Five Big Money Mistakes

Avoid these financial pitfalls on the road to wealth.

We’ve all made financial mistakes. It’s part of our financial education—we bounce checks, forget to pay a bill on time, or run up credit card debt. These are common pitfalls on the road to financial competence. But there are some bigger mistakes that we are making that could prevent us from long-term financial freedom. Avoid these mistakes and you’ll be well on your way to financial health.

 

MISTAKE #1

Failing to Save: It’s the simplest, quickest road to financial freedom, so why aren’t more of us doing it? It’s easy to let bills—along with frivolous expenses—take precedence when you write checks to pay expenses. Instead, pay yourself first. Always. Start small and the payoff will be large.

Solution: Set up an automatic savings plan so that the money passes from your paycheck to your savings account, without making a pit stop in your hands, where you’re liable to spend it. Aim for saving 10% of your salary.

 

MISTAKE #2

Being House-Poor: It’s a common mistake—we commit to taking on too much house for our income. In reality, your housing costs should not exceed 30 percent of your income. Period. It’s important to leave yourself a cushion for other expenses and emergencies.

Solution: Run the numbers before you house hunt. Know your limit and stick to it. It’s easy to fall in love with a house we can’t afford or to be convinced by an enthusiastic realtor that it makes sense to buy out of our price range. It doesn’t make sense. Don’t do it. In the long run, that extra bedroom may not be worth the  stress associated with living beyond your means.

 

MISTAKE #3

Paying for College: We have all bought into the myth that we need to start stockpiling money for our children’s college education. The reality is that there are endless options for financing a college education, including scholarships, grants, and low-interest student loans. Unfortunately, there are no scholarship programs for retirement. If you have to choose between funding your own retirement or your child’s education, retirement takes precedence.

Solution: Start teaching your kids about money at a young age. Involve them in    the process. Teach them to take responsibility for their education. Encourage them to work, save, and earn scholarships. Funding a college education will be easier  for them than taking on the financial burden of parents who failed to plan for the future.

 

MISTAKE #4

Consolidating Debt: If something sounds too good to be true, it usually is. Debt consolidation often falls in the too-good-to-be-true category. Usually, in order to get a new low-interest loan to pay off our high-interest debt, we have to tie it to something of value—like our home equity. This is a recipe for disaster. More often than not, debt consolidation results in more debt—because as those credit cards are freed up, we start using them.

Solution: Be like a tortoise—take the slow and steady approach to your debt.  Reduce your spending and throw as much money at your debt as you can. Commit to it. It will take time, but you will eventually eliminate it—and probably never let it happen again!

 

MISTAKE #5

Refinancing a Fixed-Rate Mortgage: It’s tempting to refinance in order to enjoy lower monthly payments; however, refinancing comes with a cost—literally. Not only will you rack up extra costs, you’ll reset your mortgage loan “clock,” which simply prolongs your mortgage debt.

Solution: Do the math. The professionals recommend this equation: Take your current monthly payment and subtract your new lower payment. If the difference between these two numbers is enough to pay off the refinancing costs within 24 months, then you have a green light to refinance. If not, you may be making a big  financial mistake.