10 Money Mistakes I See Too Often as a CFP®

There are hundreds of potential money mistakes people can make, but I see these far too often.

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Everyone makes money mistakes from time to time. Even as a Certified Financial Planner®, there are situations where I spend more than I should for certain purchases and don’t shop around as much as I should for the best deal.

Nobody is perfect when it comes to personal finance, but it’s important to try and avoid making some of the most common, and most costly, money mistakes. With that in mind, here are 10 money mistakes I see far too often, and some suggestions that can help you avoid making them.

1. Stretching the definition of “affordability” when buying a house

It’s possible to get approved for a mortgage that results in a debt-to-income (DTI) ratio of 45%, or even more in some cases. In other words, if you earn $5,000 per month pre-tax, a lender may approve you for a mortgage that results in total monthly debt obligations of $2,250.

However, just because you can get approved for a certain amount doesn’t mean you need to spend that amount. Set your budget based on a home that will meet the needs of your and your family, not what the bank tells you that you can qualify for.

2. Spending a tax refund irresponsibly

To be fair, most Americans who get a tax refund use it responsibly. Paying off debt, saving for emergencies, investing, and saving for retirement are all common uses of tax refunds. However, too many people use their tax refunds for things like vacations and shopping sprees.

Your tax refund isn’t “free money,” so don’t think of it as such. This is money that you earned throughout the year that was withheld from your paycheck. Would you take your entire paycheck to the mall and spend it? Hopefully not. Treat your tax refund with the same respect that you give to the rest of the money you earn.

3. Waiting too long to save for retirement

One of the most frustrating things I encounter is when a 20-something tells me “I haven’t started saving for retirement yet -- I’ll have plenty of time to worry about that later.”

This is terrible logic. In fact, it’s your younger years where you get the most bang for your buck when it comes to retirement saving. Based on a 7% annualized rate of return, every $100 you set aside when you’re 25 could grow into nearly $1,500 by the time you’re 65 and ready to retire. When you’re 35, every $100 can be reasonably expected to grow into about half of that amount.

The point -- starting early can make saving for retirement much easier than it will be if you wait.

4. Paying lots of credit card interest

The average credit card APR in the United States is currently around 18%. This means that if you have $10,000 in credit card debt at the average interest rate, you’re paying $1,800 in annualized interest just for the privilege of owing money. That’s crazy.

It’s especially silly to pay lots of credit card interest considering the alternatives on the market. A personal loan can allow you to pay off your credit cards and lock in a lower interest rate for years. And, with competition among credit card issuers at an all-time high, there are some great 0% APR offers for balance transfers and new purchases.

5. Poor car-buying skills

One favorite trick car salespeople like to use is starting the negotiating process by saying “how much can you afford per month?”

Under no circumstances should you answer this question. By naming your desired monthly payment, you’re giving the salesperson permission to charge you whatever they want for the car, pay you whatever they want for your trade-in, and give you any interest rate and loan terms they want, as long as the resulting monthly payment falls under your cap. This is how buyers end up locked into 84-month (or even longer) car loans and paying thousands more than they need to.

Here’s the tip. These three things should each be a separate negotiation:

• How much will you pay for the car you’re buying?
• How much is the dealer giving you for your trade-in, if applicable?
• What APR are you getting for your financing? (Bonus tip: Apply for an auto loan with your bank before walking into the dealership. You can use this as a negotiating tool, and if the dealer’s financing isn’t great, it can give you a better option.)

6. Paying off the wrong debts early

It makes me shake my head in disbelief when I hear of someone paying extra towards their mortgage or student loans each money when at the same time, they have a mountain of high-interest credit card debt.

I generally advise people not to pay more towards low-interest debts than they have to regardless of the presence of credit card debt, but I certainly understand that many people just don’t like having debt in any form. Even so, there’s absolutely no way to justify paying low-interest debt until you’ve paid off any higher-interest debts you have.

7. Making investment decisions based on short-term market performance

It’s common knowledge that the central goal of investing is to buy low and sell high.

Unfortunately, human beings are emotional creatures, and we’re wired to do the exact opposite.

Think about it this way: When we see prices going up and up, and all of our friends are making money, that’s when we want to throw our money in (buying high). Think about the bitcoin and cryptocurrency bubble of late 2017 as an example. On the other hand, when markets are crashing, people tend to panic and sell before prices have a chance to fall any more (selling low).

I’ve spoken with many people who panicked and sold their investments during the market crash of 2008 and 2009. Well, the S&P 500 has more than tripled from the bottom, and people who sold in a panic missed the rally.

The point? Invest with the long term in mind. Sell your investments because you need the money to help pay your kids’ college tuition or because you’re retired and need the money -- not because of what the market is doing.

8. Treating a credit card as an emergency fund

If you rely on credit cards to pay for unexpected expenses, you’re not alone. About half of Americans couldn’t cover a $500 unforeseen expense without selling something or going into debt.

The problem is that this creates a cycle of indebtedness that can be tough to get out of. By the time you pay off your credit card, you’ll have likely spent hundreds of dollars on interest, and you’ll need to use plastic again when another expense arises.

If you don’t have an emergency fund, now’s a great time to start one. Experts generally suggest a target of six months’ worth of expenses set aside, but that can be a lot of money and you don’t need to get there right away. Setting aside even $20 out of every paycheck in a readily-accessible and dedicated savings account can build up a nice cushion fairly quickly.

9. Budgeting too strictly

I have mixed feelings when it comes to budgeting. I agree that budgets can certainly be useful, but it’s also important to be realistic.

For example, many people make the mistake of not budgeting any discretionary spending whatsoever or budget for an unrealistic amount of money going into savings. Things like this are unsustainable over long periods of time. When formulating a budget, it’s important to set realistic expectations of how much you’re going to spend and save, and it’s also important to budget some money that’s just for you to do whatever you want with.

10. Skimping on insurance

As a final money tip, don’t cut corners when it comes to insurance. All of the financial success and smart budgeting in the world isn’t a big achievement when you’re just one unfortunate event away from being wiped out, or your family wouldn’t be able to continue their lifestyle without you.

There are many areas of personal finance where it makes sense to buy “just enough,” but insurance isn’t one of them. Get enough life insurance so that your family will be well provided for. Keep enough auto and homeowner’s insurance to cover property damage and liability for pretty much any conceivable situation. You can even get an umbrella insurance policy that can cover you for millions of dollars in additional liability if an especially costly situation arises.

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