Most Common Money Mistakes and How to Avoid Them
When it comes to financial decisions, consumers’ biggest disadvantage is lack of financial education. Feeling more comfortable and confident with financial decisions will help you get the most out of your money, save for your future, and better understand your financial picture. Certified Financial Planner® and the Motley Fool contributor, Matt Frankel, revealed the top money mistakes he sees his clients make and how you can avoid them.
- Stretching the definition of “home affordability.”
When buying a home, you don’t need to spend the maximum amount for which you are approved. Getting preapproved for a mortgage before you start shopping can help you set a realistic budget.
- Spending a tax refund recklessly.
While the majority of American consumers use their tax refund responsibly, by paying off outstanding debt or investing it into savings, there are some that treat the tax refund as free money. Would you spend your entire paycheck on one shopping spree? No! Treat your tax refund as an extra paycheck and use it with discretion.
- Not saving for retirement.
Many young American workers believe they have years to start saving for retirement. However, the earlier you start saving the sooner that savings starts to work for you. Frankel writes, “based on a 7% annualized rate of return, every $100 you set aside when you’re 25 could grow into nearly $1,500 by the time you’re 65 and ready to retire. When you’re 35, every $100 can be reasonably expected to grow into about half of that amount.”
4. Paying excessive credit card interest.
Today the average credit card annual percentage rate (APR) is a whopping 18%. Thus, $10,000 in credit card debt will cost you $1,800 in interest. There are other ways to pay down debt besides accruing interest. For example, most personal loans will come with lower interest rates, depending on your situation. If you are struggling to pay down credit card debt, talk with a financial planner. Working out a debt repayment plan will put you in a better position to take out new lines of credit later.
- Paying off the wrong debts.
Putting extra money toward your mortgage or car payment does not make sense if you have other higher interest debt like credit card debt waiting to be paid off. Most financial planners will agree, pay down high interest debt before allocating that money toward low interest debt. Credit card debt first, extra student loan payments later.
- Misusing credit cards.
Unfortunately, over half of Americans are unable to cover a $500 emergency cost without going into debt. This leads to many consumers resorting to credit cards to cover emergency expenses and accruing costly credit card debt. Saving for an emergency can start with taking $25 out of every paycheck, you’d be surprised how quickly that adds up!
Improving your financial habits, whether you are a current homeowner or expect to buy a home soon, puts you in a better position for taking out lines of credit, and may even help you qualify for better loan programs. Let me know if you’d like a consultation on how to put yourself in a better position for a home purchase or refinance.
Sources: The Motley Fool