Not all mistakes are created equal. There are some mistakes that will cripple your finances for decades and leave you with less money in retirement. Since we’re human beings, it’s a given that everyone is going to make mistakes. The trick then becomes making inexpensive mistakes. Losing a small part of the cash you save to invest is better than losing all of it.
The financial mistakes people make are surprisingly common. That unfortunate situation in America likely has its roots in a near total lack of education about money matters. Students can graduate from high school without even understanding simple concepts such as calculating compound interest, the basics of lending, creating a household budget and balancing a checkbook. The only skill the state measures these days is the ability of students to fill in a bubble on standardized tests.
Student Loans
With tuition rising faster than inflation, being able to completely work your way through college debt free is increasingly difficult and only managed by a few hearty souls. Still, running up $80,000 in student loan debt for a liberal arts degree with an average starting salary of less than $30,000 a year is a guaranteed loser. Using college prep schools and community colleges to cut down the number of credit hours you need at a college or university is a cost cutting strategy that still works.
Buying Too Much House
Not only do people make this mistake routinely, they make it repeatedly. I’ve seen people sell perfectly nice houses simply because they got a raise and want something bigger in a nicer neighborhood. A mortgage that sucks down nearly 40% of your combined income is the cornerstone of financial stagnation. In a deflationary environment, like we’re experiencing now, mortgage debt actually can increase the stress on your finances.
Living In Debt
Too many people have a mortgage, car loan and credit card bills. They use credit card rollover offers to move money from one credit card to another. They lead a life of poverty steeped in debt and it goes on and on. The average American has 2.6 credit cards. With that much plastic the impulse to spend freely is a constant in your life. If you’re trading in cars before you’ve paid off the old one, you may want to seriously consider making some changes.
No Savings or Emergency Fund
This goes hand in hand with living in debt. When an emergency car repair or doctor bill strikes there’s nothing to fall back on except credit card debt. In the event of a serious illness, medical bills can pile up in a hurry. Cancer frequently entails surgery, doctors visits and, frequently, radiation or chemotherapy. Even if you have insurance the out of pocket expenses can run thousands of dollars. Not only that, but you’re likely to miss a lot of work recovering from surgery and dealing with the side effects of chemotherapy. Not having enough cash to cover emergency spending is a death blow to your finances and medical bills and job losses are still the top reasons for personal bankruptcies.
If you’re going to make mistakes, try to avoid the big ones that will keep you in debt for decades.