When it comes to financial mishaps, there are a number of pitfalls that you will regret later on in life. We are all guilty of financial mistakes at some point or another. Over time, these financial mistakes can add up to a problem that will haunt you for years. To keep your financial life afloat, make sure to avoid these financial problems:
Not Paying Your Credit Debt When You Are Able to
While your credit card may help you build credit, it can also end up hurting you. The average household now has $16,000 in credit card debt. If you are only paying the minimum each month, then you are losing money in interest. If you owe $10,000 with a 12.5 percent interest rate, you can end up spending nearly $4,000 more in interest over the next decade.
To solve this problem, try to always pay off your credit card debt. If this is not possible, make sure that you are paying extra money to the debt. Sudden windfalls like a bonus at work or a tax refund can immediately go to reducing your credit card balance.
Not Having Health Insurance
The leading cause of bankruptcy is medical debt. About half of bankruptcy cases are caused by medical costs. While your health insurance may eat into your budget right now, it will ultimately save you money in the long run. You want to be covered now rather than pay for it later.
Forgetting Your Retirement Account
Saving for your retirement when you’re young sounds silly, but if you start saving in your 20s, you can easily have a million dollars or more in your retirement account by age 65. As you get older, it gets harder and harder to reach the same amount.
Compound interest is your friend when it comes to retirement savings. Social Security will not be enough for a comfortable retirement. In addition, your retirement account can save you money right now. The money you put in a 401(k) plan is tax deductible, so you can immediately lower your taxes by saving more.
Not Saving an Emergency Fund
Saving an emergency fund is one of the most important things that you can do. Currently, the average household does not have $400 saved to cover an emergency. In life, emergencies always happen. Your car could break down, or you may be laid off. You should have at least three to six months worth of your expenses saved within an emergency fund.
If you’re injured at work, you may be covered by social security disability–but this doesn’t mean you don’t need money to cover your other expenses. Just make sure that your emergency fund is saved in an account where you can easily access it. If you have your emergency money tied up in government bonds, it will be too illiquid to use when you really need it.
Buying a Car or House You Cannot Afford
While your new car might be pretty, it does not get you from point A to point B any better than your last car. Vehicles can quickly become a discretionary purchase because you do not need an expensive vehicle to get around. Once you consider your car payment, interest, and insurance–your savings and retirement accounts take a back seat.
If you don’t think you can keep up with paying off your new car, plus everything else you should be saving for–you should probably keep your old car or buy used. If not, you will be stuck paying for a vehicle that you can barely afford and holding off on important financial goals.
When buying a house, you can run into the same problem. The bank says you can afford a certain loan, but this does not mean that you should get that loan. If you commit a significant portion of your monthly income to your mortgage, you are taking on an unnecessary risk.
You have to be able to pay that loan back no matter what, but it becomes more difficult to make payments as the amount increases. As a general rule, your housing costs like homeowner’s association fees, mortgage payments, and insurance fees should not account for more than one-third of your monthly income.
Be Smart With Your Money
The biggest financial mistakes involve spending too much or saving too little. To make sure that you are financially secure, start by making a budget to figure out where your money goes. You should also start saving an emergency fund to protect your household from unexpected problems. With the right approach, you can make sure that your family is financially stable for years to come.