Financial advice can be overwhelming simply because there’s so much you’re supposed to do.
It might be easier to focus on the most important and costly mistakes to avoid instead.
The following financial mistakes are common and costly to your net worth.
1. Not having an emergency fund
Few of us really have complete control over our financial situation. At any time, you could be robbed or seriously ill. Slightly more likely, you might have something broken, like an appliance or a vehicle.
One way to offset these expensive expenses is with an emergency fund. If you’ve put enough money aside, unforeseen situations don’t become financial emergencies, which means you won’t have to do expensive things like incur debt or borrow for your future by making early withdrawals. . (More on this soon.)
Here is “9 tips for starting an emergency fund today”.
2. Follow the Joneses
As Money Talks News founder Stacy Johnson said, “You can look rich or be rich, but you probably won’t live long enough to accomplish both.”
Impressing people can actually be easier when you don’t spend time and money tracking and getting the latest, best and brightest. It’s an endless game, and once you stop playing it, you may find yourself happier and have more money to spend on things you want rather than things you’re “supposed to” want to.
3. Using debt/borrowing money to buy depreciating assets
Example: a new car. It’s a triple whammy. First, you go into debt, which means you expose yourself to interest charges. You’ll probably end up paying more than you borrowed.
Second, it also means that you lock in some of your income to make payments until the debt is exhausted. You pay the opportunity cost of everything you could have done with that money. Meanwhile, the money itself loses value due to inflation over time instead of earning more (or at least keeping pace) in a savings account or investment.
Third, you’re going into debt for something that over time won’t be worth what you paid for. This applies to most things other than homes, but it’s especially true for new cars.
4. Buy more house than you need or can afford
While it’s true that homes generally become more valuable over time, that’s not guaranteed. And even if a house goes up in value, it doesn’t mean much if you can’t afford the associated and sometimes hidden costs of ownership, from simple utility bills to property taxes.
Moreover, the other points we just made about debt are even more true here: interest costs more and the opportunity cost is much higher.
5. Make early retirement account withdrawals
When you’re faced with a major financial problem, like a job loss or medical bills, it can be tempting to break the biggest piggy bank of all: your retirement fund.
You can borrow from your retirement fund without paying financial penalties in certain scenarios, but in general, if you’re under 59.5, you must be prepared to pay taxes on the amount withdrawn and a 10% penalty.
Even if you manage to avoid the penalties, you are once again paying a huge opportunity cost. You can put the borrowed capital back into your account, but you can’t make up for the lost time your investments would have spent growing
6. Panic Selling
When it comes to investing for retirement, controlling your emotions is crucial. Sooner or later the market will crash – and on paper you will lose a lot of money.
Once you sell, that money is actually gone. But as we explain in “7 Most Costly Mistakes Investors Made Last Year,” history shows that “new bull markets have always followed downturns.” In other words, if you’re scared, you might miss out. Doing nothing in this situation will not only save you money, but it could also earn you a lot more over time.
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