6 common money mistakes to avoid

September 22, 2022

Unnecessary or misdirected spending can slow down your progress as you work toward meeting your financial goals.

 

Developing good money habits can take time and practice. Even if you have a financial plan in place, it’s not uncommon to veer off course now and then.

Here are six common money mistakes that you can turn into good money habits as you pursue your short- and long-term financial goals.

 

Money mistake #1: Too much discretionary spending


It’s fun to indulge in dining out, concerts and travel once in a while, but lifestyle creep can easily occur unnoticed over time as the occasional splurge becomes more frequent.

Develop a good money habit:

A good rule of thumb is to keep essential spending at 50% of your income, discretionary spending at 30% and to save the remaining 20%.

Consider tracking your spending patterns to get a better handle on where you money is going, so you can adjust as necessary.

 

Money mistake #2: Too little in your emergency fund


A couple thousand dollars in a savings account may seem like a good cushion, but not having enough money saved to cover an unexpected expense like a car repair, job loss or medical event can snowball. And having to redirect funds could negatively impact your other financial goals, like building your retirement savings.

Develop a good money habit:

The general rule of thumb is to have at least three to six months' worth of your household income set aside for unexpected expenses. Consider where you keep your money as well, as some types of savings accounts offer higher interest.

 

Money mistake #3: Overpay on housing


It can be tempting to lease an apartment or buy a house beyond your budget, even if you’re approved to pay more. Taking on too much in rent or mortgage payments could mean forgoing other financial goals or feeling financially pressured.

Develop a good money habit:

It’s commonly suggested that you spend no more than 30% of your gross income on housing. That benchmark can serve as a reminder that households have many expenses besides housing costs that need to be planned for.

It’s important to also consider whether the payment on your mortgage or rent will hinder your ability to meet other financial goals.

 

Money mistake #4: Put college ahead of retirement


It’s natural for parents to want to help their children with college, but it’s important not to sacrifice your own financial goals to do so. While children can apply for financial aid and take out loans to help cover their school expenses, your options for funding your retirement are much more limited.

Develop a good money habit:

Fund your retirement first by contributing to retirement accounts such as 401(k)s, IRAs and even HSAs. Also explore investing in a 529 plan for your child, available in most states, which provides tax benefits for college savings.

Cover part or all of your child’s college expenses if you have the extra income or savings beyond what is needed for your personal goals, but make sure it won’t affect your retirement planning and saving. Read more about how to pay for college.

 

Money mistake #5: Pay too much attention to market fluctuations


Your investment strategy should change along with your age and financial goals. However, changing your investment strategy based on emotion can hurt your returns. Investors who try to time the market in response to short-term swings often do poorly, and their portfolios would have performed better if they had followed a consistent plan.

Develop a good money habit:

Rather than attempting to time the market, focus on time in the market. While past performance is not a guarantee of future results, investors with diversified portfolios who stay in the market have historically and consistently experienced steady gains over time.

Consider crafting a long-term investment strategy with a financial professional that you can stick to.

 

Money mistake #6: Raid retirement savings


If you have an employer-sponsored 401(k) account, you can borrow money from your account, whether to pay for children’s college tuition or to cover emergency expenses.

While you’ll have a certain number of years to repay loans from your 401(k) (total years will depend on your loan type), you’d be making loan payments in addition to new 401(k) contributions until you’ve repaid your loans. If you leave your company, the loan must be paid off immediately. If you don’t pay it off, the loan will be considered a taxable distribution and possibly incur taxes and penalties. 

Develop a good money habit:

Resist this temptation if you want to stay on track for your retirement. You’ll lose out on the benefit of compound interest, meaning it may be costlier — and sometimes unrealistic — to rebuild your retirement fund to the same level later.

 

These common money mistakes can quickly derail your plans. However, recognizing and replacing them with good money habits can help get you back on track as you work toward your short- and long-term financial goals.

 

A written financial plan can help you take control of your money, no matter where you are in life. Read 4 key components of a financial plan.

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