No one is ever going to be perfect when it comes to managing their money. And that’s OK. You don’t need to make absolutely every financial decision correctly in order to end up rich. But you should try to avoid some major errors that could end up making your life a whole lot more difficult for years to come.
In particular, here are three financial mistakes that could really come back to haunt your personal finances if you make them.
1. Buying too much house
Committing to a mortgage payment that is too large is one of the errors you are most likely to regret. There are a few reasons why that’s the case.
For one thing, you don’t want to constantly be stressed about how you’re going to make payments to your mortgage lender — and you might have to deal with this reality for three decades if you get a 30-year mortgage that’s not really affordable. The consequences of losing your home are also dire, as foreclosure could mean damaging your credit and losing most or all the money you put in.
Even if you do manage to make your payments, you may not be able to accomplish other important things with your money if you’ve committed too much of it to buying a house.
To avoid this error, keep your housing costs below 30% of your income. That’s total costs, including your mortgage, property taxes, and insurance. If you’ve already made this mistake, selling your house is one possible option, but may not always be the right one if you have a low-interest mortgage loan, since rates have gone up significantly in recent years. Instead, you may want to look into getting a roommate to help share the financial burden.
2. Going into credit card debt
Going into credit card debt is another huge error that you could end up paying for for years to come. The average credit card interest rate is 21.47%, so if you get stuck carrying a balance, you’re going to pay a fortune in interest.
Say, for example, you’re stuck with a $5,000 credit card balance and have a card with a 2% minimum payment. If you pay only the minimums, you’ll be making payments for more than 30 years and will make a total of $27,667.16 in payments. That’s a lot of money you’d have wasted — and that’s decades of your life that you’d be stuck sending a payment to a card company instead of using the money for better things.
To avoid this mistake, don’t charge more on your cards than you can afford to pay off when the statement comes. If you’ve already made this mistake and are carrying a balance, try to pay as much extra toward your debt as you possibly can to become debt free sooner. Or consider refinancing your credit card debt using a personal loan, which may have a lower interest rate and which will have a fixed payoff timeline. To do it, just apply for a personal loan, use it to pay off the card balance, and begin making payments on your new (ideally more affordable) loan.
3. Waiting to save for retirement
Finally, waiting to save for retirement can come back to haunt you when you have a lot less money as a retiree — or have to save a lot more later to catch up. That’s because you miss out on a ton of compound growth if you delay the time you start investing.
The table below shows how much you’d have to invest to retire with $1 million at age 67 depending when you started saving, assuming a 10% average return on investment (in line with the stock market’s average over the last 50 years). As you can see, you may really regret not starting earlier when you look at the difference in required monthly contributions for those who started early versus late.
| If you have this many years to save… | You’ll have to invest this much per month… |
|---|---|
| 10 | $5,228.77 |
| 20 | $1,454.96 |
| 30 | $506.60 |
Data source: Author’s calculations.
To avoid this mistake, start saving as much as you can today to get compound growth working for you. If you’ve already made this mistake, use the calculators at Investor.gov to determine what you’ll need to set aside each month. Take advantage of tax breaks on an IRA, try to claim your full employer 401(k) match if available, and work to cut your spending and increase your income so you can hit your savings targets.
Ideally, you can avoid these three financial mistakes. But as you can see, even if you’ve made them, there are solutions — and the sooner you start implementing them, the faster you can move past the financial mistakes of your past and go on to a brighter future.
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