You may not realize it, but the actions you take now can greatly impact your sense of financial security down the road. Many Americans inadvertently minimize their future net worth by focusing only on the short term. It can be great to live in the moment, but in some situations it's a good idea to take a step back to evaluate the long-term impact of your decisions.
Here are five ways many Americans shoot their future net worth in the foot.
1.Renting a Home Instead of BuyingPurchasing a home is probably the biggest investment you'll ever make, but if you choose a property wisely, it's definitely worth it. Sure, you'll need to come up with an initial down payment and you're responsible for all upkeep and repairs, but in most cases these costs pay themselves back.
When you own the property, you build equity in an investment that will likely increase in value over time. Rather than making monthly rent payments to someone else, your mortgage payments are essentially an investment in your future. Homeowners enjoy the stability of knowing their monthly housing expenses are for the long term, whereas renters never know when their monthly rent will increase. Additionally, interest and property tax paid by homeowners is tax deductible, offering the chance for an annual break from Uncle Sam.
2.Not Paying Into a Retirement Plan Early in Your CareerWhen you're young, saddled with student loans and barely making enough money to pay the rent, it's easy to put off saving for retirement because it's still 40 years away. However, waiting until you're older to start saving can have a significantly negative impact your financial stability in your golden years.
The earlier you start saving, the more money you'll earn in interest. For example, if you opened a 401(k) account in your mid-20s, saved a total of $30,000 and realized an 8 percent rate of return, you would have approximately $280,000 by age 65. However, if you save the same amount, realizing the same rate of return, but wait until your mid-40s to start the process, you'll have only about $60,000 at age 65. Many companies also have a 401(k) match program, where they'll match your contribution to a certain percentage or dollar amount, so you're essentially turning away free money by not taking full advantage of this opportunity.
3.Waiting Until Withdrawal to Pay Taxes on Retirement PlanTraditional 401(k) and IRA plans allow you to make tax-free contributions into your retirement account, with the deductions made in retirement when you withdraw funds. However, it might be smarter to open aRoth 401(k)or IRA, where taxes are deducted upfront, allowing you the benefit of making tax-free withdrawals in retirement. This can be a savvy move, as there's a very good chance you'll be in a higher income tax bracket when you retire than you were when you opened your retirement account. There's no need to pay more taxes on your money than necessary.
4.Leasing Vehicles Instead of FinancingAt first glance,leasing a vehiclecan seem like an attractive option -- less money down, lower monthly payments and the ability to drive a higher-priced car than you could afford to finance. However, leasing won't add any gains to your future net worth. The monthly payments you make are essentially rent to the dealership, as you don't get to keep the vehicle at the end of the lease. Rather than paying off the car and driving it for a few years payment-free, you're forced to return it and immediately start making payments on another model -- and continue the cycle every few years when your lease is up. Additionally, you're limited to the number of miles you can put on a leased vehicle, you have to pay extra for excess wear-and-tear charges and you'll pay sky-high early termination fees if you need to break the lease early.
5. Using Credit Cards to OverspendEveryone wants things they can't afford, but offers for zero or low-interest credit cards can make it very difficult to avoid temptation. It might seem harmless to book a vacation or purchase a new furniture set using a credit card with little-to-no introductory financing, but what if you can't pay the balance off before the promotional period ends? It's not uncommon for interest rates to rise from zero to 18 or 20 percent, which can seriously increase the initial price of your expenditures and leave you with a mountain of debt that can take years to pay off.
Making savvy financial choices now can help ensure you're able to enjoy stability later in life. Sometimes it's worth making initial sacrifices now to allow yourself to ultimately come out ahead. Always consider what the impact of the choices you make now will have on your long-term happiness before jumping head first into a decision you'll grow to regret.
This article originally appeared on Go Banking Rates.
The article 5 Ways You're Sabotaging Your Future Net Worth originally appeared on Fool.com.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.