individual will spend roughly 14% more when using a credit card than if they were using cash! Credit cards (or debit cards) have no “ouch factor.” Paying cash does. So, pick one area of spending where you can pay for it with cash (and not just movie night!) to start curbing your expenditures in that area. Remember to keep track, though, for your budget!
Mistake #5: Racking Up Luxury Purchases
That new car sure looks great, is fast, the ride is exceedingly quiet, and it has all the latest gadgets. But the new car smell quickly wears off. The payments, however, won’t. When looking for a new vehicle or other luxury purchase, what you don’t know can hurt you.
Here is what I recommend:
Ask questions before you make a large-item purchase. If it is a vehicle you are looking at, ask: What is the gas mileage? Does it require an expensive grade of gasoline? What will it cost to insure? And what will the annual license renewal run?
And, it is more than just a big car payment that has Americans saddled with debt. In addition to spending money on a large-item purchase, such as a car, an excessive amount gets spent on jewelry, clothing, eating out, vacations, mortgages, etc. All this adds up. It means you are sacrificing comfortably financial tomorrows for excessive spending today. You need to look beyond the acquisition of various “wants” to answer the deeper questions reflecting actual cost of ownership over time and its impact upon your budget. This will keep you focused and help you sidestep the surprises which could crowd out your hobbies and financial goals.
Conclusion: Avoid These Five Money Mistakes and Reduce Your Overall Stress
If you are unsure how you might get started, we can help you develop a spending plan that will start getting your financial house in order. If you have any questions on this, and especially how to plan today for financially exciting tomorrows, please call or email your questions and concerns.
While stress-free living is hard to come by in our busy society, avoiding these five money mistakes will drastically reduce your overall stress. Hopefully, you will not have to learn the hard lesson by experiencing any of these money mistakes personally. Instead, you will have learned from other people’s mistakes. You may even celebrate this newfound knowledge by drinking a pint or two of beer on St. Patrick’s Day. Easing your financial worries brings peace of mind and sounder financial tomorrows
Written by R. J. Kelly – March 2019