4 Common Money Mistakes to Avoid
By K. Bridget Schneider, CFP®, CRPC®
Are you making money mistakes as you pursue your goals? Often, the constant reminder to follow your dreams comes at the expense of receiving prudent financial advice. Or that advice falls to the wayside as you pursue whatever makes you happy. After all, the goal of setting aside 25% of your paycheck doesn’t typically receive the same fanfare as purchasing a new car or your first home.
While attainment of your goals is worthy of applause, after a decade or so into a career, you may end up feeling like a caged hamster on a wheel – not really getting anywhere. At that point many people begin to recognize a more practical goal and are ready to take on some better money habits. So, let’s consider four of the most common money mistakes people make as they ready for retirement.
Paying Off Debt Before Saving for Retirement
You may think that you need to pay off debt before you begin contributing to retirement accounts. Whether it is credit card debt, school loans, or a current mortgage, I have heard, “I’ll start saving as soon as this is paid off.” Or, “I’ll be able to set aside so much more once I have the house paid off.” However, this is one of the most common money mistakes. And there are a couple of problems with waiting to contribute.
The first issue is time. The earlier you start saving, the longer the money will have to compound. Time is your friend as you seek growth of your retirement savings.
The second issue is that you may miss out on free money from your employer. This commonly has minimal strings attached, such as requiring a minimum contribution from you to receive it. Take advantage and claim this money before worrying about early pay-off of your mortgage or student loans.
You may also think about where you can potentially earn your best return. For example, if you pay above 6% interest on your debt, you might consider finding ways to refinance it at a lower rate. However, if your interest rate on the debt is less than that, you could invest for the long term rather than paying the extra amount to retire the debt early. Investing an extra $200 per month from age 27 to age 67 at an average annual return of 7% could grow to over $528,000. So, setting aside even small amounts now with the goal of bumping up that contribution as quickly as possible is a great idea.
Investing Too Conservatively for Your Age
Are you a conservative investor? While you should always consider your feelings about market volatility and risk when choosing an investment, a common money mistake is not thinking about how much time you have until you need the funds. Ask yourself how you will use the funds in the future.
For example, you may plan to use the savings in 10 years, but will you need the entire sum all at once or will you take a stream of income? What percentage of that investment will the income stream represent? If that income stream is only a small amount of the total available to you, then you may consider taking a little more risk in your investments. Historically, equities have been the place to invest money for long-term growth. My point is that appropriate asset allocation can be used to balance the risk with your desire for return on your investment whether you are years from needing the funds or have a more near-term need.
Taking Too Much Risk
Now, there is another side of the money mistake I just mentioned. Some investors take on too much risk in their investments. For example, if you got a late start on your savings, you may decide to use an aggressive investment to “catch-up”. An investment is selected that has shown a high rate of return. Unfortunately, these aggressive investments usually go hand in hand with volatility. Before they know it, an investor is unhappy with their choice because it hasn’t gone up the way they expected. Instead it has declined, and they decide to sell it before the value drops any further. A better strategy may be asset allocation to help you reach your desired return while balancing the volatility.
Planning to Work Forever
You may love your profession so much that you never plan to retire. But there is a difference between choosing to continue to work and not being able to quit work. Or even worse, what happens if your plans to work for your lifetime are derailed by an unexpected event? If you invest early and often you may have options in that unknown future. After all, having a ticket to the retirement dance and choosing not to go is far better than not having one at all.
I hope this list of common money mistakes helps you on your financial path to better money habits. Some of you may find value in talking with a Financial Advisor or Certified Financial Planner™ professional. If you would like help with investing or have financial planning questions that need answers, then be sure to visit our website today or call us at 217-605-8130. We want to help you make more informed financial decisions. As your friendly financial guide and ally, we can help you create a budget, develop a financial plan, review your investment strategy, or structure an estate plan that makes sense for your unique situation.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
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