We all make mistakes and finances are no exception. In fact, most Americans typically struggle with personal finance due to a number of reasons chief among them a lack of personal finance education provided to school age children. Here are the top 4 money mistakes and some practical advice on how to avoid making them in the future.
Not Saving Enough for Retirement
The average American working-household has just $3000 in retirement savings. Worse yet, fewer than half of all Americans have calculated how much money they will need in retirement. That is a scary scenario! A good rule of thumb is to plan on having 70% of your current pre-retirement income to maintain your standard of living, lower income individuals will need 90% to maintain their standard of living. It’s easy to identify the reasons why you are not saving for retirement but in the end it will be you and your bank account. If you know you are not saving enough for retirement, here are some things that you can do to get back on track.
- Start Saving – Make saving a priority and start saving now, don’t put it off any longer. Start with an amount that you can easily maintain each month. Success builds success and this is true when saving money is the goal. As you adjust your spending you can increase the amount you transfer to savings. When your income increases, try to put at least 25% to 50% of the increase into savings.
- Plan for Your Retirement Needs – Knowing what your income requirement will be in retirement is paramount if you are going to have a chance of meeting your needs in retirement. A great place to start is Vanguard’s Retirement Planner
- Take Advantage of Your Company Sponsored Retirement Plan – Your company sponsored savings plan is the best place to start your retirement savings for many reasons: 1) Free Money via Company Match 2) Reduction in Taxable Income 3) Access to quality investment options 4) Tax Deferred Growth of your funds
- Educate Yourself About Personal Finance – One of the best things you can do for your financial well-being is to take the time to learn about managing your money and the various investing options available. A great resource is CNNMoney’s Money 101 . Investing in the market to improve your financial status is a good way to go. One of the first things that need to be done is to investigate the changes in the markets that you are interested in putting your money into. Trends investing is a great site to use for this type of research. It uses trends clustering algorithm to detect trending securities with similar characteristics. It then provides investors with very detailed but easy to understand information to help with making a decision.
Not Having a Plan for Getting out of Debt and Staying Out of Debt
Not having a plan to get out of debt is like going on a hike without a map. You know you’re going on a hike but you’re just not sure how you will get there. There are several options available for dealing with debt: Personal Debt Reduction Plan, Debt Management Plan, Debt Consolidation, or as a last resort bankruptcy. The Personal Debt Reduction Plan is your first course of action and depending on your level of debt, may involve some tough choices in order to reduce your debt. A Debt Reduction Planning Calculator can be all you need and is a very effective tool if used properly. The principle is simple, make the minimum payment on one or more credit cards while aggressively paying down debt on a single credit card.
A Debt Management Plan (DMP) is a debt repayment plan that is negotiated and managed through a debt management company or a consumer credit counseling agency. In a DMP, the service provider negotiates directly with your credit card company to lower your monthly payments and interest rate to a level that you can afford. For a fee, the DMP service provider will collect a single monthly payment from you and then disperse payments to your creditors.
Once you pay down your debt, do you have a plan for staying out of debt? One of the main reasons so many continue the debt cycle is they have no plan to stay out of debt. While there are many reasons people take on debt, it is important to understand how and why you use debt. If you have a DMP, your service provider will provide some form of credit counseling which can provide invaluable insight into managing your finances so you stay out of debt.
Blowing (Big & Small) Cash Windfalls
One of the best opportunities to improve your financial situation is using a cash windfall to pay down debt or fund a retirement account. The definition of a cash windfall is the unexpected receipt of a large amount of money. Examples of typical cash windfalls are inheritances or gambling winnings. While it is easy to see how a large sum of money could help improve your financial situation by paying down debt or funding a Roth IRA it is not so easy to see the effect of blowing smaller cash windfalls can have on your personal balance sheet. Let’s face it, most of us may never see a large unexpected amount of cash however, we will see smaller amounts such as tax refunds and birthday gifts. I would argue that taking advantage of small cash windfalls can have a significant impact on your financial health long-term.
Scenario #1: Coming home from a recent family vacation you realize you have $150 in your wallet you didn’t spend because it was raining on the day you planned to go to a theme park. Do you take the family out to dinner or do you make an extra payment on outstanding debt?
Scenario #2: Your weekly food budget is $200. You are out of town on vacation staying with family and they are taking care of all the meals. Do you transfer the $200 from your checking account into your emergency fund or do you leave it in checking to mysteriously disappear over the course of several months?
By using the small cash windfalls to chip away at debt or add to a retirement account you will improve your financial situation instead of waiting for that inheritance that may never arrive.
Not Being a Smart Shopper
I’ll be the first to admit that I am not real fond of coupon clipping or shopping in general. After thirty minutes in the mall I am ready to head for the exit. There are two types of shopping: 1) Big Ticket Item Shopping and 2) Everyday Shopping. Here are some tips on how to be a better shopper for these two types of shopping.
Big Ticket Shopping – Shopping for a big ticket item like a car or an appliance is perhaps one of the most important financial decisions you will make during any year. Using a resource like Consumer Reports to purchase a Dealer Invoice for a planned car purchase or to check the ratings of an appliance you are looking at and make the best purchase possible. You may spend more for a quality appliance initially, but it may save you money in the long run with reduced repair bills and a longer replacement life. One way to save money on big ticket shopping is to visit at least 2-3 stores to compare prices and then wait at least 1 week before making a decision about purchasing the item. If you survived the wek without the item, chances are that you really don’t need the item.
Small Purchases – If you are like most Americans, the bulk of your shopping are the day to day purchases like groceries and trips to the mall. Because of the nature of this type of spending, it is easy to overlook the fact that small purchases make up the majority of your spending. One way to rein in spending is to create a budget based upon your spending and saving goals and monitor spending against this budget. Grocery shopping is typically the single largest budget item after housing and there are several easy things you can do to cut spending. Making a list of the groceries that you need and buying only those items on the list is the best way to cut your grocery bill. Clothing is another area where over spending can easily occur. Most impulse purchases on clothing are because the item is on sale and the consumer believes that it is a good deal. Again, by planning your clothing budget for the month and sticking with your budget will allow you to walk past those sale signs.
Readers: What advice do you have to avoid making one of these top money mistakes?