As we work our way toward 2018, it's natural to have money on the brain. After all, for many of us, a new year means a fresh financial start of sorts. But just as it's crucial to map out your financial goals, it's also critical to know what not to do next year. Here are five money mistakes that could derail your finances in 2018 -- so stay away from them at all costs.
1. Not completing your emergency fund
If you've been neglecting your short-term savings, you're in good company. A good 57% of U.S. adults have less than $1,000 in the bank, while a frightening 39% have no savings at all. But that's no excuse for not having an emergency fund, and the longer you go without that safety net, the more you put your finances at risk.
Image source: Getty Images.
At the very least, you should aim to have an emergency fund with three months' worth of living expenses. Amassing enough to cover six months of expenses would be even more ideal and would give you a dose of added protection. Fail to put some money in the bank, and you'll have no choice but to resort to credit card debt should you lose your job, fall ill, or encounter a whopper of a bill that your regular paycheck can't cover. And that could set the stage for a pretty bad year, financially speaking.
2. Not contributing to a tax-advantaged retirement plan
We all know that it's important to save for retirement, and we all know that it's best to take steps to lower our taxes. But if you don't contribute to a retirement plan next year, you'll fail on both fronts. In 2018, you can put up to $18,500 into your 401(k) if you're under 50. If you're 50 or older, you get a $6,000 catch-up that raises this limit to $24,500.
Don't have an employer-sponsored plan? No problem. You can still open an IRA and save for retirement that way. The annual contribution limits for next year are $5,500 for workers under 50, and $6,500 for those 50 and over.
How much can you shave off your tax bill by contributing to either type of account? Well, it depends on your effective tax rate, but if that rate is 30%, and you set aside $5,000 for the year, you'll save yourself $1,500, just like that. Plus, the money you put into your account will get to grow on a tax-deferred basis, which means you won't pay taxes on your investment gains until the time comes to take withdrawals in retirement. Talk about a win-win.
3. Shying away from stocks
If you're socking away money for retirement, you're already off to a pretty good start. But if you're not investing that money wisely, you're doing it -- and yourself -- a disservice. A Wells Fargo study released last year found that 60% of Americans are investing too conservatively for retirement and are risking not having enough income to fund their golden years.
If you've been avoiding stocks in your portfolio, it's time to change your strategy. Though it's true that bonds are a more stable investment than stocks, they'll also give you a much lower return over time.
Check out the following table, which highlights the difference between a stock-focused retirement portfolio versus two safer approaches:
|
Investment Style |
Average Annual Return |
Total Accumulated Over 30 Years* |
|---|---|---|
|
Aggressive: stocks |
8% |
$680,000 |
|
Moderately aggressive: stocks and bonds |
6% |
$474,000 |
|
Moderately conservative: mostly bonds |
4% |
$336,000 |
Table by author. *Assumes a $500 monthly investment.
As you can see, going heavy on bonds instead of stocks could cost you $344,000 in retirement income. And that's a lot of money to potentially give up.
4. Racking up credit card debt
It's not a secret that credit card debt can wreak havoc on your finances, yet consumer debt recently reached an all-time high in the U.S. If you want to come out ahead financially in 2018, then the last thing you should do is charge up a storm on your credit card and carry that balance indefinitely. Not only will doing so cost you a boatload in interest charges, but it could also lower your credit score in the process. That means that when the time comes to borrow money responsibly, such as for a mortgage, you'll be less likely to get approved or less likely to snag the best rates out there.
5. Buying too much house
It's estimated that a good 39 million Americans can't actually afford their homes. Though it's natural to want the nicest house on the block with the best amenities available, think twice before you purchase a home you know you'll struggle to keep up with.
As a general rule, your housing costs (including your property taxes and insurance) should never exceed 30% of your take-home pay. To further protect yourself, factor maintenance costs into that percentage so that you have more wiggle room in your budget for other things that inevitably creep up, whether it's healthcare expenses or auto repairs. Taking on too much house could put you in a position where you're struggling to keep up with your remaining bills, so resist the urge to buy that mini mansion, and adjust your expectations accordingly.
A new year means a new chance to improve your financial picture. Avoid these money-crushing mistakes, and you'll be better positioned to come out ahead in 2018.
