The 27 Worst Money Mistakes and How You Can Avoid Them
We all make mistakes, it’s human nature. But some basic financial pitfalls can be avoided with just a little foresight. To shine a light on some of the most common missteps, I’ve created this list of the worst money mistakes you can make, along with recommendations for what to do instead.
1. Not building an emergency fund
Why it's a mistake: Because bad stuff happens. At some point, your car will break down. Or you’ll lose your job. Or both. And when those things happen, you'll have enough to worry about without adding money problems to the list. That's what makes having a sufficiently stocked emergency fund a pillar of personal finance.
What to do instead: Open a savings account and fund it with $1000. Once you are out of debt, increase it to cover up to six months of expenses.
2. Not saving for upcoming expenses
Why it's a mistake: You can’t plan for all expenses, but there are a ton of them you can. Why not start saving for your vacation months before, so you don’t have to use a credit card? How awesome would be to come home relaxed...and stay relaxed.
What to do instead: Plan your big, foreseeable expenses 6-12 months in advance. Some banks actually allow you to create multiple savings accounts, which you can then designate for things like vacation, Christmas gifts, new tires, etc.
3. Waiting too long to start investing
Why it’s a mistake: Investing is a long-term strategy. A huge factor in the growth of your portfolio is time. The longer your investments have to compound, the greater the results will be in the future.
What to do instead: Start now, even if it’s only $500. An easy way to start is by opening an account with a robo-advisor like Wealthfront. Just deposit your funds, set it, and forget it.
4. Investing in speculative assets (e.g. gold, bitcoin)
Why it’s a mistake: If an investment seems a bit too good to be true, it probably is. Frequently, these types of investments go up in price very dramatically due to market interest, but then crash just as dramatically when the market figures out how unsustainable the prices are.
What to do instead: Don’t try to get rich quick; get rich intentionally. Invest in an S&P 500 Index Fund. You’ll get much less volatility with a lengthy history of positive returns.
5. Trying to time the market
Why it’s a mistake: One mistake folks make is actively trying to time the market by buying low and selling high. That’s great in theory, but the problem is that due to market volatility, it's very difficult to tell what's "high" and what's "low." There are folks who make a living doing this way, but they aren't us. Let’s leave this to the experts.
What to do instead: Set it and forget it. Invest your money using the buy and hold strategy, which means exactly what it says. Buy an investment and hold it for years. That way market fluctuations are irrelevant, since they will likely smooth out over time.
6. Not planning for retirement
Why it’s a mistake: Because you can’t stop time. You will get older and you will want to work less or not at all.
What to do instead: Create a retirement strategy. Start by identifying when you’d like to retire and how much money you’ll need to live off. Then work backwards to figure out how much you’ll need to invest monthly to hit your goal. If you're already investing for retirement, make sure you are watching how your investments are allocated and how much you are paying in fees. If not, overtime this can cost you big. You can use a service like Blooom to perform a free 401k analysis that will tell you exactly that.
7. Not taking the match
Why it’s a mistake: Because It’s free money! If your company matches 401(k) contributions, make sure you’re taking advantage of it. The only possible reason not to do this is if you have the ability to be debt free in 6-12 months by not contributing. But even then, it’s a hard call.
What to do instead: Contribute up to the match. If you’re debt-free, contribute even more!
8. Borrowing from your 401(k)
Why it’s a mistake: Besides the fact that you are losing out on the compounding growth, these loans are also paid back with after-tax dollars. Oh, and if you leave the company, they become due within a short period of time.
What to do instead: Save up for the expense, or don’t buy it. If it’s an emergency, use your emergency fund. If you don’t have an emergency fund, stop contributing to your retirement until you do, or you’ll just be stealing from one pocket to pay the other.
9. Using a reverse mortgage for retirement
Why it’s a mistake: These products tend to have very high fees, and are difficult to get out of once you are in them. You also can’t sell the home while under this agreement.
What to do instead: Begin saving for your retirement now. Your home should be your home, not your retirement.
10. Not discussing Your finances before marriage
Why it’s a mistake: Marriage is a big commitment and one you should go into with total transparency. Talking to your fiancé about your student loan debt may seem difficult now, but it will be way easier than waiting until you go to buy a home together and find out you can’t qualify for a mortgage.
What to do instead: Sit down on a quiet evening and a open discussion about your finances. It may seem stressful, but keeping it hidden is much worse.
11. Overspending on the wedding
Why it’s a mistake: Getting married is a beautiful thing, and your wedding day should be special. But that doesn’t mean you have to go broke. Financial stress is commonly cited as one of the leading contributors to divorce. Why start yourself off at a disadvantage?
What to do instead: Be smart about how you start your life with your significant other. Make sure it’s a magical moment, but let photos capture the memories, not your credit card statement.
12. Putting the burden on one partner
Why it’s a mistake: Because finances are a two-way street when you’re married. Making one person carry the stress of managing money is not healthy.
What to do instead: Talk about your monthly bills and expenses. Create a shared system for managing your money. If you can’t do that without fighting, get help and coaching.
13. Being married with separate accounts
Why it’s a mistake: Separate accounts are inefficient when it comes to optimizing your finances. It’s just another set of bank statements and balances to deal with. It can also breed distrust between partners when there doesn’t need to be.
What to do instead: Set up shared checking and savings accounts. If you still crave a little autonomy, you and your spouse can each set up a secondary checking account that gets funded from the primary and is used for smaller purchases or gifts.
14. Carrying a balance to improve your credit score
Why it’s a mistake: No. Just…no. This is one of the most annoying myths about personal finance. Carrying a balance won’t improve your credit score—it just means that you’ll get charged interest on your purchases.
What to do instead: Now, credit card utilization does have some impact on your score because lenders want to see that you can use credit responsibly. That said revolving a balance doesn't help, so you should make your payments on time and in full each month.
Then make sure you keep a tabs on what's in your credit report, as there may be something else dragging down your scores. Luckily there are a bunch of great credit monitoring tools available that make this super easy...and FREE!
15. Lending money to family
Why it’s a mistake: Money can drive a wedge between family members. Who wants to ruin a long-term relationship over a few thousand dollars.
What to do instead: If you want to help a family member, gift them the money, don’t loan it. Removing the expectation of getting it back removes the animosity created when they don’t.
16. Sharing finances when you aren’t legally married
Why it’s a mistake: There are no legal statutes that cover money shared between boyfriends and girlfriends.
What to do instead: Maintain separate accounts, bills, and expenses (when reasonable) unless you’re married. This doesn’t mean you can’t share rent, it just means you shouldn’t buy a house together.
17. Not creating a will
Why it’s a mistake: If you have family that is dependent on you, then you should have a will. It doesn't have to be complicated, and you don't have to have a lot money to benefit from having one. The main benefit is that there is a clear set of instructions from you on how your family should be taken care of when you pass.
What to do instead: Simply put: create a will. Death is difficult enough as it. You love your family. Don't let your passing be even harder on them.
18. Not having life insurance
Why it’s a mistake: The point of having life insurance is to replace your income in case of you die, so that your dependents will be taken care of. Having it makes a difficult time just a little easier for those left behind.
What to do instead: Carry term life insurance. A good rule of thumb is to carry about 8-10x your annual income.
19. Assuming you’ll make more money in the future than you do now
Why it’s a mistake: The future is uncertain. The job market could change, your interests could evolve, or health problems could impact your ability to earn. Nothing stays the same forever.
What to do instead: Plan for the future, but be conservative in what you expect to earn. Don’t assume you’ll get a raise every year, or big bonuses. If those things do come your way, just treat them like happy accidents.
20. Not setting goals
Why it’s a mistake: It’s hard to figure out a strategy for your investments (or anything else, really) if you don’t have a goal in mind.
What to do instead: Start creating S.M.A.R.T. goals. You’ll be glad you did.
21. Buying a new car
Why it’s a mistake: New cars lose over 10% of their value the moment they leave the lot, and nearly 50% of their value in the first 3 years.
What to do instead: Buy a car that’s 2-3 years old. It’ll still have low miles and most the new bells and whistles, but cost half as much.
22. Buying More Than you Can Afford
Why it’s a mistake: Whether it’s a house or a car, the last thing you want is a payment that’s out of whack with your income. That’s where the term “house poor” comes from.
What to do instead: For a house, try to keep the payments within 25% of your take-home pay. For cars, try to purchase with cash since it’s a depreciating asset.
23. Leasing a car
Why it’s a Mistake: From a personal finance perspective, leasing is never a good idea. The dealership makes a ton on leases, and at the end of the day you end up covering the vehicles depreciation. And to top it off...you don’t own it!
What to do instead: Buy a vehicle with cash.
24. Remaining in debt
Why it’s a mistake: Because you’re throwing away money every month to service the debt, which in turn reduces your overall cash flow. Interest charges and fees add up. Before you know it, you’ll be spending your whole paycheck just keeping up with minimum payments.
What to do instead: Pay off your debt! Fast!
25. Carrying a balance on your credit card
Why it’s a mistake: Credit cards can be a valuable tool and can give you the ability to earn rewards on everyday purchases. That said, they can also be very dangerous if you don’t use them properly. By carrying the balance just one time, you can potentially wipe out a full year’s worth of rewards value by the interest you are charged.
What to do instead: Pay off your entire statement balance each month.
26. Not doing the math on membership fees
Why it’s a mistake: Often when we sign up for a subscription-based service or product, we rationalize the expense based on the relatively small monthly fee, and don’t stop to consider the full cost over the course of the year.
What to do instead: Before you sign up, multiply the monthly fee by 12. This gives you a better sense of what you’re actually spending (e.g., $50 a month vs. $600 a year).
27. Buying a timeshare
Why it’s a mistake: Because they are expensive, confusing, and nearly impossible to get out of.
What to do instead: Try Airbnb. Way more options and a lot less money.