8 alarming signs that you could be sabotaging your finances

Managing your finances can be stressful, and many people make mistakes along the way. Unfortunately, the mistakes you make now with your money can take years to recover from, so it’s a good idea to do what you can to avoid them in the first place. Avoiding these pitfalls and setting achievable financial milestones will put you on the right path to a comfortable retirement.

Here are some of the most common ways people hurt their finances and what you can do to protect yourself.

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1. Not taking advantage of matching contributions to your retirement plan

To satisfy employees, some companies offer top-up pension contributions. If your company has an employer-sponsored retirement plan, such as a 401(k) or 403(b), it may match a portion of your contributions up to a percentage of your salary. It is a common advantage. According to Vanguard’s “How America Saves” study, 51% of employers offered matching contributions.

Unfortunately, many people don’t take advantage of this benefit because they don’t want to lose money on their salary. However, this is a costly mistake that can cost you in the long run.

For example, let’s say you’re 25, earn $40,000 a year, and your employer will match 100% of your contributions, up to 3% of your salary. If you contribute $1,200 per year to your 401(k) – 3% of your salary – your employer will contribute an additional $1,200 per year to your 401(k).

If you stay with your employer for 10 years at the same salary, continue to make those 401(k) contributions and earn the same match, you will receive $12,000 in matching contributions. By the time you turned 35, you would have only contributed $12,000 to your 401(k). But with your employer’s $12,000 in contributions and an average annual return of 8%, your 401(k) would be worth $36,257. That’s over $24,000 of free money that you would otherwise lose.

  • Years of investment: ten

  • 401(k) Starting Balance: $0

  • Your contributions: $12,000

  • Contributions from your employer: $12,000 (100% of your contributions, up to 3% of your salary)

  • Annual rate of return: 8%

  • Total at age 35: $36,257

Talk to your payroll or human resources department to sign up for employer matching and get every dollar you’re entitled to.

2. Save money in a low-interest account

While it’s a good idea to put your money in a savings account in case of bad weather, keeping your money in a low-interest account could cause you to lose interest.

The FDIC reported that the national average annual return as a percentage of savings is 0.21% (as of October 18, 2022). With such a low APY, your money will earn very little interest. However, you can find high-yield savings options that pay much higher rates if you’re willing to shop around.

For instance, Ally has an online savings account that offers 2.35% (as of October 20, 2022) annual percentage yield (APY), and Marcus of Goldman Sachs offers an online savings account with an APY of 2.35% (as of October 18, 2022). Over time, the higher rate can help you earn significantly more interest on your savings.

Compare the best savings accounts.

3. Sell your investments when the stock market goes down

Watching the ebb and flow of the stock market can be frightening. When the value of your investments goes down, you might be tempted to sell your stocks to get some of your money back, but this can cost you dearly in the long run.

According to Morningstar, a leading investing site, over 20 to 30 years you can expect average market returns of 8% to 10% for stocks and 4% to 5% for bonds.

By keeping your money in the stock market rather than selling it, you can ride out market fluctuations and realize long-term gains.

4. Not building credit

Your credit history and credit score play an important role in your life. If you don’t have a strong credit history in your 20s or even 30s, it can be difficult to qualify for a car loan, buy a house, or get approved for an apartment. In fact, your credit can even affect your ability to find a job. In a survey conducted by the National Association of Professional Background Screeners, 44% of employers said they perform credit checks on some or all job applicants.

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If your credit is less than stellar, spend some time building your credit history and establishing good credit habits:

  • Make all your payments on time. Your payment history is one of the main factors used to determine your credit score. Make all your monthly payments on time to boost your credit score.

  • Pay off the debt. If you have credit card debt, student loan debt, or medical debt, focus on paying down your balances to reduce your use of credit.

  • Get a secure credit card. If you have bad credit or little or no credit history, you may not qualify for an unsecured credit card. Instead, you can apply for a secured credit card to start building your credit history. Secured credit cards require a security deposit and report your account activity to major credit bureaus.

  • Review your credit report. Regularly review your credit report and look for errors or inaccuracies. You can check your credit report for free at AnnualCreditReport.com. [Note: Typically, you can view a report from each of the three credit bureaus once per year. But due to the COVID-19 outbreak, you can view your credit reports weekly for free through December 2022.]

5. Pay only the minimum due on credit cards

According to the Federal Reserve, the average APR on all credit cards that charge interest was 16.17%, as of February 2022.

If you’ve only paid the minimum – which is usually 2% to 3% of your account balance – it can take you years to get out of credit card debt, and you’ll be paying back thousands of dollars of more than you originally charged.

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For example, let’s say you had a credit card balance of $3,500 at 16.17% APR. If your minimum monthly payment was $105 per month, it would take you 45 months to pay off your debtand you would pay $1,178 in interest charges.

By increasing your monthly payments, you can lower your interest costs and get out of debt faster. Ideally, you want to pay off your credit card balance in full each month to avoid paying interest entirely.

6. Spend your raises when you get them

If you get a raise, you might end up spending the difference in your salary on new clothes, restaurant meals, or an upgraded apartment. But lifestyle inflation can cause you to live paycheck to paycheck despite your higher income, leaving you at a higher level of risk in the event of an emergency or if you are furloughed or laid off. .

Instead, use your raise strategically. Set aside some of your raise – say 10% to 15% – for fun spending. Deposit the rest of your raise in your savings account or retirement fund.

For example, if you earn $40,000 a year and get a 3% raise, your income will increase by $1,200 a year. You would set aside $180 – 15% of the increase – as extra spending money for entertainment, and the remaining $1,020 would be split between your savings account and your increased retirement contributions.

7. Not saving for an emergency

In a 2018 study, the Federal Reserve found that 40% of Americans would struggle to find $400 to pay for an unexpected expense. If you’re one of the millions of people who can’t afford a sudden car repair, medical bill, or other emergency, you may find yourself in deep debt; just one unexpected expense could derail your finances.

Start building an emergency fund today. While an emergency fund of three to six months worth of expenses is ideal, don’t let that number intimidate you. Set smaller goals, like building a fund of $500 or $1,000 to start with. Set aside some money each pay and add to it each month. Over time, you can build up your savings and give yourself additional security.

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8. Take out loans you can’t repay

Unfortunately, it is very easy to take out loans. Whether it’s a car loan, student loan or personal loan, you can borrow thousands of dollars to finance major purchases. Interest rates can cause you to pay back thousands of dollars more than you originally borrowed, and monthly payments can strain your monthly budget and make you feel like you’re drowning in debt.

To avoid getting into unnecessary debt, take out only the absolutely necessary loans and borrow the minimum amount you need. Apply for loans that you can afford to repay in just a few years and make sure you have a payment plan in place to pay them back on time.

The bottom line

If you’ve made mistakes with your money, you’re not alone; this is a very common problem. The important thing is to recognize some of the most common problems and take steps to prevent them from happening again. By coming up with a plan of action, you can create a more secure financial future. Consider using one of best investment apps to help you learn how to invest money to build a nest egg.

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