Don’t pay the stupid tax!
Mistakes, we all make ’em. But what are the top 10 financial blunders? I think I have made 8 of these mistakes (see below). Doh! I was being stupid in a no stupid zone. Consider your own personal financial journey. Have you made any of these mistakes? The crazy thing is, you can recover from your financial mistakes. Turn over a new leaf, turn those bad habits into good habits; how? one decision at a time and day-by-day. Wealth is built little-by-little (Proverbs 13:11); get your spending under control, get a part-time job and pay-off that stupid tax.
Learn from your mistakes; better yet, learn from others’ mistakes and don’t make the blunder in the first place. I believe Dave Ramsay estimates that personal finance is 80% discipline and 20% knowledge. Sounds about right to me. I can’t help you with the discipline part – that’s up to you! Choose each day to live for the future (stay on budget). Delay gratification. Save up for purchases. Take a tip from millionaires and sleep on a purchase before you pull the trigger, especially a major purchase. A 24-hour delay can make the difference between a good decision and a nightmare purchase that could haunt you for years. Talk to a close friend – who is good with money – don’t talk to your broke cousin who can’t hold down a job. Everyone should be tracking their expenses monthly and telling their money where to go and what to do.
Not saving enough/investing too little in my retirement
I will do a detailed post on this one, but for starters, I recommend saving 15% of your salary for retirement (including any company match). 15% assumes you start fairly early (in your 20s) and relies on the power of compounding and a diversified portfolio, invested mostly in stocks (index funds or mutual funds). If you have a 401k with a company match, start contributing right away! (only 1/3 of those with access to a 401k actually contribute anything, what gives?)
Accumulating credit card debt/spending outside my means/taking on more debt
Set a balanced budget. Setting a budget is simple – I didn’t say it’s easy – but it is simple. Spend less than you make. Start with the basics: food, housing, and transportation; then pay any debts you owe (e.g., student loans). I only recommend adding luxuries (don’t confuse wants with needs) if you are debt-free (excluding your mortgage). If you really want that new couch then save up and pay for it in full – don’t put it on a credit card.
I will do a separate post about budgeting, but I’m a Christian so I also consider tithing (giving to the church) as a basic (Malachi 3:10). My point is to budget for your needs before you ever consider budgeting for your wants. I know this is challenging, but overcoming the stupid tax is a game changer; it will take hard work, discipline and probably a little time too.
Harness your passion, develop your perseverance, in short – get some GRIT (see an excellent video below).
Track your expenses; manually or via mint.com – I’m old school and use an excel spreadsheet with a different tab for each month. If budgeting is a real struggle or you end up going over in certain categories (e.g., going out to eat), then go retro and use an old-fashioned envelope system (at least for those categories) – yep, cold, hard cash! Setup an accountability partner – your spouse or a close friend you can trust.
Draining my emergency fund/failing to budget properly
Draining your emergency fund is actually not a problem, if it is truly an emergency. Examples of emergencies include: car repair, house repair, and unplanned medical expenses, etc. Examples of expenses that are not emergencies: a smartphone, a vacation, the latest Xbox, etc. If you do drain your emergency fund, make sure to put at least $1,000 back – as soon as you can! I recommend 3 – 6 months living expenses after you are debt-free.
Taking out a 401k loan
This is technically your money but you end up getting taxed twice because you are repaying a 401k loan with after tax money – you will get taxed again when you withdraw in retirement. You could also end up with tax penalties if you change jobs before you pay it back. Plus, you are un-plugging that money from being invested and short-changing the power of compounding. Unless they are on the verge of repossessing your house, I don’t recommend it.
Top 10 financial blunders 2016 (per the Principal Financial Group Annual Financial Well Being Index 2016)
1) not saving enough
2) accumulating credit card debt
3) spending outside my means
4) taking on more debt
5) investing too little in my retirement
6) not budgeting properly
7) draining my emergency fund
8) failing to invest
9) investing at the wrong time
10) taking out a 401k loan
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