Have you ever made a financial decision you wish you could take back?
Making a regretful money choice is the kind of thing that sticks with you for a long time. You end up thinking to yourself, “What could I have done differently? Why didn’t I think about it a little more before deciding?”
We’ve gathered advice from financial experts across the country about the most common financial mistakes average consumers make.
They responded with some excellent answers that we think you’ll enjoy. Each bit of advice will help you avoid poor financial decisions and achieve that second scenario we mentioned – making great financial decisions that set you up for success.
Along the way, we’ll add our own insights along with links to some of our most popular personal finance articles.
1. Short-Term Thinking
One of the biggest missteps we make in our decisions is looking a month or year ahead when we should be looking much further into the future.
Jon Dulin, a financial expert with Money Smart Guides, says that many consumers “get suckered into the instant gratification of society and buy the new smartphone even though they already have a perfectly fine one.”
The idea here is that, instead of spending $300 dollars on the latest phone, you can buy a used phone for $100 and put that extra $200 into a retirement account that can multiply over 20, 30 or 40 years.
But the problem of short-term thinking isn’t just a matter of retirement plans. Loans are also an area where we tend to look at monthly payments as opposed to the overall duration.
“Most people focus on the monthly price of a new car or house and not the overall cost including interest,” Jon says. “They could improve their financial situations greatly.”
How much does a lower monthly payment really cost me?
A common tactic among car salesmen is to dazzle you with a low monthly payment without telling you your loan payments will last six or seven years.
What’s the difference between a four-year loan and a seven-year loan on a $22,000 car at 6% interest? About $2,000. You’re basically handing the dealership $2,000 to pay $292 a month instead of $470.
If you decide on a cheaper car or the higher monthly payment, you could invest that $2,000 into a robo-advisor like Betterment or Wealthfront. If your portfolio grows at 6% per year for 10 years, that $2,000 turns into about $3,500!
Pro tip: When you’re buying a car, take a moment to crunch the numbers with a car loan interest calculator. It will help you see how much you could save over time with a higher monthly payment.
2. You’re Unprepared for Emergencies
When I was getting my graduate degree, I found myself in a tough position. I couldn’t work full-time because I wanted to do well in school. So, I worked a part-time job and took out low-interest student loans to make up the difference.
I also had credit card debt (I know…not a good situation!). Every semester, I’d cash my loan check and pay off all my balances. The feeling of bringing those balances down to zero was amazing.
But here’s the drawback – if an emergency came up, I was totally unprepared. And then I’d have to use my credit cards. The cycle continued!
Eventually, I decided to put those checks in savings and pay off my credit cards each month. I had money to pay for emergencies and I didn’t have to charge more money to my cards.
Looking back on these times, I would’ve worked full-time, avoided the loans and done my best in graduate school.
But it did teach me a valuable lesson – emergency funds are important in case a big hospital bill comes up, your car breaks down or you have to take your pet to the vet.
Expert money-saver and personal finance maven Andrea Woroch agrees.
“Those who don’t set up an emergency fund will find themselves relying on high-interest credit cards and digging themselves deeper into debt to pay for unexpected issues,” she says. “This turns into a vicious debt cycle that’s hard to break!”
Her suggestion? Treat monthly savings like a bill – add it to your budget and make sure you tuck away money each month in case of an emergency.
Treat monthly savings like a bill – add it to your budget and make sure you tuck away money each month in case of an emergency.
“Set up an automatic transfer from your checking account to your savings account,” she recommends.
While the general rule of thumb is to build up 6 to 9 months of savings, we know that’s not always possible. So start with a small goal that financial author Dave Ramsey recommends: $1,000. Once you hit that mark, review your debt and make decisions about how much money you can devote to paying things off.
One essential tool for building an emergency fund is creating a budget. If you don’t, you’ll have no idea how much extra money you have every month to put into savings.
3. Not Getting Expert Financial Advice
Though we’re not all financial geniuses, it seems like everyone’s got an opinion about when and how to use credit cards, what types of investments to make, buying vs. renting a home and more.
But just because someone – parent, sibling, friend, boss – has an opinion doesn’t make them an expert. And that’s where many of us stumble, says Tammy Johnston, founder and president of personal finance consultancy The Financial Guides.
“Most people don’t like financial advisors, don’t trust financial advisors and don’t want to pay financial advisors,” she says. “Instead, they try to do everything on their own or take advice from people that do not know what they’re talking about.”
In these types of situations, the story rarely resolves well.
“You end up making very costly mistakes,” she says.
California CFP Breanna Reish also mentioned that consumers often forego the advice of experts.
“You will not believe how many people come into my office and tell me all about the advice they’ve received from friends and relatives,” she said. “Your family and friends may mean well, but if they’re not financial professionals, take their advice with a huge boulder, not grain, of salt.”
But let’s be honest with ourselves. Who really wants to go through the trouble and stress of finding a trustworthy financial advisor when you can subscribe to some financial blogs and get free advice?
Our suggestion is to check out our two-part series on when and how you choose a financial advisor to oversee your investments. The first article helps you understand whether or not you need an advisor and the second article gives you tips for finding a reliable financial advisor.
4. Waiting Too Long to Start Your Retirement Plan
Have you ever been in a position where you knew that starting your retirement plan (401k, for example) was a good idea, but you felt like the extra money you’d put away would keep you from paying bills or just doing something fun every month?
Those crossroads of decision tend to either speed up our wise choices or delay them. Unfortunately, most of us delay retirement contributions, says Ryder Taff, a CFA with Mississippi-based financial firm New Perspectives.
“Many people postpone getting serious about their finances because they are afraid of looking into their own finances,” Ryder says. “They think their long-term needs are too far in the future or they mistakenly think they will be totally taken care of with some minimal effort on a 401k or through social security.”
“Many people postpone getting serious about their finances because they are afraid of looking into their own finances.”
Business Insider financial writer Libby Kane wrote a fantastic article about the importance of starting early. For example’s sake, she uses a chart from J.P. Morgan. The chart shows two people who put away $5,000 each year starting at two different ages (25 and 35) over two different time periods (40 years and 30 years, respectively).
The investor who started putting away $5,000 at 25 and ended at 65 retired with more than $1.1 million. The investor who started at 35 and ended at 65 retired with more than $540,000. It definitely pays to start early!
5. Giving in to Peer Pressure
You move into a new neighborhood and pretty soon you’re hanging out with neighbors. You begin to realize that their standard of living is a little higher than yours.
So, over the next few months you trade in your old vacuum for a Roomba, your 32” flat screen for a 60” OLED and you trade out that old Casio for an Apple Watch.
Ever been in that position? It’s hard to avoid it, especially if you and the people closest to you have different standards of living. All too often we live up to the lifestyle of those around us; rarely do they cut back their lifestyle to match ours.
Resist the urge to run at the same spending speed as those around you, Benjamin Sullivan, a CFP at the Austin, TX., firm Palisades Hudson Financial Group.
“Unless you’re Bill Gates or Warren Buffet, there’s always going to be someone wealthier than you,” Benjamin says. “Rather than trying to keep up with your neighbors, you should manage your spending based on your personal needs and goals consistent with your budget.”
Pennsylvania investment advisor Mike Falco, a 25-year veteran in the financial services industry, says another way to overcome this spending-fueled hindrance is to realize jealousy is at the root of the problem.
“Figure out what you’re jealous of, then figure out what you really want and start making it a priority in your life,” Mike says. “Be grateful for the things you already have, whether that means your health, close friendships, the love of your family or your fulfilling career.”
6. Using Your Emotions, Not Your Mind, to Decide What to Buy
Advertisers and marketers know that the average consumer is an easy target if he or she is shopping while in an emotional state or feeling alone. Why? Because our emotions cloud our judgment, and then we become vulnerable to scams or tricks we’d normally filter out.
The biggest impact of emotional purchases goes beyond just scams and tricks; you’ll most likely cut into your savings or go into debt with impulse buys.
To avoid this, Andrea Woroch recommends asking yourself “Why?” before you head out on a random shopping trip.
“Are you shopping because it makes you feel better after a tough day at the office or as a reward after scoring a big client,” she asks. “Such emotional spending leads to a big dent in your savings, results in wasted money and can land you in debt.”
Financial advisor Mike Falco also chimed in on this common mistake. He calls it “retail therapy”; we use spending to deal with life’s ups and downs.
His solution involves setting some ground rules for big purchases:
- Only buy items from a wish list you’ve made when you weren’t sad, anxious or distracted.
- Make yourself wait 24-48 hours before giving in to an impulse buy.
Put those two tips to use and we think you’ll find that you won’t make as many random purchases (and you’ll have a little extra cash in your savings).
7. Jumping on a Credit Card Offer Then Paying Interest on Purchases
You get an envelope in the mail from Chase offering you an amazing offer of 50,000 bonus points if you spend $4,000 on their Sapphire Preferred credit card. This is a great deal, you think.
So you get the card and rack up a $4,000 balance in the first month. But wait; you don’t have enough money to pay off the entire balance and interest kicks in after you make the minimum payment. If you’re APR is 20%, you’ll be paying about $65 in interest on that balance the following month.
Each month you don’t pay off that total balance, you’ll keep forking over interest payments. Those 50,000 points you got may seem great, but you end up paying a decent chunk of interest charges in order to get them.
Andrea Woroch has some great advice in this area: if you can’t pay the balance off every month, pass on the offer.
“Though it’s tempting to charge purchases … and also earn rewards like cash back or miles,” Andrea says, “refrain from throwing down the plastic if you’re carrying a revolving balance or you’ll end up wasting money on interest and those rewards you earn will become obsolete.”
How to Avoid Financial Mistakes That Can Cost You
Are you worried about making financial mistakes? You aren’t alone. Even if we make mistakes without knowing it, at some point in our financial lives we feel the distinct sting of regret.
Now, every person is different: incomes vary, bills fluctuate and spending habits are numerous. However, we’ve found the seven principles in this article can apply to nearly anyone:
When getting a loan, consider how much you’ll pay each month and how much you’ll pay overall. Long-term thinking is crucial.
Save up a small emergency fund of $1,000 to protect you if an unexpected expense pops up.
When making big investment decisions, consult financial professionals instead of friends and family.
Start your retirement plan as soon as you can. Compounded interest will make your choice pay off.
Live within your means and don’t compare yourself to your friends or neighbors.
Avoid buying things when you are in an emotional state; give yourself one or two days to think over an impulse purchase before making it.
Only apply for a credit card offer if you’re certain you can pay it off each month.
We’re not saying your financial problems will be solved if you practice each one of these; becoming a sound decision-maker is a big responsibility with all kinds of details. But we do believe that these seven tips are really important steps in your path to financial freedom.
» For Further Reading on This Topic:
- First-Time Homebuyer Tips: Expert Advice to Avoid Costly Mistakes
- How a Good Credit Score Can Save You Money on Mortgage, Car Loan, and Credit Cards
- How to Make a Personal Financial Plan: A Step by Step Guide