We counted 13 biggest money mistakes people make throughout their lifetime.
Financial mistakes can happen at every single stage of our life. With each new financial commitment and responsibility, there is a whole new way for us to mess it all up.
The good news is, you are not alone. As long as you are just making minor financial mistakes instead of major financial mishaps, you can still recover pretty quickly. And the best way to avoid big mistakes is to know what they are, and find your way around them.
With that said, let us examine the common big mistakes that can happen at every stage of our lives.
Financial Mistakes People Make in Their 20s
The young generation of twenty-somethings are often seen as the most irresponsible when it comes to personal finances (although a study made by Scottrade American Retirement Survey may beg to differ). If you are in your twenties, avoid these 5 mistakes and you will get ahead early on in the financial game.
Mistake 1: Piling Up Credit Card Debts
Don’t let that little demon on your shoulder convince you, “Your credit card debt isn’t as bad as your friend Brad’s, so don’t feel bad and keep on spending,” and “Oh you don’t have enough money, let’s just pay whatever you can this month.”
These are the kind of rationalizations that pull you deeper into credit card debts, and trap you in it. If any of these thoughts ever cross your mind, slap yourself (not so gently) and focus on getting out of debts systematically.
To put it simply, there are 2 rules you have to always follow:
- Keep track of your credit card spending and make sure you are not spending more than you earn
- If you are already in debt, calculate how much you can put towards clearing debts each month and stick to it
Mistake 2: Not Planning for Retirement
Huh, what retirement? To many millennials, retirement is a long, long time away. Most people plan to retire in their 50s to 60s, so there is a good 30 to 40 years for me to plan, right? So what’s the hurry?
Well, if you are a millennial, you have something extremely valuable on your side – Time.
Someone who invests $5,000 annually at 7% growth between age 25 – 35 (total investment $50,000) will end up with more money in his nest egg at age 65, compared to someone who invests $5,000 annually between age 35 – 65 (total investment $150,000).
Want to begin investing but know nothing about investments? Understanding how mutual funds work can be a good start.
Mistake 3: Not Doing the Maths on Student Loans
Many graduates choose to pay the minimum sum on their student loans right after college, and continue to pay the bare minimum even when they are employed.
It’s important to get rid of these loans quickly, so you can avoid paying an exorbitant amount of interests over years. Have you done the maths on your student loans?
A mere 5% interest rate on a $25,000 student loan will cost you more than $100/month on interests alone.
You don’t want to keep paying off your student loan debts in your 40s, do you?
With that said, if you are eager to invest but have major debt, it’s usually better to clear your debts first, unless you are sure your investments can outgrow the loans interest rates, which most likely isn’t the case.
Mistake 4: Refuse to Learn About Money
Most young people do not receive proper personal finance education. The more fortunate ones may have teachers and parents who are well-versed in personal finance management and are willing to provide guidance, but many individuals are never taught any money management skills at all.
While this can be debilitating, it shouldn’t be an excuse for ignoring the importance of personal finance management.
The fact that you are reading this article is a good start. If you want learn more about personal finance management, reading a few good books will prove to be an excellent investment over the long term.
Mistake 5: Unwilling to Take Calculated Risks
Young people in the 20s usually have fewer life responsibilities and of course, financial responsibilities. This is the group of individuals that can afford to shoulder more calculated risks that are potentially rewarding down the road.
I’m not talking about risky investments and uninformed decisions. Any investments and decisions you make should be well-researched and understood. There is a saying – Don’t invest in what you don’t understand.
With that said, this is the best age to start investing and take advantage of compounding interests. This is also the best time to start a side business that can be extremely rewarding for the years to come.
Financial Mistakes People Make in Their 30s
The thirty-somethings have some working experience under their belts and are usually better off financially compared to the fresh graduates. While their income has increased, their financial responsibilities have most likely grown too. Avoid these mistakes in your thirties and stay on top of your game:
Mistake 6: Buying a More Expensive House than You Need
More often than not, someone in their thirties is expected to have his/her own house whether he/she is married or not. No doubt, buying a house is a great investment, but a larger house shouldn’t be viewed as a greater investment and accomplishment.
Too many people put themselves through unnecessary financial crisis when they buy a house that is too big for their budget, and their needs. A new family doesn’t require a big home, and most likely they don’t have a sufficient budget for it too.
A bigger house not only means a bigger mortgage, it usually entails more taxes and higher utility bills.
Therefore it’s often wiser to start with a small house and move up to bigger ones when your net worth and your family expands.
Mistake 7: Not Having a Proper Budget
While you should start budgeting when you are in your twenties, it becomes even more important when you have a family to feed and a mortgage to pay.
If you really want to take control of your money, you need to know where it is going and plan it before you spend it.
Planning a budget may sound daunting, but it is really not. You need to have priorities for your spending and the following is a good rule-of-thumb:
- Top Priority (50% of income) – Essential expenses. These are the expenses you cannot escape. Includes housing, transportation, utilities, groceries, and basic family needs.
- Medium Priority (20% of income) – Saving and investing. You should save 20% of your take home income towards savings and investments every month.
- Low Priority (up to 30% of income) – Lifestyle choices. Eating out in restaurants, giving gifts, buying gadgets. If you want to have a vacation, you should save up using money from this category.
Mistake 8: Keeping Up With the Joneses
At this age, if you are still judging someone’s wealth and net worth by their material possessions, you really need to read Thomas J. Stanley’s “The Millionaire Next Door“.
Individuals who stay in luxury residential areas aren’t necessarily wealthy, and those who stay in middle class neighborhood may very well be millionaires.
Remember that when your friend or neighbor goes out to buy a new car or a sparkling new yacht, all he does is just signing up for another debt. Those who have nicer things aren’t necessarily more financially well off.
Take pride in your savings and investments instead, and enjoy the financial security and freedom that you have.
Financial Mistakes People Make in Their 40s
When you are in your 40s, you most likely have some sort of savings and investments in your accounts. Or so I hope. Here are 3 mistakes you should avoid to make sure you are well on your way to a comfortable retirement:
Mistake 9: Giving Up on Retirement Savings
You were advised to start saving for retirement a long time ago, but somehow you didn’t get to do anything about it. You check your accounts and realize you have no substantial savings or investments that can cushion your retirement years.
Do not despair. It’s always not too late to start saving and investing. You are playing catch-up now, so make sure you maximize your retirement accounts and put more money towards investments each year.
You might not end up with a huge retirement fund, but you will still have a healthy nest egg if you start now.
Mistake 10: Not Reviewing Mortgage Interest Rate
When you are in your 40s, you may have been paying for mortgage for so many years that it becomes a second nature for you. Mortgage repayment is always there in your monthly budget and you don’t even bother thinking about it.
Don’t. This might be a good time to review your mortgage repayment plan and refinance if the prevalent rate is lower than what you have.
Talk to your financial planner to see if it makes sense to refinance your mortgage, or use an online tool to help you get quotes at prevalent rates.
You may be able to slash tens of thousand of dollars off your mortgage and put more into your investment for a bigger retirement nest egg.
Mistake 11: Not Having a Will if You Have Kids
You may feel it’s too early to think about setting up a will at this stage, but if you are having young kids, getting a will is more than necessary.
Your will allows you to name a guardian for your children in the event of your death, and it also decides how your wealth is getting distributed to your designated beneficiaries.
It helps to clear up confusions of your loved ones if something were to happen to you.
You don’t want the state to decide where your wealth goes and what happens to your spouse and kids, right?
Financial Mistakes People Make in Their 50s
Retirement is just around the corner, and what you do at this point is critical to your quality of life when you finally retire. Don’t make the following 2 mistakes or all your plannings for all these years may go to waste.
Mistake 12: Dipping into Your Retirement Fund Too Early
By now, you should have a pretty significant sum of money sitting in your investment and savings accounts.
It can be very tempting to dip into it and use it on that luxury item you have been eyeing on for so long. When else should I buy it if not now, right? No, don’t do it.
You may also be facing financial pressures now that your kids are entering college and wants you to pay up the tuition fees. Again, don’t do it.
The retirement fund should be used solely for your retirement. If you are facing a new financial pressure, keep where your retirement funds are and don’t let anyone pressure you into taking them out.
Find another way to deal with the financial pressure, or preempt the financial commitments earlier in your life.
College funds can be saved up a lot earlier, and even a financial crisis from unexpected medical conditions can be prevented by buying an appropriate insurance earlier in life.
Mistake 13: Underestimating Retirement Costs
Most retirees don’t spend much on food and entertainment every month, and spend practically nothing on housing if the mortgage has been paid off.
But there is a cost many people overlook when they plan for retirement – the medical bills and cost of healthcare.
You can mitigate the bulk of medical costs if you buy a life or term insurance that covers you during your retirement, but the reality is that you might need nursing home care in your 70s and 80s.
These costs can quickly add up to over $5,000 a month, so make sure you plan ahead for it.
The Bottom Line
Building wealth and excelling in personal finances require proper planning and the discipline to stick to it. Just take some time to calculate the amount of retirement funds you need and how much you need to invest every month to achieve your goal.
You may want to get on board our financial freedom bootcamp to prepare yourself not only for retirement, but to achieve financial freedom within 5 years time using a combination of active and passive incomes.