Managing your money can feel stressful and complicated, especially since it's important to make the right financial decisions to achieve key goals. Knowing how to manage your money properly involves knowing what you need to do -- like making a financial plan. But it also means knowing what not to do. Many Americans make the same common money mistakes, and these mistakes can be costly.
To make sure you're not sabotaging your chances for financial success, it's helpful to look at some of the big money mistakes you might be making right now. Here are five common financial faux pas that could be costing you your chances at financial security and that you'll want to be sure to avoid.
1. Not having a budget
Just 2 out of 5 Americans have a budget and a clear idea of what they're spending their money on. This proportion of Americans who are carefully monitoring their spending has held steady since 2007. Unfortunately, this means around 60% of people are flying blind when it comes to managing their income and outflow.
If you don't have a budget and don't know where your money is going, there's a good chance you aren't allocating your money as wisely as you should be -- and there's also a good chance you're overspending. Less than half of adults responding to the 2017 Consumer Financial Literacy Survey believed they had a good idea of how much they were spending on housing, food, and entertainment, and separate data reveals when people do track their spending, their costs are at least 20% higher than expected.
To avoid wasted spending, use a budget to take charge of how you allocate your hard-earned money. Track your spending for around 30 days first so you can ensure your budget is realistic, and don't forget to budget for savings.
2. Investing too little in retirement savings
On average, Americans are contributing around 6.8% to their workplace retirement plans. This is well below what you need to save in order to retire with financial security. Most experts recommend saving at least 10% for retirement, and even this amount is likely insufficient given the fact interest rates are near historic lows while life-expectancy has increased.
If you make the average income of $46,409 and invest only 6.8% of what you earn over 30 years, you'd have just $298,000 to retire with, assuming you earned 7% on your investments . This is woefully insufficient, especially given that studies show you may need as much as $350,000 saved just to cover healthcare costs.
You cannot count on being able to work longer, as many older people become unable to work due to age or difficulty finding employment. You need to prepare for retirement throughout your career, which means investing around 15% of your income or more. The sooner you begin investing, the more compound interest will help you end up with a generous nest egg.
3. Relying on your credit cards for emergencies
Around six in 10 Americans do not have $500 saved to cover an emergency . This is a big problem, as a 2017 Bankrate survey showed 3 in 5 Americans incurred a major unexpected expense during the prior year . If you're like most Americans with no emergency savings, you probably use your credit card to cover emergency expenditures. Unfortunately, this can cost you a lot in the long run.
If you go $1,000 into debt due to an emergency and you make only a $20 monthly minimum payment on a credit card with a 17% interest rate, it would take you 88 months to repay that debt -- and you'd spend $752 in interest in the process . During that seven year repayment period, chances are you'd experience other emergencies too that would cause your debt balance to rise further.
4. Spending too much on your car
In 2016, 86.3% of all new cars were financed, with drivers borrowing an average of $30,032 and facing payments of around $503 monthly over a 68-month period. During the same time period, 55.3% of used cars were financed, with average loan amounts of $20,723 and average monthly payments of $376 monthly over 66 months .
With Americans generally owning new cars for around 79.3 months and used cars for 66 months , most Americans either have car loans constantly or never go more than a year without a loan.
If you bought inexpensive reliable used vehicles and invested the money saved by not constantly having a car loan over 40-years of your working life, you could end up with around $621,000 saved for retirement that you would have otherwise wasted on a vehicle. Buying an expensive car, especially on credit, is simply not worth the cost.
5. Not monitoring your investments
As many as 40% of Americans don't know how their investments are allocated . Asset allocation accounts for 93.6% of your investment returns, according to a frequently cited study 1986 study, so you simply cannot afford to be lax when it comes to allocating risk appropriately.
If your investments are too risky, you could lose it all. If your investments are too conservative, you'll need to significantly increase retirement contributions to end up with the same nest egg. Your appropriate allocation changes as you age, since younger people have more time to weather market downturns and take more risks. Stay on top of how your money is invested and make appropriate changes as you age to avoid ending up with too little retirement cash when you need it.
Here's what it comes down to
Planning and a little extra time can make a big difference in your finances. Don't miss out!