Over the course of your life you will have many opportunities to make financial mistakes. Some may only cost a few dollars, but others may cost thousands of dollars in the long term. When first stepping into the world of finances, make sure you’re aware of how to avoid these mistakes.
Whether you’re currently dealing with financial hardship or looking to avoid it, you’ve come to the right place. Here we’ll take a look at 7 financial mistakes and how you can potentially save thousands by avoiding them.
1: Being irresponsible with your credit and credit card
Becoming a credit cardholder is one of the earliest financial milestones that you will hit. Credit cards offer a sense of financial freedom along with a range of benefits. Understandably, this can result in both responsible and irresponsible financial habits.
It’s important that you understand what comes with being a credit card holder. You must familiarize yourself with topics such as credit scores, payments, debt, and a large vocabulary of credit card terms. Don't believe credit card myths. You also need to have a steady source of income and a bank account before you get a credit card.
As you continue on your credit card journey, you will be faced with many opportunities to make unnecessary purchases. Although it’s okay to spend money and spoil yourself sometimes, it can be a slippery slope into poor spending habits. Relying on your credit card and always carrying a balance are other bad habits to pick up.
A credit card can help remedy other financial mistakes, but only if you’re responsible and financially conscious. Things such as your cell phone bill and gas are good expenses to charge to your credit card. Although credit cards can save you from financial burdens, it also carries great potential to make a financial mistake.
If you find yourself dealing with credit card debt, pay off as much as you can as quickly as possible! Tackling a large debt in a short time can be intimidating, but you’ll save on interest. It’s important that you hold yourself accountable and don’t make purchases you can’t afford. Your credit score is a direct reflection of your habits, so make sure you’re building a great score.
Making irresponsible decisions with your credit and credit card can cost you thousands of dollars in interest payments and penalty fees. Let’s say you carry a balance of several thousand dollars on your credit card and only make a minimum payment each month. Depending on your interest rate, it’s possible to accumulate $100 a month in interest. After 10 months, you will have racked up $1,000 in interest alone, not including penalty fees and any other expenses.
2: Not being prepared for buying a car
Buying a car is fun and exciting, but it is also a financial milestone that will impact you greatly. New makes and models are produced and sold every year, and the possibilities are seemingly endless. You have the opportunity to pick between a variety of makes, models, and colors in order to find the perfect car. However, there are many financial factors you must take into consideration before coming to a decision.
When browsing for a car, be sure to refine your search according to how much you can afford to spend. Buying a new car can be tempting, but it may be a step in the wrong direction if you’re not financially ready.
It’s a good idea to wait to purchase a car until you have a good credit score and history. Although having credit isn’t always required when buying a car, it can potentially save you a lot of money by helping you qualify for a greater loan amount and a lower interest rate.
Once you have purchased a car, take good care of it. Be sure you have good car insurance to help cover your vehicle in case of an accident. Maintaining your car can save you from pricey repairs in the future. It can also allow you to resell or trade the car for a higher value.
Roughly every $5,000 in repairs to your car is $2,500 taken off your trade in value. There are many DIY car maintenance jobs that can keep your car in good condition without spending hundreds of dollars.
Not being prepared before buying a car can cost you thousands of dollars in interest rates, excessive payments, and additional fees. USN reports that when buying a used car, a good credit score will get you an average interest rate of 4.81%. In comparison, a bad credit score will get you an average interest rate of 11.24%. Depending on how much your car payment is every month, these interest rates could be the difference of thousands of dollars.
Let’s compare the total cost of a $10k car loan using the interest rates above and a 72 month loan term. At the end of the term, a person with a good credit score will pay $1,532 in interest on the car. On the other hand, a person with a bad credit score will pay $3,793 in interest.
3: Neglecting your college savings
Saving up for college is a goal that can take many years to fulfill. Whether you’re a student or a parent saving up for college, maximizing the time and money saved is the goal. There’s a wide variety of savings accounts and plans to choose from when the time comes. However, what really determines the success of a college savings account are the actions of the account owner.
A 529 plan is one of the most common ways to save money for college. These plans offer their account holders high investment limits, financial flexibility, and tax breaks. It’s up to you to maximize the benefits of a 529 plan to your advantage.
A great way to maximize your college savings plan is by getting started as early as possible. You should aim to save money consistently, take advantage of interest, and not withdraw from the account. Applying for scholarships and grants early on is also part of a great college savings plan.
Neglecting your college savings could cost you a lot of money from missing out on compound interest and other saving opportunities. For instance, let’s say you were able to set aside $200 for your college savings every month for 15 years.
If you decided to save this money with no plan, you will have only saved $36k by the end of the 15 years. If you chose to save for college using a 529 plan with a compound interest rate of 5%, you will save up nearly $54k. That’s nearly 20 thousand dollars more in savings.
4: Not being prepared to rent an apartment
For first-time movers, renting is the most common option. New tenants will often be required to pay an application fee, security deposit, last month’s rent, and first month’s rent up front. Before you decide to rent an apartment, keep in mind that your potential landlords and creditors have access to your credit.
They will check your credit when determining whether to accept you, require a cosigner, or reject you. If your credit score is anything less than fair, you should wait to rent an apartment until you can increase your score. It is also crucial to have your personal finances in order, such as your budget, income, emergency fund, and more.
When it’s time to rent your first apartment, avoid the temptation of an over-the-top apartment. Instead, spend some time searching for an apartment that’s priced reasonably and well suited to your needs. Many apartment buildings offer tenants some property benefits as well, such as a pool, gym, playground, etc. While an apartment complex with additional amenities may be more expensive, it may be cheaper than paying for these benefits externally.
While an apartment may have an attractive rent price, there may be additional costs and responsibilities waiting for you. Regardless if you’re renting your first or third apartment, it’s important to read and understand your apartment lease. It’s also crucial to have renters insurance and understand what it covers for you.
Not being prepared to rent an apartment can end up costing thousands in application fees, expensive rent, utilities, and a lost deposit. Although the cost of rent varies wildly, a two-bedroom apartment costs about $1,180 every month on average.
If you’re not careful, you could end up paying a lot more than originally planned. Once you’ve moved in, take care of the apartment. Doing this will ensure you receive your deposit back at the end of your lease.
5: Not prioritizing your student loans
More than 50% of college attendees take on student loans to help pay for their college education. After graduation, there are two common ways people begin to pay back student loans: debt refinancing and debt consolidation.
Debt refinancing is the process of paying off an existing debt by taking on a debt from a new loan provider that offers more favorable terms. Debt consolidation is the process of taking out a large loan with favorable terms and to pay off two or more smaller debts. This leaves the borrower with one monthly payment as opposed to several. Both debt refinancing and consolidation strive for similar results: lower interest rates, manageable monthly payments, and more control.
Financing your student loans for the shortest time frame you can afford can save you a substantial amount in interest payments. It can also help improve your debt-to-income ratio.
Not prioritizing your student loans can cost you thousands of dollars in interest and late fees. You can save money by consolidating and refinancing student debt in order to pay it off sooner. Using the average student loan interest rate of 5.8%, let’s say you borrowed $30k to pay for your education.
With monthly payments of $150, it would take you 30 years to pay off your student loans. You would end up paying $33,369.33 in interest alone, more than double the cost of your original loan.
However, if you decided to make larger monthly payments of $250 with the same interest rate, it would only take you 15 years to pay off your student debt. In the end, you would end up paying $14,986.85 in interest.
6: Not being prepared to buy a home
For many, buying a home is the most significant purchase they’ll ever make. Amidst the excitement of purchasing a home, it’s easy for some to overlook the commitments of being a homeowner.
You will be required to provide a down-payment and closing costs on up front, as well as ongoing mortgage payments. Owning a home also comes with property taxes, repair costs, insurance, and other expenses. Learn the different steps of buying a house.
Before you begin the process of buying a house, be sure to ask yourself: are you ready to be a homeowner? Have you been planning and saving up for this milestone? Are you confident in your knowledge of all things related to buying a property, such as mortgage, insurance, etc?
If your answers are all “yes!”, then by all means, get started! The worst thing you can do when it comes time to buy a home is not be prepared. Make sure that you get all of your finances in order beforehand, especially your credit score and history. Having good credit can help you qualify for loans and secure a lower interest rate.
Not being prepared to buy a home can cost you thousands of dollars in high interest rates due to bad credit. In addition to the average $10k upfront expenses, it costs roughly about $24k or more per year to own a home.
Having a down payment will allow you to shorten your mortgage term and save you from paying additional interest. For example, say you’re planning on purchasing a $200k home using a 40-year mortgage plan with a fixed rate of 3%.
If you were to purchase a home without a down-payment, you would be paying a total interest amount of $143,665. However, if you were to save the $30k down payment in advance, you would only be paying $122,115 total in interest.
7: Neglecting your retirement fund
According to a 2020 Gallup update, the average working American is expected to retire around 66 years old. Ideally, every person should begin to save towards their retirement soon after college by the age of 25.
That being said, only 39% of adults currently saving for retirement began in their 20’s. In fact, 50% of adults from ages 18 - 34 are not saving for retirement at all.
People often choose to focus on their short-term financial goals rather than learning about 401(k)’s. There are various retirement plans to choose from, such as 401(k)’s, traditional IRA’s, Roth IRA’s, and more. Most retirement plans are tax-deferred or tax advantaged in some way.
Each of these plans also offer different benefits and have different requirements and rules. It is up to you to choose a retirement plan that best fits your needs. Make sure the plan also provides good financial benefits such as compound interest and savings matches.
Once you have established a retirement plan that works for you, you need to manage it well and maximize the benefits. Consider automating your account contributions. You should also take advantage of your ‘employer match’ if offered.
Although it may be tempting, you should never allow yourself to withdraw money from your retirement fund. Even if you plan on paying it back, borrowing money from your retirement account often comes with penalties and could cost you over time.
Continue to hold yourself accountable and stay focused on maximizing your savings. The time, energy, and money you put into your retirement fund now will help determine your financial situation in the future.
Neglecting your retirement fund could cost you a lot of money due to missing out on interest, plan benefits, tax advantages, and other saving opportunities. For example, imagine if you were able to set aside $300 every month for your retirement fund. If you decided to save this money without the help of a retirement plan, you would have $108k after 30 years.
If you take advantage of a retirement plan with a 5% rate of return, you could have a total of $292,353 after 30 years. That’s a total of $184,353 from interest alone, not including any other benefits.
Learning from these mistakes and taking our advice will help you be prepared to avoid potentially losing money in the future. We urge you to continue to educate yourself on matters of personal finance. Understanding your finances will prepare you for the future and difficult situations such as dealing with debt, identity theft, and more.
Curious to learn more? Check out 10 Common Budgeting Mistakes (and How to Fix Them).
Want to plan ahead for your future? Take a look at How to Plan for Financial Emergencies.