Nobody’s perfect. But making mistakes when it comes to building credit, paying off debt, investing or saving your money can cost you big time.
Fortunately, you don’t need to commit them yourself in order to learn the lessons. We’ve laid out 20 common money mistakes below, plus how you can avoid (or fix) them.
1. Waiting to get started
It can be tempting to put off saving, especially when you’re young and/or not earning much and figure you’ll catch up when you’re making more. “But you’re never going to get this time back,” points out Natalie Colley, analyst at Francis Financial. And time is your biggest ally if you want to build wealth.
Even if you’re only able to save a few dollars, the most important thing is to get into the habit of saving and investing so you maximize the time your balance has to grow and you can really benefit from compounding interest and earnings.
2. Saving saving for last
Does this pattern sound familiar? Get paid, spend money, wonder why you have nothing left to save, repeat. So how can you break the cycle?
“You have to pay yourself first,” says Nicole Mayer, partner at RPG Life Transition Specialists. “It’s simple. Save [and pay bills] first—then you can spend the rest of your money on whatever you want.”
3. Not paying attention to interest
Yes, we’ve been living in a low-rate world for years—though that’s starting to change—but you can do better than earning nothing on your savings. “An easy fix [to keeping too much money in a low-interest account] is to link your checking account to an Internet savings account, and transfer money you don’t need for immediate expenses,” says consumer banking expert Ken Tumin of DepositAccounts.com. (Compare savings accounts on sites like Bankrate, NerdWallet or DepositAccounts.com)
4. Doing it manually
Again, without a good system in place, it’s easy to fall into the trap of overspending and not saving anything. A better strategy is to set up automatic transfers from your paycheck or checking account to savings and investment accounts, so you never see that money at all. (Bonus: You can also set up automatic bill pay to ensure you’re never late.)
5. Falling asleep at the wheel
Even though you’ve engaged autopilot, you still want to log into your bank and credit card accounts regularly to monitor activity—and be sure there are no fraudulent charges or unexpected fees, says Tumin. “If you wait too long to dispute them, you may not be able to get your money back.”
1. Putting all your eggs in too few baskets
Having a well-diversified portfolio is crucial to investing success, but rookie investors often misunderstand what diversification really means. You want to own stocks, bonds and cash—then diversify further from there, making sure you have U.S. and foreign, large-, mid- and small-cap stocks, and government and investment-grade corporate bonds with varying maturity dates.
Sound complicated? Investing in index funds and exchange-traded funds (ETFs), which are diverse and relatively low cost, can help simplify the process. (This is what Acorns, and some other investing apps, do.)
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2. Forking over too much in fees
The more you pay in investment fees, the less you get to keep of your returns. So it literally pays to know what your investments cost you. When it comes to mutual funds, avoid funds that come with a sales charge, also called a load. In fact, this is another good reason to consider sticking with index funds and ETFs, which can have fees (otherwise known as “expense ratios”) as low as .03 percent. Also be aware of any trading fees and, if you're working with a financial advisor, ask what his (or her) pay structure is.
3. Getting too emotional
You can easily get sucked into the daily churn of the market, but investing based on today’s headlines can often lead to trouble. Some bad news might make you panic and run—and end up selling when prices are down—while good news could send you on an irrational shopping spree while prices are high.
Keep your emotions in check with a solid, long-term investment plan you’re willing to stick to no matter what’s going on now.
4. Jumping in without doing your homework.
Emotions can also push you to jump into investing in something without taking the time to research it.
Working with a financial pro can help you develop an investment strategy that’s a good fit. But educating yourself through books, courses and other resources (like, say, the site you’re on) can also help you gain a better understanding of what’s worth investing in—and what’s not.
5. Being overconfident
Check your swagger, too. As knowledgeable as you might be about investing, the stock market can make a fool out of anyone. Being overconfident might lead you to think you can time the market or to hold onto a stinker for too long due to pride. Again, sticking with a carefully thought-out investing plan can keep you from sabotaging yourself.
1. Waiting until you make more
You can't guarantee your income will rise, but you can be sure that your debt will get more expensive the longer you let it sit. Even if interest rates weren’t heading up, the magic of compounding can work against you in this case, and interest will accrue exponentially on your growing balance. The sooner you commit to a repayment plan, the less you’ll pay in the long run.
2. You start before having an emergency fund
That said, you do want to set aside some cash for an emergency. The standard advice is to have at least three months’ worth of basic expenses, but you can aim for a smaller goal of $1,000 initially. That should be enough to cover typical unexpected expenses like a medical bill or minor car repair—and help you avoid racking up more debt and throwing your repayment plan off track.
It’s also smart, by the way, to start investing while you pay off debt—and again, it doesn’t have to be much. If your employer offers a retirement plan and match, you should at least take advantage of that. It’s free money! But the point is, the earlier you start investing (even if it’s a small amount), the longer your money has to grow.
3. Not making it a priority
According to CreditCards.com, the average credit card interest rate is a whopping 15.96 percent—a hefty amount that can add up quickly. Even though it can be a little painful in the short term, cutting costs and finding ways to up your income in order to pay off debt faster will create more financial security and less stress in the long run.
4. Paying off the wrong debts first
Paying off any debt is a step in the right direction, but there is an order of operations here: “You should almost always pay off credit card debt before any other type,” says credit pro John Ulzheimer, formerly of FICO and Equifax—because credit cards typically have the highest interest rates. Indeed, while credit cards hit you with rates in the teens, the average rate for a 30-year fixed mortgage is currently 3.8 percent.
5. Forgetting the deadline on balance-transfer offers
One way to clear away debt faster is to use a balance-transfer offer, which can bring the rate on some or all of your debt down to zero—for a limited time. If you’re aggressively getting rid of debt and can pay off what you transferred before the deadline (typically within one or two years), this can save you a lot in interest. But if you let that initial rate expire, the charge on the remaining balance can spike to more than 25 percent, potentially leaving you worse off.
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1. Revolving a balance
“There's a pretty common myth that you have to have debt in order to have a credit report and a good score,” says Ulzheimer. “That's incorrect. You don't have to have a penny of debt in order to build and maintain great credit reports and scores.”
What to do instead? Use your card responsibly, paying off your entire balance, on time, every month. This counts for 35 percent of your FICO score.
2. Maxing out your cards
Using up all the credit available to you is another bad move. “Even if you’re paying it all back every month, that can have a big negative impact on your credit score,” Colley says. Indeed, your debt utilization ratio—how much of the available credit is in use—counts for 30 percent of your FICO score. FICO High Achievers, with scores above 800 on a scale of 300 to 850, use just 7 percent of available credit.
Besides keeping your debt usage down, you can request a credit limit increase—so long as you don’t use that as an excuse to spend more.
3. Giving up credit cards
If you can’t control your swiping, temporarily hiding your cards might help. But closing your accounts is not so savvy. Not only will that lower your available credit, causing an uptick in your utilization ratio, but it might shorten the length of your credit history, which makes up 15 percent of your FICO score.
4. Missing a payment
Letting one bill slip through the cracks is easy to do, but it’ll cost you. “One thing I see is people attempting to dictate the rules of engagement with their lenders by paying what they want, when they want. This is a horrible idea,” says Ulzheimer. “Take your payment obligations and due dates seriously. Your lenders certainly do.” Setting up automatic payments ensures you’ll never break this rule.
5. Not checking your report
You may manage your credit perfectly, but credit reporting bureaus do not. In 2016, consumers complained to the Consumer Financial Protection Bureau (CFPB) about credit reporting the most—making up 23.2 percent of all 186,494 complaints. And of those complaints, 74 percent were about incorrect information on a credit report.
Be sure to check all three of your credit reports at least once a year to make sure your score is all it deserves to be. You can do so for free at www.annualcreditreport.com.