Managing your money can be confusing, and a lot of people make mistakes along the way. Unfortunately, errors you make now with your finances can take years to recover from, so it’s a good idea to do what you can to avoid them in the first place. Avoiding these pitfalls and establishing attainable financial milestones will put you on the right track toward a comfortable retirement.
Here are some of the most common ways people damage their finances — and what you can do to protect yourself.
8 ways you might be sabotaging your finances (and what to do instead)
1. Not taking advantage of matching contributions to your retirement plan
To keep employees satisfied, some companies offer a retirement contribution match. If your company has an employer-sponsored retirement plan, such as a 401(k) or 403(b), it may match a portion of your contributions up to a percentage of your salary. It’s a common benefit. According to Vanguard’s “How America Saves” study, 51% of employers offered matching contributions.
Unfortunately, a lot of people don’t take advantage of this perk because they don’t want to lose any money from their paycheck. However, that’s an expensive mistake that can cost you a significant amount of money in the long run.
For example, let’s say you’re 25, earn $40,000 per year, and your employer will match 100% of your contributions, up to 3% of your salary. If you contribute $1,200 per year to your 401(k) — 3% of your salary — your employer will contribute an additional $1,200 per year to your 401(k). If you stay at your employer for 10 years with the same salary, keep making those 401(k) contributions, and earn the same match, you’ll get $12,000 in matching contributions. By the time you turned 35, you would have contributed just $12,000 to your 401(k). But with your employer’s $12,000 of contributions and an average annual return of 8%, your 401(k) would be worth $36,257. That’s over $24,000 of free money you would otherwise lose out on.
|Years of investing||10|
|Initial 401(k) balance||$0|
|Your employer’s contributions||$12,000 (100% of your contributions, up to 3% of your salary)|
|Annual rate of return||8%|
|Total at age 35||$36,257|
Talk to your payroll or human resources department to sign up for the employer match and get every dollar you’re entitled to receive.
2. Saving money in a low-interest account
Although it’s a good idea to stash your money in a savings account for a rainy day, keeping your money in a low-interest account could cause you to lose out on interest.
The FDIC reported that the national average savings annual percentage yield is 0.45% (as of Sep. 20, 2023). With such a low APY, your money will earn very little in interest. However, you can find high-yield savings options that pay much higher rates if you’re willing to shop around.
For example, Ally has an online savings account that offers 4.25% (as of Sep. 18, 2023) Annual Percentage Yield (APY), and Marcus by Goldman Sachs offers an online savings account with an APY of 4.30% (as of Aug. 4, 2023). Over time, the higher rate can help you earn significantly more interest on your savings.
3. Selling your investments when the stock market dips
Watching the stock market ebb and flow can be scary. When your investments fall in value, you may be tempted to sell your shares to recoup some of your money, but doing so can cost you over the long run.
According to Morningstar, a leading investment site, over the course of 20 to 30 years, you can expect average market returns of 8% to 10% for stocks and 4% to 5% for bonds.
By keeping your money in the stock market rather than selling, you can ride out market changes and experience long-term gains.
4. Not building credit
Your credit history and credit score play significant roles in your life. If you don’t build a solid credit history in your 20s or even your 30s, it can be difficult to qualify for a car loan, buy a home, or get approved for an apartment. In fact, your credit can even affect your ability to get a job. In a survey by the National Association of Professional Background Screeners, 44% of employers said they perform credit checks on some or all job candidates.
If your credit is less-than-stellar, spend some time building your credit history and establishing good credit habits:
- Make all of your payments on time. Your payment history is one of the biggest factors used to determine your credit score. Make all of your monthly payments on time to boost your credit score.
- Pay down debt. If you have credit card debt, student loan debt, or medical debt, focus on paying down your balances to lower your credit utilization.
- Get a secured credit card. If you have poor credit or little-to-no credit history, you may not qualify for an unsecured credit card. Instead, you can apply for a secured credit card to start building your credit history. Secured credit cards require a security deposit and report your account activity to the major credit bureaus.
- Review your credit report. Review your credit report regularly and look for errors or inaccuracies. You can check your credit report for free at AnnualCreditReport.com. [Note: Typically, you can view a report from each of the three credit bureaus once per year. But due to the COVID-19 outbreak, you can view your credit reports weekly for free through December 2022.]
5. Paying only the minimum due on credit cards
According to the Federal Reserve, the average APR on all credit cards that assess interest was 18.43%, as of October 2022.
If you paid only the minimum — which is typically 2% to 3% of your account balance — it can take you years to get out of credit card debt, and you’ll pay back thousands more than you initially charged.
For example, let’s say you had a credit card balance of $3,500 at 16.17% APR. If your minimum monthly payment was $105 per month, it would take you 45 months to pay off your debt, and you’d pay $1,178 in interest charges.
By increasing your monthly payments, you can reduce your interest charges and get out of debt faster. Ideally, you want to pay off your credit card balance in full each month to avoid paying interest entirely.
6. Spending your raises when you get them
If you get a raise, you may end up spending the difference in your paycheck on new clothes, meals out, or an upgraded apartment. But lifestyle inflation can cause you to live paycheck to paycheck despite your higher income, leaving you at a higher level of risk if there’s an emergency or if you're furloughed or laid off.
Instead, use your raise strategically. Set aside a portion of your raise — such as 10% to 15% — for fun spending. Deposit the rest of your raise to your savings account or retirement fund.
For example, if you make $40,000 per year and get a 3% raise, your income would increase by $1,200 per year. You would set aside $180 — 15% of the raise — as extra spending money for entertainment, and the remaining $1,020 would be split between your savings account and increased retirement contributions.
7. Not saving for an emergency
In a 2018 study, The Federal Reserve found that 40% of Americans would have trouble finding $400 to pay for an unexpected expense. If you’re one of the millions of people who couldn’t pay for a sudden car repair, medical bill, or another emergency, you’re at risk of ending up in significant debt; a single unexpected expense could derail your finances.
Starting building an emergency fund today. Although an emergency fund of three to six months’ worth of expenses is ideal, don’t let that number intimidate you. Set smaller goals, such as building a fund of $500 or $1,000 to start. Set aside a little money every paycheck, and add to it every month. Over time, you can build your savings and give yourself added security.
8. Taking out loans you can't pay back
Unfortunately, it’s really easy to take out loans. Whether it’s a car loan, student loan, or personal loan, you can borrow thousands of dollars to finance major purchases. Interest rates can cause you to pay back thousands of dollars more than you initially borrowed, and the monthly payments can strain your monthly budget and lead you to feel like you’re drowning in debt.
To avoid unnecessary debt, only take out loans that are absolutely necessary, and borrow the minimum amount you need. Apply for loans you can afford to pay within just a few years and make sure you have a payment plan in place for paying them off on schedule.
The bottom line
If you’ve made mistakes with your money, you’re not alone; it’s a very common problem. The important thing is to recognize some of the most pervasive issues and to take steps to prevent them from happening again. By coming up with an action plan, you can create a more secure financial future. Consider using one of the best investment apps to help you learn how to invest money to build a nest egg.
Disclaimer: All rates and fees are accurate as of May 9, 2023.