You don’t have to know everything about money to be good at personal finance. In fact, personal finance largely comes down to a few simple rules that anyone can master — even if you don’t have a business degree or a head for numbers.
Here are the 10 biggest money mistakes anyone can make and how to avoid them.
Most people know that credit card debt is the worst debt you can have, and it’s true. The typical credit card APR is about 25%, higher than most other types of loans.
That can have severe consequences over time. For example, let’s say you carry a $5,000 balance with 25% APR and only make the $150 minimum payment. You’ll end up paying $3,625.11 in interest.
If you’re saving for retirement, you probably think that you’re doing the right thing. However, you might be making one crucial mistake that could cost you millions.
One of the most expensive mistakes you can make is not selecting any investments in your IRA, 401(k) or other retirement account. Here’s what we mean: When you open a retirement account, you have to transfer money from your bank account to your retirement account.
Unfortunately, some people don't realize there’s another step: actually choosing which investments you want to buy. Without completing this step, your money will essentially sit as cash, instead of growing in the stock market.
If you’re not comfortable investing your money, you may want to hire a professional to help you. But be careful. Some advisers charge high fees for their management services.
You might think that a 2% fee sounds low. After all, a loan with a 2% interest rate would be a steal. However, investment planning is different. The typical rate of return is about 10% a year before inflation, so paying 2% a year would actually eat away a huge portion of your earnings.
Having a life insurance policy is crucial, especially if you have a family. However, choosing a whole life insurance policy may be the wrong choice. It could cost you thousands per year. Monthly premiums for whole life policies are often 10 times more than they would be for a term life policy.
In general, whole life policies are best only if you have a high income or net worth and need to minimize your tax burden.
Also, most people don’t need life insurance for their whole life. They only need it while they’re still generating income for their family. That’s another reason why a term life policy is better.
Every parent wants to help their children, but you could be shooting yourself in the foot. Before saving for a child’s college education, you have to prioritize your own retirement savings.
Your children can always take out loans to pay for college, but you can’t take out a loan to pay for retirement.
The best thing you can do for your kids is to ensure your financial future so you won’t be a burden to them later on. And when it’s time for them to go to college, you can help and encourage them to complete scholarship applications to minimize their student loans.
It’s tempting to take money from your retirement account, especially if it's only a small sum. However, that’s one of the worst things you can do.
When you withdraw money from your investments, you won’t be able to reap the benefits of compound interest.
Let’s say you take out $10,000 from your retirement account to pay for a vacation and some home improvements. In 30 years at 7% interest that $10,000 will be worth $76,122.55. And taxes and fees make the withdrawal even more costly.
Even if you're living withing your means, you should still review your bank and credit card statements regularly. If you don’t, you may not notice mistakes, like being billed for a canceled subscription, or credit card fraud.
Set aside time weekly or monthly to look at your statements. If you’re married or have a partner, do this together so you can both see how much you’re spending.
Your credit score is a huge part of your overall financial health and not checking it regularly can lead to major problems. If you don’t look at your credit report, you may not find instances of fraud, like someone opening a credit card in your name. About 1 in 5 people has mistakes on their credit report that could hurt their score. This could really come back to bite you when it’s time to apply for a new loan or credit card.
You can check your official credit report at AnnualCreditReport.com. You can view it for free once a week with each of the three major credit bureaus.
Many new homebuyers use their current rent as a guideline for how much house they can afford. But homeowners are also responsible for all utility payments, trash and recycling, and, of course, repairs and maintenance. That’s why it’s best to spend less on your mortgage than your monthly rent.
Plus, property tax changes or higher homeowners insurance premiums can also increase mortgage payments. It’s best to spend less on a home so you’re not stuck with a mortgage you can’t afford.
The average Social Security monthly benefit is only about $1,700, which isn’t enough to cover expenses for most people in retirement. And with the death of company pensions, it’s up to individuals to fund their retirement.
That's why saving and investing for retirement is crucial. It’s the only way to ensure your money outpaces inflation.
And even if you plan to work forever, plans can fail. Almost 60% of adults have to stop working before they planned to, often due to health reasons or needing to care for someone else.
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