30 Financial Mistakes You Should Avoid (Seriously, Don’t Do This)
Talking about financial mistakes isn’t the most exciting thing, and focusing on the negative isn’t really my favorite approach to a blog post either. But here’s the deal: understanding and avoiding these common financial pitfalls can save you from some serious headaches down the road. Think of this as a guide designed to help you dodge those traps, so you can enjoy a smoother, more secure financial future. From avoiding high-interest debt to knowing how much you need for retirement, the right decisions now can set you up for success later. Ready to learn and make smarter choices? Let’s dive in and make sure you’re not falling into these 30 money mistakes!
Debt Management
DO NOT:
1. Pay only the minimum on debt or credit cards: Paying only the minimum on your debt or credit cards results in high-interest charges and extended repayment periods. This keeps you in a cycle of payments with little progress toward reducing your balance.
2. Take a cash advance on a credit card: Cash advances come with high fees and immediate interest charges, making them an expensive option for borrowing money.
3. Consolidate credit card debt on a secured asset or credit line (HELOC/home/car): Using a secured asset to consolidate credit card debt puts your property at risk if you fail to make payments, leading to potential foreclosure or repossession.
4. Prioritize unsecured debt over secured debt: Failing to pay off secured debt first (like mortgages or car loans) can result in losing your home or vehicle, while unsecured debt, although damaging to your credit, does not carry the same immediate risk.
5. Borrow from your retirement/401(k): Taking loans from your retirement savings can severely harm your future financial stability, as it reduces your growth potential and often has penalties if not repaid quickly.
6. Co-sign a loan: Co-signing a loan puts your credit and finances at risk if the borrower defaults, as you become responsible for the debt.
Insurance & Investments
DO NOT:
7. Buy whole life insurance – it is NOT an investment: Whole life insurance premiums are much higher than term life, and much of your payment goes towards fees and commissions, not the death benefit or investment growth. Term life insurance offers more affordable coverage, allowing you to invest the difference elsewhere.
8. Try to time the market: Trying to predict market fluctuations is nearly impossible and can lead to poor investment decisions. Consistently investing over time, regardless of market conditions, is often a smarter strategy.
9. Forgo health insurance: Going without health insurance can lead to catastrophic financial consequences if unexpected medical expenses arise, leaving you with high out-of-pocket costs.
Long-Term Financial Health
DO NOT:
10. Save for your children’s college before securing your own retirement: Prioritize your own retirement first—your children can borrow for college, but you cannot borrow for retirement.
11. Invest less than it takes to get the company match in 401(k): Not taking full advantage of your employer’s 401(k) match is essentially leaving free money on the table that could significantly grow your retirement savings.
12. Neglect an emergency fund: Not having an emergency fund means you’ll rely on credit cards or loans when unexpected expenses arise, which can lead to debt accumulation and financial strain.
13. Think you don’t need a budget: Many people believe budgeting is unnecessary, but without one, it's easy to overspend and lose track of your financial goals. A budget helps you manage your spending, save for future expenses, and prevent financial stress by making sure your money is working for you.
14. Think you can’t afford to save: Even small, consistent savings can add up over time and provide financial security. Cutting unnecessary expenses or delaying discretionary purchases can free up money to put into savings. Pay yourself first by saving - automate directly from your paycheck.
15. Fail to understand how much you need for retirement: Not understanding how much you need to save for retirement can leave you unprepared. Familiarize yourself with the 4% rule (for example, having $1,000,000 at retirement means $40,000 per year in withdrawals for living expenses) to gauge how much you should be saving to ensure a comfortable future.
Borrowing & Credit
DO NOT:
16. Take out a HELOC or borrow against the equity of your home: Using your home as collateral for loans can be risky. If you can’t repay, you could lose your home and end up with even more financial stress.
17. Get a second mortgage: A second mortgage adds more debt to your home, often at higher interest rates, and puts your home at risk if you’re unable to make the payments.
18. Lend money to anyone, especially family – gift money is OK: Lending money to friends or family can strain relationships, and they may not be able to repay, leading to awkward situations and financial stress.
19. Add anyone but your spouse or adult child as an authorized user on your credit card: Adding non-immediate family members as authorized users can impact your credit score if they misuse the card or fail to make payments.
20. Take a 0% financing deal without a plan to repay within the terms of the agreement: If you miss even one payment or exceed the terms of the agreement, the lender can retroactively apply all the interest from the entire term, making it far more expensive than expected.
21. Never let anything go to collections: Failing to pay bills and letting them go to collections can seriously damage your credit score. Always do whatever you can to pay the minimum and stay current to avoid long-term financial consequences.
Lifestyle Choices
DO NOT:
22. Lease a car: Leasing a car means you're paying for the highest depreciation, plus interest on the lease. At the end of the lease, you own nothing and may face penalties for excessive wear or mileage.
23. Buy a mobile home: Mobile homes depreciate quickly, similar to vehicles, and often have higher maintenance costs, making them a less reliable long-term investment.
24. Pay for a time share: Don’t even go to the timeshare sales meeting. Timeshares come with high upfront costs and long-term maintenance fees, often leaving you with limited flexibility and little or no resale value.
25. Purchase something you do not have the money for: It seems logical, but credit card debt is at an all-time high across all income levels. Buying items on credit you can’t afford creates debt limits your ability to live your best life and to save for important goals.
26. Pre-spend your anticipated bonus: Spending your bonus before receiving it can lead to overspending or disappointment if the bonus is smaller than expected, making it harder to stay on track with your budget.
Financial Advice & Scams
DO NOT:
27. Pay someone to “repair” your credit: Credit repair companies often ruin your credit and charge high monthly fees for services you can do yourself for free. Legitimate credit repair is usually a matter of correcting errors and improving financial habits.
28. Participate in a MLM (multi-level marketing) organization: MLMs promise profits, but in reality, 98% of participants lose money. They often involve high startup costs, ongoing fees, and recruiting others to make money, rather than selling actual products.
29. Take financial advice from someone who sells or earns a commission on financial products or services: Commission-based or AUM advisors may be biased towards recommending products that benefit them financially, rather than what’s best for your situation. Look for fiduciary, hourly, and fee-only professionals who act in your best interest.
Buying a Home & Financing Decisions
DO NOT:
30. Focus on monthly payments, not total cost: When buying a home or car, it’s easy to get caught up in what seems to be low monthly payments, but this can lead to financing for a longer period with higher overall purchase price due to interest. Always consider the full purchase price, interest, and term length to understand the true cost of the item you’re financing.
