In my quest for financial independence I have made countless money mistakes. It wasn’t until I became a tax consultant and started analyzing the finances of my clients, that I began to spot the red flags in my own budgets.
Money mistakes aren’t specific to a particular age group or social status, so much as they are the result of a lack of basic financial education in America. Throughout my 17-year formal schooling I was never required to acknowledge money management or taxes.
In fact my first exposure to finance was through a sales person for Edward Jones. I gleefully skipped into my very first investment meeting with what I figured must be a top investment firm (I fell prey to the, “if it has a guy’s name in the title it must be a prestigious firm” fallacy).
But after about an hour of reviewing cool, upward-trending bar graphs I was given a lot of paperwork to sign on the spot. Thankfully, I decided to take the paperwork home but I could see how others might feel guilty for not signing right away. He was a good salesman and made me feel important, unfortunately the contract terms did not. That first meeting set me on the path to learn as much as possible about financial topics and become a licensed tax consultant.
After reviewing the finances of hundreds of clients from all walks of life, I have compiled the following list of the 15 biggest money mistakes and how to avoid making them.
Money Mistake #1. Not Keeping a Daily Budget
Perhaps the biggest money mistake -that nearly everyone makes- is not tracking your income, expenses and investments on a daily basis. Having a budget tracking platform forces you to acknowledge your spending, decreasing the likelihood of overspending. If you can establish the habit of reviewing your income and expenses on a daily basis, cutting out unnecessary costs becomes effortless. There are a variety of free programs for keeping a budget (I currently use Mint.com)
If you need an easy way to track your retirement investments, check out: The Best Free Investment Tracking Spreadsheet
Money Mistake #2. Overusing Your Bank
Your bank or Credit Union is not an ideal place for investments. For emergency funds, rent and credit card payments,the bank account is still king. But at current interest rates, savings accounts rarely provide enough of a return to justify a significant investment.
The best interest return I found is for a checking account with Lake Michigan Credit Union at 3% per year on up to $15,000.00. I’m not affiliated with this program but I plan on testing it out. The account currently requires direct deposit, a small donation and multiple monthly uses of a bank card.
Here’s one easy way to prioritize the allocation of your savings:
- Cash On Hand: Enough for immediate emergencies like longer-term power outages, $100-$300.
- Interest Bearing Checking or Savings Account: Enough for rent/mortgage, maximum insurance co-payments and 6 months of living expenses.
- 401K with Match: Up to the amount of the employer’s match. If your employer provides diversified, low-cost index funds consider contributing the maximum allowable amount.
- Individual Retirement Accounts (IRAs): The maximum allowable contribution.
- Other FDIC insured investments (CDs) or Taxable Brokerage Account
- Speculative Investments (peer-to-peer lending etc.)
Money Mistake #3. Not Using a Bank or Credit Cards
Not too long ago I had a colleague at a tax consulting firm, a woman in her sixties, who did not have a bank account and never used credit cards. Her rationale was that credit cards lead to debt and banks can’t be totally trusted. Well, those things are somewhat true but that doesn’t mean you should start cashing checks or cutting up your credit cards.
Not having a bank account virtually guarantees that you won’t have adequate savings for an emergency. Because money in the bank is federally insured up to $250,000, there is no better place than a bank account for the majority of your non-invested funds.
Using credit cards is an excellent way to earn valuable loyalty rewards and to build credit to get the best rates on loans. Paying your bills in full at the end of the month ensures that you never pay a penny in interest.
Money Mistake #4. Lending Money to Friends and Family
In Hamlet, William Shakespeare wrote:
Neither a borrower nor a lender be,
For loan oft loses both itself and friend
Lending to (or borrowing from) your friends and family is not only a major money mistake today, it has also been historically unwise. If you have to lend money to friends/family make sure you can afford to lose it. This usually entails that you have emergency and retirement funds in place.
Also, its probably a good idea to refer to it as a gift rather than a loan. If you let go of the expectation that the money will be returned you can avoid the inevitable confrontation.
Money Mistake #5. Paying for a Service That You Have Time to Do Yourself
I pay someone to change my oil but not to wash and detail my car. Why? Well for one, changing my own oil doesn’t save me time or money. The cost of an oil change at the shop I go to is almost the same as what it would cost me to do it myself. Washing my car is not only convenient and relatively painless, it has saved me a lot of money over the years. If you can spot examples like this within your own budget you avoid this money mistake without sacrificing your happiness.
Money Mistake #6. Paying for Services You Don’t Need
Before you sign up for any service, you owe it to yourself to ask google about it. With some basic research skills you will not only be able to quickly determine if you have a need for a service but also if there is a better way to fulfill that need. This is especially true for monthly service fees that don’t have a specified end-date and automatically bill you every month.
Money Mistake #7. Not Learning Some Basic Cooking Skills
In college I spent way too much money eating out because I was lazy, I didn’t know how to cook and I love good food. When I finally started to take control of my finances I identified restaurant outings as one of the biggest money drains on my budget. Learning to cook proved to be a big money saver and it only takes a few simple skills to get started. I now enjoy eating in almost as much as going out, despite the dirty dishes.
Money Mistake #8. Not Knowing the Average Cost of Goods and Services
Having a basic knowledge of what various goods and services should cost gives you razor-sharp financial instincts. You need to know when you are getting a deal and when you are overpaying. You can easily compare prices, services and products with your smartphone, while shopping, so there is little excuse for overpaying anymore.
Money Mistake #9. Putting off Your Tax Bills
Sometime tax consultants advise their clients to pay past-due tax bills with credit cards because surprisingly, credit cards actually often have better repayment terms than the federal government. If you have a tax bill you can’t pay you can easily enter a repayment plan. You don’t even have to call the IRS to set up an installment agreement if your bill is low enough. If you have a large tax bill or cannot afford repayments you will want to speak to an Enrolled Agent to evaluate your case. Feel free to contact me with inquiries.
Money Mistake #10. Starting a Business Without a Plan
Before you start a business you should fully understand your industry, your competition, the various types of business entities and how they are taxed and do some initial financial planning. You don’t have to be a professional to figure out how much money you expect to spend and what your expenses will be. It is also advisable to have an exit strategy that you adhere to so that you don’t sink too much money into an unprofitable idea.
Money Mistake #11. Not Taking Advantage of Individual Retirement Accounts (IRAs)
It almost goes without saying that you should invest as early and consistently as possible. Roth and Traditional IRAs are an excellent place for your long-term retirement or tax-inefficient investments. The Roth IRA is the more flexible of the two as you can withdraw contributions (but not returns) at any time tax and penalty free. Upon retirement, at 59.5 years old, you can withdraw your entire investment tax-free. Traditional IRA funds are taxable income when distributed during retirement.
The best feature of the Traditional IRA is that your contributions reduce your taxable income for the year. You wont be able to withdraw your contributions penalty free without claiming a hardship but the tax benefits of a Traditional IRA become more and more valuable as your earnings increase.
Money Mistake #12. Drinking at Bars and Restaurants
There is no worse value in dining than ordering drinks at the bar or restaurant. The last time I had a glass of wine at a restaurant it cost me nearly $9 with a tip. I’m pretty sure the full bottle of that wine is $20 at the store. That’s not to say there isn’t a time and place for ordering drinks but if you make a habit of getting drinks whenever you go out you could save some serious cash by drinking at home, or by drinking less.
Money Mistake #13. Playing the Lottery
The argument for playing the lottery is something like, “Its not even that much money and I would have spent it on coffee anyways.” Not true, it turns out that playing the lottery costs players a lot of money over the years both in actual losses and opportunity loss, and I see that Starbucks cup in your office. At this point it should be clear from the countless “Curse of the Lottery” TV features that getting a large amount of money that you didn’t earn is unlikely to increase your happiness for long.
Money Mistake #14. Unpaid Internships, Especially When You’re Not in College
In certain industries unpaid internships are nearly mandatory. But probably not for post-college-age applicants rethinking their career paths. Only a small percentage of interns are given full-time positions and that group is mostly college students anyways. While you wait for that lucrative employment offer for months you could have been building a new career and getting paid to do it. Yeah I saw that Will Smith movie, The Pursuit of Happyness, I’m aware that there are exceptions but as a general rule you should treat your time and effort as your most valuable asset. If you work intelligently you deserve to be compensated for the significant dedication of time that all jobs require.
Related Bonus Money Mistake: Overestimating the financial return of going back to college late in life.
Money Mistake #15. Getting Too Comfortable at Work
You are settled in, you’ve got family photos posted all over your cubical, plants that have developed into trees over the years, seasonal decorations and your colleagues are your best friends for life. Either you have the perfect job or you may be getting too comfortable at work. Your workplace shouldn’t serve as a second home, it should be a temporary stop on the road to something greater.
When you are too comfortable at work it becomes easier to let your career go stagnant. Once you are emotionally attached to the comfort and stability your job provides, looking for new opportunities is no longer your top priority. Even if you are perfectly happy with your career, keeping your office life mostly work-focused can help you maintain a healthy work/life balance.
Did I miss anything? Let me know your thoughts.