Top 10 Money Mistakes

Top 10 Money Mistakes

In addition to not having enough money, most of us make money mistakes all the time. Let’s discuss the top 10 money mistakes most of us make.

Money Mistake #1 – Not Taking Advantage of Company Match for 401K

Retirement will be your largest expense ever! It’s important to take advantage of money your employer wants to give you. A 401K match is a 100% tax-free investment return. Since you cannot make up for lost company match in future years you have to take advantage each and every year. If your company has a 6% match, then, it would take only $130 out-of-pocket spending per paycheck to achieve $500K in 20 years.

article: 3 Keys to Healthy 401K

Money Mistake #2 – Not Taking Advantage of HSA/FSA Medical Benefits

It’s been said there are only two certainties – death and taxes. I would like to add rising medical costs to that list. Most companies offer Health Savings Accounts or Flexible Spending Accounts, which allow tax-free contributions. And most HSAs, which are for large deductible medical plans, also have company contributions – and your account balances roll over from year-to-year.

Money Mistake #3 – Giving the Government YOUR MONEY for FREE

Take advantage of the tax savings mentioned previously. In addition, don’t give Uncle Sam your money all year for free when it could be put to better use such as paying down credit card debt. Think about it. Not reducing debt all year on your 15% credit card, and then receiving a $3,000 refund is mathematically the same as charging $3,000 on your card to give the money to the government for free. Instead you could have reducing your debt by $250 per month all year! Financially successful people avoid tax large refunds. Broke people celebrate them. Which would you rather be?

articles: Preparing for Tax Season / How to Handle Your Tax Refund

Money Mistake #4 – Not Planning Your Spending

Early, I wrote a post called SPEND for Financial Success. In it, I explained the acronym S.P.E.N.D.

  • S – Save for emergencies
  • P – Plan your purchases
  • E – Establish financial goals
  • N – Never let others spend your money for you
  • D – Don’t forget non-monthly expenses

Money Mistake #5 – Not Protecting Your Assets

It’s important to insure for the big stuff. This includes your house and your car. You are not insuring for the little stuff such as your blender or your TV. But what could be bigger than insuring your income? That should be a priority. How do you insure your income? Using life insurance and disability insurance. If you are injured for a period of time, when will your sick leave run out? You should have a short-term and a long-term disability policy. Life insurance should be used to replace your income for your survivors.

article: Insure Only for the Big Stuff / Life Insurance Tips

Money Mistake #6 – Failing to Monitor Your Credit Score/Report

Interestingly, 72% of the wealthy know their credit score; only 5% of the financially disadvantaged know theirs. Wealthy individuals understand how important a credit score is in today’s electronic environment. They understand the importance of getting the best rate on loans, but they also understand that credit scores are used for so much more than just debt. Car insurance companies, employers, lenders and more use credit scores.

article: Credit Scores Explained

Money Mistake #7 – Not Saving Your Money Automatically

We already automatically pay our utilities, car payment, mortgage/rent and so on. So we automatically pay everyone else, but we don’t automatically pay ourselves. Why is that? We should be using automatic systems to invest in retirement, establish our emergency fund, reduce our debt, and so on. Set up separate multiple bank accounts to separate needs and wants or bills and fun. You can either direct deposit into these accounts or set up your main account to automatically move funds after each pay period. The key is automatic. Set it and forget it.

Money Mistake #8 – Mismanaging Debt

Debt takes away choices. So why give up more choices than you have to? Instead, pay down and eventually pay off debt. There are many strategies to do this. The three easiest ways to eliminate debt are:

  • Highest interest rate first (mathematically sound)
  • Smallest debt first (psychologically sound)
  • Cash flow approach (practically sound)

With each of these approaches, the key is to eliminate the first debt and then move on to the next. We also teach a specific DebtorADE™ strategy.

article: Debt Takes Away Choices

Money Mistake #9 – Trying to Time the Market

Investments are not microwave friendly; they must slow-cook! You can’t just put $1,000 into the stock market, wait 3 minutes and have a nice, hot $10,000. Investing requires patience. How do you know where to park your money? Align your investments with your goal time-line. Short-term goals should be in a bank account. Long-term goals should be in a brokerage account.

Money Mistake #10 – Borrowing from a Retirement Plan

When you borrow from your retirement plan you are risking a long-term position for possible short-term purposes. In addition, there are negative tax and growth consequences, especially if you lose or change jobs. Retirement accounts should not be used as a revolving account. Any use of retirement funds should be such a drastic situation that you consciously understand the trade-off of giving up possibly hundreds of thousands of dollars while in your most vulnerable years as a retiree.

Keep in mind, making good money decisions is not about learning one or two tricks like how to find a coupon code online or using a cool budget app. Its about seeing the big picture and understanding how to get the most out of every dollar you have and make sure those dollars are going towards the things that are most important in your life.

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Bill Pratt

Bill is an Assistant Professor of Business at Piedmont Virginia Community College. He speaks on topics related to personal finance on college campuses across the country and is the author of multiple books on personal finance. He left the financial industry to focus on helping people become personally and financially successful. He lives in Charlottesville, VA with his wife and their three pets.