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Financial advice can be overwhelming simply because there are so many things you need to do.
It might be easier to focus on the biggest and most expensive mistakes to avoid instead.
The following financial missteps are common and costly hits to your wealth.
1. Not having an emergency fund
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Few of us really have complete control over our financial situation. You can become robbed or seriously ill at any time. It is slightly more likely that something will break, such as a device or vehicle.
One way to offset these heavy costs is with an emergency fund. If you have enough money set aside, unexpected situations don’t become financial emergencies — meaning you don’t have to do something precious like taking on debt or borrowing against your future by making early retirement withdrawals. (More on that soon.)
Here are “9 Tips for Starting an Emergency Fund Today.”
2. Keeping Up With The Joneses
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As Stacy Johnson, the founder of Money Talks News, said, “You can look rich or be rich, but you probably won’t live long enough to achieve both.”
Impressing people might be easier if you don’t put the time and money into following and acquiring the latest, greatest and most brilliant stuff. That’s a never-ending game, and once you stop playing, you’ll find yourself happier and have more money to spend on things you want rather than things you “supposedly” want.
3. Debt/borrow money to buy depreciating assets
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Example: a new car. This is a triple blow. First, you go into debt, which means you expose yourself to interest charges. You are probably paying more than you borrowed.
Second, it also means committing a portion of your income to make payments until the debt is gone. You pay the opportunity cost of everything else you could have done with that money. Meanwhile, money itself loses value over time to inflation rather than earning more (or at least keeping pace) in a savings account or investment.
Third, you are going into debt for something that over time will no longer be worth what you paid. That’s true for most things except houses, but that’s especially true for new cars.
4. Buying more house than you need or can afford
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While it is true that homes generally become more valuable over time, this is not guaranteed. And even if a home gains in value, it doesn’t mean much if you can’t afford the associated and sometimes hidden costs of homeownership, from simple utility bills to property taxes.
Plus, the other points we just made about debt are even more true here: interest costs more and opportunity costs are much greater.
5. Make withdrawals from an early retirement account
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When faced with a major financial problem, such as job loss or medical bills, it can be tempting to crack the biggest piggy bank of all: your retirement fund.
You can borrow against your retirement fund in certain scenarios without paying financial penalties, but in general, if you are under 59 1/2, you must be prepared to pay income tax on the amount withdrawn and a 10% penalty.
Even if you manage to avoid fines, you will again pay a huge opportunity cost. You can put the borrowed principal back into your account, but you can’t make up for the lost time your investments would have spent growing
6. Panic Selling
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When it comes to investing for retirement, mastering your emotions is critical. Sooner or later the market is going to crash – and on paper you will lose a lot of money.
Once you sell, that money is basically gone. But as we explain in “7 Most Costly Mistakes Investors Made Last Year,” history shows that “new bull markets have always followed a downturn.” In other words, if you get scared, you’re probably missing out. If you do nothing in this situation, not only will you save money, it could also save you a lot more over time.
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