Even a few money missteps can take a huge toll on your finances. When respondents to a January survey from the National Financial Educators Council were asked to put a dollar figure on how much money they lost last year due to personal finance mistakes, their average response was $1,634.
Sadly, that's not surprising, says Brad Klontz, a certified financial planner and financial psychology professor at Creighton University who has compiled a list of five common but significant money mistakes that he says can "sabotage your financial life."
Here's the impact each mistake can have on your finances, and how to avoid making them, according to experts.
Not paying yourself first "will keep you poor forever," says Klontz. "I think it's the biggest mistake people make around money."
If you're unfamiliar with the concept of "paying yourself first," it simply means prioritizing saving over other needs. Before you spend a dime, even on necessities like groceries or rent, experts recommend making a commitment to setting some of your cash aside and parking it in an investment or savings account.
"The biggest mistake I made prior to creating my first budget was that I never paid myself first," Shaquana Watson-Harkness, the founder of financial education company Dollars Makes Cents, told Grow last month. "I always paid my bills and everyone else before I put any money in my savings or set anything aside for personal purchases."
Once Watson-Harkness prioritized saving, she was able to pay off $169,000 in debt over the course of 20 months.
Even if you're on a tight budget, save and invest whatever you can. "The earlier young people invest, the more time and compounding [interest] can work in their favor," Evelyn Zohlen, a CFP at Inspired Financial in Huntington Beach, California, told Grow last month. "Even if they start small, making progress toward long-term financial goals early is so important."
Credit card debt is a slippery slope. The average U.S. household carries a credit card balance of more than $7,500, according to a recent WalletHub study. Even if you only accumulate a small amount of debt, things can escalate quickly. "Those interest rates will kill you," says Klontz.
The average APR on a credit card is currently around 15.78%, according to the Federal Reserve's most recent data. That's more than five times higher than the 2.75% federal student loan interest rate for undergraduates for the 2020-21 school year.
Even if your card has a 0% introductory rate, be wary of the time when that expires and interest begins piling up. "Once the interest clock starts ticking, that could be really significant," Ted Rossman, a credit card industry analyst at Bankrate, recently told Grow.
To tackle your credit card debt and avoid high interest payments, experts recommend making a list of all your debts, including balances and rates. Two proven strategies for paying off debt are the "snowball" method, which targets whatever debt has the smallest balance, and the "avalanche" method, which has you pay off the debt with the highest APR first.
Another key money mistake is "not having some of the insurance basics," Klontz said. If an emergency happens and you're uninsured, the resulting bills can wipe you out financially.
"People are really focused, especially on social media, on making a lot of money, investing to make a lot of money," he says. "But there's not a lot of focus on protecting ourselves from catastrophe."
Only 41% of U.S. adults have enough savings to cover a $1,000 emergency, like a trip to the ER or major car repair, according to a 2020 Bankrate survey. Having an insurance plan can act as a safety net and help you avoid surprise expenses that can put you in debt.
Klontz recommends having the following insurance policies:
- Medical insurance
- Auto insurance
- Term life insurance
- Long-term disability insurance
- Homeowners or renters insurance
- Umbrella insurance (if you own a home)
Having a well-padded emergency savings account doesn't mean it's smart to go uninsured, says Klontz. "Even multimillionaires can be at significant risk if they're not insured."
When you see stories about overnight bitcoin millionaires and high-flying day traders, it's tempting to assume you can do the same. But that's not realistic, says Klontz: "I mean, seriously, have you read any studies on investing?"
For the best returns, experts recommend sticking with low-cost, long-term investments, not trying to time your trades to sudden swings in the market.
"For young investors, it's not about timing the market, it's about time in the market," Marguerita Cheng, a certified financial planner and the CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland, recently told Grow.
Video by Jason Armesto
For example, from the beginning of 2001 through the end of 2020, the S&P 500 returned an annualized 7.5%. Had you invested $10,000 at the beginning of the period and stayed invested for the duration, you'd have ended up with $42,000 heading into 2021. But if, over the course of the same period, you missed the 10 best days for the stock market, you'd have just over $19,000, according to data from J.P. Morgan Asset Management.
Plus, if you're moving your money in and out of the market, you're missing out on the power of compound interest.
Avoid buying a new car, suggests Klontz. "I know a lot of ultrawealthy people who buy used cars," he says. "They're very conscientious, which is another personality trait that is associated with people who have a high net worth."
Driving your current car for as long as possible is "a great way to save thousands," self-made millionaire Steve Adcock previously told Grow. In fact, Adcock says driving an older car is one of his top financial rules that will "get you rich."
The average monthly loan payment for a new car is nearly $600, according to Experian. Every month that you're not in debt for a new car is a month when you can put that money toward other financial goals.
More from Grow: