There’s no need to beat yourself up over small money mistakes. As humans, we all slip up from time to time. But sometimes small blunders we think are harmless can end up becoming mistakes that compromise our long-term wealth.
While you make plans for the future, it is critical to be able to identify bad money habits that prevent you from reaching your financial goal. Going the extra mile to determine these bad habits and changing your wealth mindset is going to result in a healthy relationship with your finances.
Here are 5 common mistakes people make that sabotage their long-term wealth and overall financial success.
Having Excess Debt
Debt, especially consumer debt, is the biggest obstacle for wealth. One of your main priorities when protecting your long-term wealth should be to identify your debt and making a pay off plan for it. Compounding interest on debts or loans, in particular, can seriously hinder your way to financial success.
It is the sole reason why it is important to try and pay off your debt as quickly as possible instead of waiting until you think you are in a more financially secure situation. Waiting to pay off debt that is compounding delays the pay-off time as interest is increasing accruing onto your account.
One way to get started is by paying off as much as you can above the minimum balance due on your debts or loans. This means more money is going towards paying off the principal balance and will reduce the amount you are paying in interest.
Insufficient Retirement Planning
Saving up for financial independence and not having to rely on each paycheck is a giant money goal for everyone. Though saving for retirement may seem difficult when bills and other financial obligations pile up, it should begin as early as possible to reap the maximum benefits.
One of the best ways to get started with a retirement savings plan is using a 401(k), IRA, or 403(b). You’ll want to double-check with your employer if they offer a company-match on your retirement plan, and take advantage of that.
You will want to save at least enough to meet the match. Not only will you be getting “free” money from your employer, contributing to a retirement plan is also an excellent way to decrease your taxable income come tax season.
Create a Savings Goal You Will Stick With
Something that seems pretty apparent to do, but happens more than we assume it does is not putting aside money for investing or saving. Many people end up spending more than what they should be.
Getting unnecessary loans and splurging on credit cards too regularly can put you in debt which can easily spiral out of control with negligence and high interest. Not buying more than you can actually afford, and putting aside savings funds will help mitigate this bad money habit.
An example of a budgeting plan I personally like to use is the 50/20/30 rule. This rule forms the foundation for setting personal money goals for the year. The rule is based off of your after-tax pay and is divided to spending 50% on only the necessities, like rent or utilities, followed by 20% going to savings, and lastly, 30% going towards things like shopping, hobbies, or recreational activities.
Using this framework, you can modify the percentages to whatever your personal budgeting goals are. For instance, if you want to save up for a vacation or a new car, you might want to bump up your savings to 30% and decrease the amount you are spending eating out or whatnot.
Certain credit unions and banks will let you configure your accounts to automatically divide your paycheck into separate accounts whenever a paycheck gets deposited. This is a great tool to help you achieve your budgeting plans.
Having a Poor Tax Strategy
Everyone wants to figure out how to pay the least amount of taxes possible, and that’s for a good reason. Taking advantage of every chance to lower your tax liability will allow you to use the extra cash to save and invest more into building your wealth.
There are many tax strategies you can use depending on your financial situation. There are many things you can do to leverage your position to get the highest returns. For instance, you have the option to max out your retirement savings, make a charitable trust, or even consider moving to a state that has no state income tax.
Not Having the Proper Insurance
One major medical emergency can make a huge impact on your financial health. Without the proper health care coverage, medical expenses and bills can ruin your net worth along with your savings and retirement plans. For this reason, it is critical to make sure you have the most effective, best-suited coverage.
It’s worth taking the time out of your day to reanalyze your health care plan and see if there are any better options out there. You will want to find one that has a premium that aligns with your budget but also offers a good deductible and covers any out-of-pocket expenses you might predict happening to you.
It is recommended to try and save at minimum your total deductible amount as part of your emergency savings. If you qualify, Health Savings Accounts (HSA) are also an excellent, tax-free way of saving for future medical expenses.