Are you making money mistakes? Here are five big financial faux pas to avoid at all costs.
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Managing your finances is undeniably complicated. Unfortunately, mistakes you make when handling your money could end up being extremely costly. Avoiding errors that cost you a fortune is one of the keys to financial success -- and here are five of the biggest mistakes you'll need to be sure you avoid making.
Paying a bill late
Paying a bill late is one of the most damaging things that you can do to your credit score. A single late payment could drop your score between 60 and 110 points, depending where your score was before the late payment. This could mean the difference between getting approved for a loan and getting competitive interest rates, or either paying more to borrow or being denied a loan altogether.
The better your credit, the worse the impact of a late payment -- so make sure you avoid this big error. Set your bills to autopay if you can, or at least set calendar and text reminders a few days before they're due so you won't make the mistake of paying your creditors late.
Getting into credit card debt -- and paying only the minimums
Speaking of debt, getting into credit card debt is one of the worst things that you can do because credit card interest is notoriously high. In fact, the average APR on a credit card as of October 2018 is 17.07%, which is an all-time high.
If you have a credit card charging an APR of 17.07%, you charge $5,000 on it, and you make minimum payments that equal only 3% of the card balance, it will take you 190 months to pay off that $5,000 balance -- and you'll end up paying a total of $9,240.40. You'd be paying for whatever your $5,000 in purchases were for almost 16 years and you'd end up almost doubling the cost of what you bought thanks to paying so much in interest.
You can't afford to make all of your purchases so much more costly -- so avoid getting into credit card debt.
Don't charge anything you can't pay off when the statement comes due and pay off your bill as soon as it arrives. If you already have credit card debt, pay more than the minimums until it's paid off -- and consider taking steps such as transferring the balance on your card using a 0% balance transfer offer so you can reduce your interest rate to 0% while you work on paying down your debt.
Buying a house you can't afford
For most people, the biggest debt they have is mortgage debt. While homeowners generally tend to be wealthier than renters because amassing equity in your home helps grow your net worth, your mortgage payment could also be a drag on your ability to accomplish other things if you borrow too much.
Most experts recommend keeping your housing costs to no more than 30% of your monthly income. If your costs exceed this, you could find yourself “house poor,” with so much income going to your mortgage that you have nothing left over to save for the future.
Waiting to save for retirement
Failing to properly fund your retirement savings is a major mistake that could come back to haunt you at a time in your life when you're too old and sick to work. It's imperative you have enough money to help support you along with Social Security in your old age -- and the sooner you start saving, the better off you'll be.
If you start saving when you're 20 and you want to become a millionaire by age 65, you'd need to save around $3,500 each year in a tax-deferred retirement account, assuming a 7% return on investments. But, if you waited a decade until age 30, you'd need to save around $7,250 -- or more than double what you'd have needed to put aside if you started when you were younger.
By starting to save as soon as possible, you can make compound interest work for you. It's much easier to amass the funds you need for retirement when time is on your side.
Failing to pay attention to investment fees
One of the biggest mistakes investors make involves failing to pay attention to the impact that fees can have on their retirement savings. The amount of fees you pay for your 401(k) or for the investments you buy can make a huge difference in how much of a nest egg you ultimately end up with -- so you can't afford to ignore investing costs.
For example, assume you start contributing $10,000 annually to your 401(k) at age 30 and contribute until your retirement age of 65. If you earned a 7% investment return before fees, here's how much you'd end up with depending on the fees you pay:
- $1,114,347 if you paid a 1% fee
- $1,0002,513 if you paid a 1.5% fee
- $903,203 if you paid a 2% fee
- $814,966 if you paid a 2.5% fee
- $736,522 if you paid a 3% fee
Your retirement account balance would be $377,825 higher if you paid a fee of just 1% compared with a 3% fee.
If your 401(k) fees are high at work, consider talking to HR about options for reducing costs. If there's no plan to do so, invest the minimum you need in your 401(k) to max out any matching funds your employer provides you with and then invest the rest of your retirement dollars in a no-fee account such as a traditional IRA.
Avoiding money mistakes can help you become a financial success
By avoiding the types of mistakes that hurt your credit score, cause you to pay high interest, or make it harder to save for the future, you'll be well on your way to achieving greater financial success. The good news is, now you know the big errors to avoid, and these mistakes won't cause your financial life to suffer.