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The 27 Worst Money Mistakes and How You Can Avoid Them

The 27 Worst Money Mistakes and How You Can Avoid Them

We all make mistakes, it’s human nature. But when it comes to money, there are some basic mistakes that can stop you from reaching your financial goals in the long run. Most of these basic financial pitfalls can be avoided with just a little foresight.

To shine a light on some of the most common missteps, we’ve created this list of common money mistakes you can make, along with recommendations on how to avoid making them.

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 unexpected expenses, like medical bills, pop up, you need to have enough money to get through them. That’s what makes having a sufficiently stocked emergency fund a pillar of personal finance.

How to avoid this: Open a rainy day fund savings account and fund it with $1,000. If you can’t put $1,000 your account right away, set aside money with every paycheck until you reach $1,000.

If you’re making debt payments, try to scale back to the minimum payments until you reach this goal. Once you are out of debt, increase your emergency savings so that you can cover up to six months’ worth of expenses. That way, if you experience a major life-changing event, you can maintain your basic needs until you make the necessary adjustments.

2. Not saving for upcoming expenses 

Why it’s a mistake: You can’t plan for all expenses. But there are a lot of major purchases that you can save for.

Why not start saving for your vacation months before, so you don’t have to use a credit card? A vacation isn’t that relaxing if you spend the next 6 months trying to figure out how to pay down your credit card balance.

How to avoid this: 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. Avoid the high interest rates that come with having a credit card balance.

3. Waiting too long to start investing

Why it’s a common mistake: Investing is a long-term strategy that largely depends on compound interest. Since time is one of the biggest factors in investing success, it pays to start as early as possible.

How to avoid this: Start now, even if it’s only $500. An easy way to start is by opening an account with a robo-advisor like Wealthfront.  Don’t have $500? Start with Acorns, which has no account minimums, and allows you to make fractional investments with spare change.

4.  Speculating

Speculation is a money mistake
Stick to investments you’re familiar with.

Why it’s a mistake: Speculation is investing in assets you don’t know that much about, like Bitcoin, futures, or gold contracts.

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. Conversely, those investments crash just as quickly when the market sentiment changes

How to avoid this: Don’t try to get rich quick; get rich slowly and 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: A common investing mistake is actively trying to time the stock market by buying low and selling high

. What usually happens is the opposite.

People wait until the market is high before they decide to jump onboard and put more money into it. Then, when the market falls, these people are often the first ones to sell their investments and “wait it out.”

How to avoid this: Establish an asset allocation that suits your financial goals. Leave your money invested in the stock market. Periodically rebalance your portfolio to ensure it’s properly balanced.

Generally speaking, you’ll buy an investment and hold it for years, while making minor adjustments to keep your portfolio properly balanced. That way market fluctuations 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.  Or your health might eventually force you to leave the workforce.

How to avoid this: 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 backward to figure out how much you’ll need to invest monthly to hit your goal.

Even if you can’t contribute as much as you need to, contribute something to your retirement accounts. This could be either your employer-sponsored plan or an individual retirement account (IRA). Then, with each pay raise or promotion, set aside a certain portion of that extra money towards your retirement savings.

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. You can use a service like Blooom to perform a free 401k analysis that will tell you if you’re paying too much for your investments.

7. Not taking the matching contribution on your retirement plan

Why it’s a mistake: Most people have access to an employer-sponsored retirement plan, like a 401(k). And most of these plans offer matching contributions. If you don’t take advantage of the employer matching contributions, you’re leaving free money on the table.

How to avoid this: Contribute up to the employer match. If your cash flow allows you to, contribute up to the IRS annual maximum.

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. Many 401(k) administrators charge significant fees, and not paying back your 401(k) loan properly can have tax implications.

How to avoid this: Save up for the expense, or don’t buy it. If it’s an emergency, use your emergency fund. Find another way. But don’t use your 401(k) except as a last resort.

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. Since only older people are eligible for reverse mortgages, many lenders are notorious for bad lending practices.

How to avoid this: Talk with your financial planner about your financial options before taking out a reverse mortgage. Ask for references to a reputable lender if this is your best option.

10. Not discussing your finances before marriage

Why it’s a mistake: Marriage is a big commitment for both people in the relationship. 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.

How to avoid this: Sit down on a quiet evening and an open discussion about your finances. It may seem stressful, but keeping it hidden is much worse.

When facing major financial decisions, like getting married, having an open discussion is the best way for both partners to feel like they’re heard.

11. Spending too much 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. So why start your marriage in a bad financial situation?

How to avoid this: Be smart about how you start your life with your significant other. Be deliberate about your plans, and don’t give in to the add-ons that your wedding planner might propose.

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.

How to avoid this: Talk about your monthly bills and expenses. Create a shared system for managing your money.

In many households, one spouse tracks the spending, while the other spouse might handle investing, insurance, and other financial planning roles. This is perfectly fine, as long as each spouse has an understanding of what the other spouse is doing. 

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. Unless you are on a second marriage, or have significant outside assets that you’re bringing into the marriage, it might be better for you to have joint accounts.

How to avoid this: 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 credit card balance to improve your credit score

Why it’s a mistake: This is one of the most annoying myths about personal finance. Carrying high-interest credit card debt and keeping credit card balances won’t improve your credit score. You simply are paying double-digit interest rates on money you don’t need to borrow.

How to avoid this: Credit card utilization does have some impact on your score. Lenders want to see that you can use credit responsibly. But as long as you’ve got good financial habits and you’re handling debt responsibly, your credit score should reflect it in the long run.

If you have a credit card balance: When you receive your monthly credit card bill, make sure your paying more than the minimum. If you only pay the minimum credit card payment, you’ll end up paying a lot more in interest than you need to. Avoid late payments.

Make sure you keep tabs on what’s in your credit report. Often, there’s something you’re unaware of, like identity theft, that causes your credit score to go down. Luckily there are a bunch of great credit monitoring tools available that make this super easy. And free!

1​5. Lending money to family

Never a borrower nor a lender be
Don’t loan out your last dollar to a family member!

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? As Shakespeare once said: “Never a borrower nor a lender be.”

How to avoid this: If you want to help a family member, gift them the money, don’t loan it. Tell them that you don’t expect the money back.

Removing the expectation of getting it back removes the animosity created when that family member can’t (or won’t) pay you back.

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.

How to avoid this: Each partner should maintain a separate bank account. From there, you can split bills and expenses as you see fit until you get married. This doesn’t mean you can’t share rent, it just means you probably shouldn’t buy a house together.

Have a plan to transition from keeping your finances separate to combining your finances when you eventually get married.

17. Not creating a will

Why it’s a mistake: Everyone should create an estate plan. And proper estate planning includes having 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 what happens to your assets and your family when you’re not around any more.

How to avoid this: Talk to an estate attorney and have a will created. Death is difficult enough as it is, so don’t put your family through the experience of trying to figure out what you would have wanted.

18. Not having life insurance 

Why it’s a costly mistake: The point of having life insurance is to financially take care of your loved ones. Life insurance replaces your income in case of your death so that your family doesn’t have the added stress of worrying about money.

Having financial security makes the grieving process a little less traumatic for those left behind, and gives them some financial peace of mind.

What to do instead: Carry term life insurance. A good rule of thumb is to carry about 8-10 times your annual income. But for larger families, or complex situations, you may need to talk with a financial planner about how much life insurance is appropriate for you.

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. You might reach a state of obsolescence in your industry. 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, keep aggressively saving for retirement. 

20. Not setting goals

Why it’s a mistake: It’s hard to figure out an investment strategy if you don’t have long-term financial goals in mind.

​​How to avoid this: Your financial planning framework depends on having long-term goals. If you can’t create your own financial goals, that might be a reason to hire a financial planner.

A fee-only financial planner can help clients organize their finances, establish financial goals, and take action steps towards achieving those goals.

21. Buying a new car

New car money mistake
A new car looks nice, but can put a ding in your finances.

​Why it’s a mistake: Buying new cars is one of the most common financial mistakes young people make. 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.

​How to avoid this: Buy a car that’s 2-3 years old. It’ll still have low miles and most of the new bells and whistles. But you can get it at a steep discount to the new models.

This is a great way to keep your car loans at a minimum, and free up extra cash for the important things, like paying down student loans.

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 not in line with your income.

​How to avoid this: If you’re buying a house, shop around for a mortgage first. See what you can get pre-qualified for without having to pay for mortgage insurance.

Once you’re pre-approved, then use that limit to help find a house you can afford. But your goal should be to keep your total house payments under 25% of your take-home pay.

If you’re buying a car, try to save up and pay with cash. If you can’t do this, then shop around for the lowest rates you can find. Don’t finance a car for more than 5 years.

23. Leasing a car

Why it’s a Mistake: From a personal finance perspective, leasing vehicles is never a good idea.  The dealership makes a ton on leases, and at the end of the day you end up covering the vehicle’s depreciation. And to top it off, you have to give the car back and start over again.

​How to avoid this: Buy a vehicle. Even if it’s used. Better yet, if you live in a place with public transportation options, opt for that instead.

24. Remaining in debt

Why it’s a mistake: Because you’re throwing away money every month to service the debt. In turn, this 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.

​How to avoid this: Pay off your debt as your finances will allow.

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.

With that said, credit cards can also be very dangerous if you don’t use them properly. By carrying credit card balances, even for a month, you can potentially wipe out a full year’s worth of rewards with the interest you are charged.  

​How to avoid this: Pay off your entire statement balance each month.

26. Not doing the math on membership fees

worst money mistake not doing math

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 or the promotion that got us into the deal. We often don’t stop to consider the full cost over the course of the year, and sometimes forget to use the product or service over time.

​How to avoid this: Before you sign up for a specific service, 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).

Do an audit of all your memberships. This might include things like:

  • TV subscriptions for people who cut the cord
  • Software-based subscriptions
  • Gym memberships
  • Credit monitoring or other financial subscriptions
  • Anything that’s charged on a monthly or quarterly basis

If you haven’t used it in 3 months, odds are that you can stop the service without much harm. And if you need to rejoin, they’ll often give you a deal to bring you back as a customer.

27. Buying a timeshare

Why it’s a mistake: Because timeshares are expensive, confusing, and nearly impossible to get out of.

​How to avoid this: Try Airbnb or VRBO. You have more housing options to choose from, more flexibility, and you’re not bound by long-term contracts. 

If you’re beyond most of these financial mistakes, and are looking to take the next steps, you should check out our investing section!