A study by Finder revealed that 126 million American adults admitted to having made a money mistake once in their lifetime. That goes to show that money mistakes are common but are also avoidable.
Our detailed guide explores some things experts agree you should never do with your money.
Spending More Money Than You Earn
One of the reasons most people get into debt is spending more money than they earn. Experts warn against keeping up with the Joneses or using money to impress others. Prioritize living below your means and investing for the future to attain financial freedom.
Avoid unnecessary purchases and overspending on useless upgrades. Additionally, don’t increase your spending when you get a raise. Instead, use the extra funds to invest.
Invest in Something You Don’t Understand
Avoid investing in something because of peer pressure or hearsay. Experts recommend seeking advice from a financial consultant when investing in bonds, stocks, mutual funds, real estate, etc. An experienced financial expert will guide you on the best options depending on your budget, preferred investment period, and risk tolerance.
Keeping Too Much of Your Money in Cash
Keeping a lot of money in cash may be a mistake, mainly if the interest rates decrease. If you prefer some form of liquidity and security, you can put your money into certificates of deposit (CDs) or high-yield savings accounts.
Set aside some cash for your emergency funds and think of a long-term investment plan that matches your risk tolerance, time horizon, and future financial needs.
Putting All Your Investments in One Place
While putting all your investments in one place may seem convenient, the risks far outweigh the benefits. Experts advise investors to diversify their portfolios to reduce the risk of market volatility. That would mean investing in fixed-income securities, bonds, stocks, and other assets to protect your portfolio.
An experienced financial consultant can help you achieve a diversified portfolio and advice on how to keep building your portfolio.
Not Factoring in Inflation When Investing
Inflation may seem trivial when considering investing, but it can quickly chip away at your investments. For example, inflation can reduce your returns on fixed-income investments such as CDs, municipal bonds, and treasures. Experts advise on factoring in inflation when investing.
That includes diversifying your portfolio to protect your money against inflation. You could also opt for treasury inflation-protected securities issued by the government.
Not Saving Enough for Retirement
Experts recommend investing at least 10-15% of your annual salary for retirement. Although it may be challenging to save for retirement, given the rising cost of living and inflation, having a balance can help you set some funds aside for retirement.
Investing in Overpriced Financial Products When Your Budget Doesn’t Allow
High-fee mutual funds, whole life insurance, and annuities may have a higher return on investment. Unfortunately, they also come with increased fees, which can interfere with your returns. It’s still possible to grow your wealth on your budget by investing in exchange-traded funds or low-cost index funds.
Wasting Money on Monthly Subscriptions You Don’t Use or Need
Experts advise against making emotional decisions when making long-term investments. Although things may sometimes go differently than planned, avoid making quick decisions based on such an experience. Speak to a financial consultant on investment and economic cycles to help you determine the best way to invest and how long to invest.
Accumulating High-Interest Debt
Experts recommend avoiding high-interest debt. Pay off your payday loans, credit card debt,
and other personal loans with high interest rates. Have a budget that accounts for these unpaid loans, and use any excess money you get to pay down the debt. Additionally, interest rates are expected to decrease in 2024, making it a perfect time to refinance with a new lender or negotiate with your lender on payment terms.
Cosigning a Loan
Experts warn against cosigning loans for your friends, family, or colleagues. That’s because it increases your debt-to-income ratio. While this may not be a problem if the borrower is paying, lenders will evaluate your DTI ratio when you borrow money to determine the risk of lending you money.
Unfortunately, Cosigning a loan could increase your DTI ratio and deny you any chance of approval when applying for a loan, mortgage, or credit card. Also, cosigning a loan means the risk is entirely yours, and any missed payment could entail paying up the entire balance.
Taking Out a Loan From Your 401K
Times are tough, and it may be tempting to dip into your 401K to cover some of your expenses. Unfortunately, the repayment ends up costing you more than your original contributions. Additionally, if your financial situation deteriorates and you’re unable to repay the loan, the loan becomes a withdrawal. That means the outstanding loan balance will be subject to taxation at your current income tax rate. You may also incur a withdrawal penalty if you are below 59.
Spending a Lot of Money on Take Outs and Fancy Coffee
Chasing a trendy lifestyle like buying fancy coffee or eating out daily may cost you a lot in the long run. Experts recommend focusing on building actual wealth rather than trying to look rich. They advise spending money on investments and using some of the money made through investments on the treats.
Master Your Finances
Mastering your finances and staying on track takes time, practice, and patience. With the above tips from experienced financial experts, you can better learn how to manage your savings, consult on investments, and avoid unnecessary purchases. Always consult an expert if you’re unsure about a particular investment or lack direction in your financial planning journey.
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