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The Biggest Money Mistake You May Not Even Realize You're Making

By Katie Brockman - Oct 28, 2019 at 9:44AM

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It could cost you thousands of dollars (or more) over a lifetime.

When it comes to money management, nobody has all the right answers. Everyone will make mistakes sooner or later, and that's OK. The most important thing is to realize your mistakes and correct them before they cause bigger problems down the road.

The most dangerous mistakes, though, are the ones you don't recognize you're making. You may go your whole life without realizing you're doing anything wrong, then by the time you do, it's too late to do anything about it. This is especially prevalent when it comes to retirement planning. Saving for retirement is playing the long game, and the choices you make now will affect your life decades down the road.

One of the most common mistakes workers make when planning for retirement is waiting too long to get started. At first glance, it might not seem like waiting a few years to start saving will have a dramatic effect on your overall savings -- especially when you have a lifetime before you can even think about retiring. However, this mistake can do far more damage than you may think.

Hand stacking increasingly higher piles of coins.

Image source: Getty Images.

The consequences of waiting too long to save

Approximately 42% of workers say they'd rather wait to save until they get closer to retirement age, a report from the Transamerica Center for Retirement Studies found. Even among baby boomers (the generation closest to retirement age), 28% are putting off saving until they get closer to retirement, according to the report.

The problem with holding off on saving is that it becomes exponentially harder to accumulate a significant amount in savings the longer you wait to begin. Once you reach a certain point in your life, it may even be impossible to save enough to retire comfortably.

You may be telling yourself that the reason you're not saving for retirement now is because you can't afford to do so. That's a valid concern, but if you stash away even a little now, you might actually be able to save more overall than if you wait and boost your savings later when you're earning more money. This is thanks to compound interest, which allows your money to grow faster the longer it sits untouched in your retirement fund.

To demonstrate, let's look at a hypothetical example. Say you're 30 years old and you haven't yet started saving for retirement. You can't afford to save much, but you can sock away around $100 per month. If you're earning a modest 7% annual rate of return on your investments, you'd end up with around $166,000 in savings by age 65.

In another scenario, let's say you decided to hold off on saving until you were 50 years old. At that age, you're earning a significantly higher salary, so you start saving $500 per month. However, by age 65, you'd only have around $151,000 saved, assuming you're still earning a 7% annual return. Even though you're saving five times as much per month, you're missing out on your most valuable asset: time.

Balancing financial priorities to save more

It's tempting to put off saving for retirement because you have more pressing financial priorities to consider, like paying off debt or simply covering all your monthly bills. You may tell yourself that once your financial situation improves, then you'll focus more on long-term goals like retirement.

However, that day may or may not come, and you might always be juggling financial priorities. You might have more to save once you pay off your student loans, for example, but by then, you may be knee-deep in other expenses with a mortgage, kids, and more credit card debt to pay off. The point is there's never necessarily a "good" time to save for retirement, so it's important to start saving as soon as you can, which will involve creating a strategy to balance your priorities.

If money is tight and you're finding it difficult to save for retirement, take a look at where all your money is going. Next, see if there are ways to lower your biggest monthly payments. For example, if you're loaded with credit card debt, a balance transfer card might help you pay that down faster and save money on interest. If you're struggling with student loans, consider whether refinancing could lower your monthly payment. Or if a significant chunk of your money is going toward nonessential costs, like fast food or morning coffee, see if you can cut back to save at least a few dollars per week.

Once you have a little more cash to spare, make sure you're investing it in the right places. It might seem safer to put your retirement money in a savings account because it's less risky than investing it in the stock market. However, even the best savings accounts only have interest rates of around 1% to 2% per year, meaning that, over time, your money may not even keep up with inflation, let alone grow as much as you need it to.

That's why the best place to stash your retirement cash is in a retirement account, such as a 401(k) or IRA. These accounts make it easy to start investing -- with a 401(k), you may even be able to have a portion of each paycheck automatically transferred to your retirement fund). 401(k)s also typically see much higher returns than if you were to sock your money in a savings account.

The key to saving for retirement, though, is to be patient and stick with it. It will take decades before you start to accumulate some serious cash, and you'll need to save diligently during that time. But the wait will be worth it, and the earlier you get started, the more you'll be able to save.

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