When it comes to money, it’s easy to get into hot water. Everywhere you look, ads are encouraging you to buy, buy, buy, even as your bank account is saying “no, no, no.” But splurging on a new pair of shoes and forgetting to set up a 401(k) have far different implications. Here are seven avoidable financial decisions with long-term consequences:
1. Taking on credit card debt
Almost all financial experts recommend paying off your full credit card statement balance each month, because getting into credit card debt will cost you far more than whatever you bought in the first place. For one thing, credit card interest is charged every day. Say you have a 16 percent interest rate on your credit card and a $1,500 bill. If you only pay off $150 each month, even if you don’t spend any more money, it’ll take you 11 months to pay off your bill, and you’ll end up paying $121 just in interest over that time period. While it’s tough to foresee circumstances like huge medical bills, for regular spending, aim to limit the amount you fork over to what you can actually afford. That said: If you can afford to use your credit card, don’t hesitate to break it out for everyday expenses. Regular, responsible credit use—that is, credit that you pay back in a timely fashion—will show banks and other lenders that you’re a reliable borrower.
2. Not setting up a retirement savings account
When you’re young, it’s easy to assume there’s plenty of time to save for retirement, and you don’t need to start just yet. But thanks to compound interest, it’s better to funnel a small amount into your paycheck at 25 years old, 40 years before you retire, than to contribute a lot 10 years before you retire. The interest on your account means that your small contributions will grow year over year, making it beneficial to save for as long as possible. And if your employer provides matching contributions, save as much as possible to meet those requirements—that’s free money.
3. Letting your savings account dwindle
Experts recommend keeping at least three to nine months of living expenses tucked away in an emergency fund in case you lose your job, have an unexpected medical emergency, or find yourself dealing with similar unforeseen expenses. But there seems to be a substantial gap between the recommendation and what people actually do. One 2014 Federal Reserve report found that 47 percent of U.S. residents said they couldn’t afford to cover a $400 emergency expense. To avoid finding yourself in a similar situation, leave room in your budget for some savings. Ideally, portion out your direct-deposit paycheck so that the majority of it goes into your checking account, and some goes straight into a savings account—ideally a high-interest one. Think of this account as totally off-limits, and avoid checking it often. (It’s much easier to save when you’re not thinking about it.)
4. Turning down your employer’s pre-tax benefits
Just like investing in your retirement pays off over the long run, so does taking advantage of pre-tax savings plans for medical and transportation purchases. Allocating some of your paycheck to a Flexible Spending Account or getting a bus pass through your employer lowers your taxable wages, meaning that you pay less in taxes on each paycheck. A 401(k) is a pre-tax account, too. And by putting money into an FSA, you get to spend the full amount that you earned, whether it’s $25 a month, $100, or more, without giving any of it into state and federal tax coffers.
5. Spending mindlessly
If you want to keep yourself on track with your savings goals and keep from blowing your whole paycheck on things you don’t really need, it’s important to make some sort of budget, if only to track exactly where your money goes. There are plenty of apps that will track your spending and help you categorize purchases, allowing you to see that you accidentally spent $300 on new gadgets last month but only $200 on groceries. With a better idea of where your money goes, you can figure out if your spending matches your goals and desires. Maybe you want to cut out some dinners out in preparation for buying a new computer in a few months, or really hate that you blow all your money online shopping. A realistic budget can help keep you on task. “Realistic” is the key word here: Don’t assume you can just make all your spending desires disappear, as you’ll only end up disheartened.
6. Avoiding your money problems…
When your bank account is looking sad or your credit card bills seem never ending, it’s tempting to just throw away the statements and just never log into your account. If you don’t acknowledge it, does it even exist? Well, of course, and if you just try to forget about it, you’re likely to incur overdraft fees, get hounded by bill collectors, and see a significant drop in your credit score.
The potential consequences here are too great to let this stuff get away from you. Aim to devote at least an hour, once a month, to paying your bills, reviewing your bank statements, and figuring out your financial goals. Treat it like you would any appointment—set up a recurring calendar event and stick to the schedule. Your financial health depends on it.
7. …And not getting help from a professional
Plenty of people are hesitant to ask for help with their finances. For one thing, it costs precious money. For another, what if they judge your terrible habits? Financial advisors can help you come up with a strategy to get out of a tight spot, but they can also generally help you set goals and get started on the way to achieving them. They’ll assess your finances completely, including your assets, insurance, taxes, and estate plan, and identify any weaknesses. They can also help you get started on investing, which can be a great way to keep your savings growing over a long period of time—just like that 401(k).
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