Our whole site is designed to help those who struggle with money mistakes. We make them. You make them. We see our friends and family make them.
Here are our top five most common money mistakes:
1. Not having an emergency fund
Note: this is not a knock on those who have trouble deciding on the amount to place in an emergency fund. This is for those with zero emergency fund. Living month to month. Paycheck to paycheck. Zilch. Don’t do this.
Also . . .don’t use credit cards to cover these expenses. Use debitize or mint to make sure you pay off your cards every month in full. If you do this, you also get to use credit cards for travel points.
Generally, it’s standard advice to have at least 3-6 months of non-discretionary expenses stashed away for life punches you in the face.
Air conditioning breaks . . .emergency fund.
Hit a deer driving down the road . . .emergency fund
Blow your budget on food . . .work a second job to pay that off. No emergency there.
2. Not paying off credit cards in full every month
The second mistake I see all the time is people not paying off their credit cards in full every month. I mentioned this earlier, but this is for emphasis.
I like to spend. My wife does too. We also use credit cards for travel expenses. And we pay our cards off in full every month.
Travel rewards are only for those with discipline. If you run up debt, you end up paying 20% interest or more. We used our points to go to Orlando and Washington DC and still have enough miles to travel the globe.
It’s such a huge mistake to carry a balance on your credit card.
When you keep a balance on your credit cards, interest compounds and you pay a lot for whatever it is you bought.
If you are in credit card debt, here’s a blog post that can help you – How we paid off $15,000 in credit card debt in a year without losing our lives.
3. Not saving for retirement
The third mistake I see people making is not saving for their own retirement. In my profession, I often see those who lose loved ones with nothing but debt to show.
Don’t do this.
You can start saving $100 a month in a Betterment account and leave your loved ones hundreds of thousands when you die. Let’s say you start at age 50 and invest $100 a month for 25 years. With a normal interest rate (around 7%), you will end up with $75k in your savings. $200 a month gets you $150k.
Typically, I see this from people who are intimidated by investing, so instead of choosing, they do nothing. Don’t do nothing. Let that money work for you.
If you’re not sure where to start saving for retirement, check out a podcast like Listen Money Matters for a good place to start.
Check out our archives for more savings tips.
4. Buying insurance products for investments
The fourth biggest mistake I see people make is buying insurance products as investments (e.g.: whole life insurance).
The general consensus in the financial industry is that you shouldn’t view insurance as an investment. Some financial planners might suggest life insurance as a viable investment option, but the data proves otherwise.
For a full explanation of why mixing insurance and investments isn’t my cup of tea, read this post by money under 30. They do a great job of explaining why it’s often not a wise investment option.
The main reasons why I don’t love whole life insurance (and mixing insurance with investments in general) are:
Whole life policies are expensive, and it’s hard to determine the actual fees you pay (commissions are paid out to the advisor/salesman who sold it to you, along with administrative fees that may be hard to find).
The returns can take a long time to appear positive and when they do, they’re not guaranteed as advertised when you consider the fees you pay. If you decide to surrender the policy for the cash value in the short-term, you can come out negative because not enough time has passed to recoup the cost of the policy.
The investment isn’t diversified (you’re basically putting all of your eggs in one basket).
There’s no real incentive to invest in an insurance policy versus buying a term insurance policy and investing separately. Yet, there are benefits to doing the latter, including more investment options, more transparency, and more of an opportunity to increase your likelihood of earning positive returns over time.
Typically, the only people I see recommending mixing insurance with investments are the people selling these policies.
If you need insurance, figure that out yourself and look into buying insurance just for insurance (e.g.: term insurance). You can use Policy Genius to search for insurance, for example. If you want to invest, save money in a retirement account or some other investment account where you have more options, clearer fee structures, and more control. We used policy genius for our pets and saved over $300 a year for the exact same policy.
5. Not having a financial plan
The final mistake I see people make the most is not having a plan.
This happens a lot with people who don’t have an interest in money or financial health at all.
The problem is they steer clear of taking action because they’re intimidated by it. The result is a financial mess (at worst) or a hodge podge of random financial decisions that haven’t resulted in disaster, yet (at best).
Maybe your savings plan is to save “whatever is left at the end of the month.” Maybe you like to use credit cards as slush funds.
Don’t.
Start with a plan. You may fail a few times. Maybe your budget doesn’t work or maybe you rack up some debt. Keep going. Stick to your budgeting mindset for a year and see where you stand. I guarantee you will see results after that year. Keep yourself motivated by tracking the future investment returns on your investments.
Here are a few suggestions to get started learning about money:
Read our blog! No, seriously.
Listen to podcasts. check out our toolbox.
Read personal finance books. Dave Ramsey has some awesome starters.
Review our five most common money mistakes often.
Stay rational.
-B&T