8 Financial Choices You’ll Regret in 5 Years

Financial success will come easier if you can avoid these common mistakes.

If your goal is getting ahead financially, the formula for success is simple: Maximize tax-advantaged retirement accounts early, boost your savings with a Roth or traditional individual retirement account, choose investments you feel comfortable with and avoid debt like the plague. If you do those four things, you’re bound to enjoy less stress and more wealth over time.

But is it always that easy? Absolutely not. As you move through the various stages of life, you’ll encounter myriad pitfalls and temptations that can knock you off track – some of which can seem like a smart idea at the time.

Speeding toward financial independence is easier when you know which financial choices can slow you down. I spoke to a handful of top financial advisers to get their takes on the most common financial choices their clients live to regret. Here’s what they said.

1. ‘Investing’ in a New Car

“At first blush, buying the latest and greatest version of the ultimate driving machine may seem like a value worthy of your hard-earned money,” says California financial advisor Anthony M. Montenegro of Blackmont Advisors.

Unfortunately, new cars depreciate the moment they leave the lot, and continue dropping in value until they’re worth almost nothing. If you finance the average new car priced at more than $30,000 for five years, you’ll pay out the nose for a hunk of metal worth a small percentage of what you paid. (Remember, a good credit score can qualify you for lower interest rates on your auto loan. You can see two of your scores for free on Credit.com)

Pro tip: Buy a used car and let someone else take the upfront depreciation, then drive it until the wheels fall off. Once five years has passed, you won’t regret all the money you never spent.

2. Not Watching Your Everyday Purchases

While big purchases like a new car can eat away at your wealth, the little purchases we make every day can also do damage, says Maryland fee-only financial adviser Martin A. Smith. If you’re spending $10 per day on anything — your favorite coffee or lunch out with friends — your seemingly small purchases can add up in a big way. (If you must feed a coffee habit, the right credit card can help make it more worthwhile.)

Keep in mind that $10 per day is $300 per month, $3,600 in a year and $18,000 after five years. While you may not regret your daily indulgences, you may regret the savings you could have had.

3. Not Refinancing Your Mortgage While Rates Are Low

While refinancing your mortgage is anything but fun, now may be the perfect time to dive in. That’s because interest rates are still teetering near lows, says Colorado financial adviser Matthew Jackson of Solid Wealth Advisors LLC.

Even one percentage point can cost you – or save you – tens of thousands of dollars in interest over the years. Since rates will eventually go up, you “don’t want to miss the opportunity now,” says Jackson.

4. Buying Too Much House

Buying the ideal home may seem like a smart idea, but does your dream home jive with your financial goals?

Unfortunately, buying more house than you need can lead to regret and financial stress, says Vancouver, Washington financial planner Alex Whitehouse.

“Too much income going to housing payments makes it difficult to fully furnish rooms, keep up with rising taxes, and often leads to struggles with maintenance and utility costs,” notes Whitehouse.

Banks may be willing to lend you more than you can reasonably afford. If you want to avoid becoming house-poor, ignore the bank’s numbers and come up with your own.

5. Borrowing Against Your Retirement Account

While you can borrow against your 401K plan with reasonable terms, that doesn’t mean you should. If you do, you may regret it for decades.

“Millennials often ask if it’s okay to access their 401K or IRA early (before age 59 ½) to buy a home, travel or pay off debt,” says Minnesota financial adviser Jamie Pomeroy of FinancialGusto.com.

However, there are numerous reasons to avoid doing so.

Not only do you normally have to pay a penalty to access retirement funds early, but you’ll pay taxes too. Most important, however, is the fact you’re robbing your future self. You will regret the lost savings (and lost compound interest) when you check your retirement account in five years.

6. Not Using a Budget

While many people buy the notion that budgets are restrictive, the reality is different. If used properly, budgets are financial tools you can use to afford what you really want in life.

“I would suggest that you create a budget that you stick to,” says financial planner David G. Niggel of Key Wealth Partners in Lancaster, Pennsylvania. “At the end of the year, you have the chance to evaluate your spending habits and make some serious changes if necessary.”

If you don’t, your finances could suffer from death by a thousand cuts.

7. Not Saving as Much as You Can

While it’s easy to think of your disposable income as “fun money,” this is a decision you could live to regret in five years.

The more money you have saved later in life, the more flexibility you’ll have, notes fee-only San Diego financial adviser Taylor Schulte. And if you don’t get serious about saving now, you could easily regret it in the future.

According to Schulte, you should strive to “play it safe” when it comes to your savings.

“I’ve never heard anyone regret having too much money,” says Schulte. “But, I’d be willing to bet we have all heard far too many people complain about not saving enough or not starting earlier.”

8. Not Buying Life Insurance When You’re Young

If you are married, own a home, or have children, you need life insurance coverage. Unfortunately, this is one purchase that becomes more difficult – and more expensive – as you age.

If you don’t buy life insurance when you’re 25, you can expect to pay a lot more for coverage when you’re 30, 35, 40 and so on. And if you wait long enough, you may not even be able to buy it at all, says New York financial planner Joseph Carbone of Focus Planning Group.

As Carbone notes, if you develop a chronic health condition before you apply for life insurance coverage, you could easily become uninsurable. To avoid regretting inaction in five or 10 years, most people would benefit from applying for an inexpensive, term life insurance policy as soon as they can.

Image: Ridofranz

The post 8 Financial Choices You’ll Regret in 5 Years appeared first on Credit.com.

Your Financial Ignorance Could End Up Costing You Thousands

Everyone makes mistakes, but you can avoid these common financial blunders and end up saving yourself a lot of money.

None of us like to make mistakes, even though they’re frequently part of the learning process. Still, if you could avoid making mistakes, especially with your money, you’d probably prefer to do so rather than wasting your hard-earned dollars on bad decision making.

If that’s you, take heed. Here’s your chance to learn from others and avoid their mistakes.

A recent study by the National Financial Educators Council (NFEC) found that 28.8% of Americans aged 65 or older said their personal lack of knowledge about personal finances caused them to lose $30,000 or more in their lifetimes.

NFEC asked participants across age groups, “Across your entire lifetime, about how much money do you think you have lost because you lacked knowledge about personal finances?” Across all age groups, respondents said their lack of financial knowledge had cost an average of $9,724.83, with nearly a quarter of respondents reporting a loss of $30,000 or more.

The survey didn’t ask participants how they lost their money, or what bad decisions they made that led them to part with their cash, but the problem frequently boils down to one thing — people thinking they know more than they actually do. Case in point: Another recent study by Sallie Mae, “Majoring in Money: How American College Students Are Managing Their Finances,” looked at the financial habits of college students between the ages of 18 and 24, including the methods they use to pay for purchases, their knowledge and use of credit, and their money management skills.

Of those surveyed, 65% thought their money management skills were good or excellent. In reality, only 31% of these respondents answered three basic financial questions correctly. The questions were on how interest accumulates, how repayment behavior affects the cost of credit over time and how credit terms affect the cost of credit over time. (You can take a financial capability survey on the NFEC site to see how you compare nationally.)

Whatever your age, making financial decisions on assumptions or only part of the facts can lead to frustration and economic loss. But if you’re in your teens or 20s, chances are you haven’t made any major financial missteps, and can potentially avoid them altogether.

Let’s take a look at some of the key areas of the study and address how you can avoid making mistakes that could end up costing you thousands over your lifetime.

Paying Bills On Time

A large majority of respondents to the Sallie Mae survey said they pay their bills on time — a whopping 77%. Not paying bills on time can result in late payment fees. If they go unpaid long enough, there can be a snowball effect when they end up in collections. Suddenly, that unpaid phone bill is hurting your credit scores, which means it will cost you more in interest when you apply for things like credit cards, auto loans or a mortgage.

If you struggle to pay your bills on time, you’ll want to look at exactly why. Is it because you don’t have enough money to make the payments when they come due? You’ll be well served by reviewing your spending habits, creating a monthly budget and sticking to it. Are you just forgetful? Automating your bill payments can help tremendously.

Setting Aside Savings

A surprising 55% of college students reported setting aside savings every month. Having a financial safety net is important in the event of an emergency — your car breaks down, you break your leg and can’t work, you lose your job. Having an emergency fund or savings account is an important first step when it comes to financial security, so take a look at your budget and figure out how you can start saving small, eventually setting aside enough income to live on for three to six months if needed.

Tracking Your Spending

We’ve already mentioned it twice, but we’ll say it again: Having a budget is important if you want to stay in control of your finances, and tracking your spending is an important part of the budgeting process. More than half of college students surveyed (56%) said they track their spending, and you should too. There are lots of helpful apps available to help make it easier.

Having a Paying Job

If you’re in college and aren’t working, you may want to reconsider that choice. 65% of students surveyed said they had a paying job, and there are numerous studies that show students who work tend to manage their time better. Working also gives you the opportunity to manage your money better. Think of the nest egg you could put away if you don’t need the extra spending money.

Getting a Credit Card …

The majority of students surveyed (59%) said their No. 1 reason for getting a credit card was to begin building credit, and that makes a lot of sense. A credit card, wisely used, is one of the best ways to establish credit. There are lots of good credit cards for students that offer added incentives for making good grades and paying bills on time. There are also secured credit cards if you can’t qualify for a standard card, or you can ask a parent or guardian to become an authorized user on one of their cards to help you establish credit.

… & Managing It Well

According to the survey, 36% of respondents said they never charge a purchase without having the money to pay the bill when it arrives, while 23% said they have rarely done so. On the flip side, 25% said they sometimes do this, and another 15% said they do it frequently.

If you’re charging too much on your credit cards because you just need that latest gadget, keep in mind you’re only making life harder for your future self by racking up debt. If you’re charging too much because you’re using your credit card as an emergency fund for unexpected bills, you may want to consider the additional costs you’re incurring to pay off that debt. Putting a little money aside and earning interest on it is a much better alternative financially.

… By Paying Off Balances Every Month

The absolute best way to ensure you don’t get into credit card debt (and to boost your credit scores as much as possible) is to pay off your credit card balances every month. The survey found that 63% of the students surveyed pay off their balances in full each month. These students also tend to have lower average monthly balances — $825 compared to $1,635 among those who pay only the minimum amount due.

Carrying $1,500 in debt every month on a credit card with an APR of 15.99% can cost you more than $200 a year in interest. You can use this handy credit card payoff calculator tool to see how long it will take you to pay down your debt.

Paying Your Student Loans on Time

Just like making credit card payments on time (and in full, if you can) making student loan payments on time can have a significant positive impact on your credit scores, meaning you’ll qualify for better interest rates on better products with better perks. If you’re already behind on your student loan payments, it’s a good idea to contact your servicer right away and sort out how you can get back in good standing. Don’t let your student loans go into default because you’re afraid to admit you need help.

Being Aware of Your Credit Standing

Of the college students surveyed, 67% said they were aware of credit reports, and about half had viewed theirs (you can get two of your credit scores, absolutely free, on Credit.com).

The survey also found that those who had experience with credit were far more likely to have viewed their credit report than those without credit experience. For example, 66% of students with credit cards reported having viewed their credit report, compared with 27% of those who did not have a credit card.

Seeking Professional Help

Making financial decisions isn’t always easy, particularly when you’ve run into trouble. That’s why it’s always a good idea to consider professional help, whether for tax preparation, investing decisions or getting debt under control. Paying a reputable person for expertise and assistance can end up saving money in the long run.

Reading the Fine Print

Life is full of agreements, and many of those include legally binding contracts. Most are on the up-and-up, but it’s still a good idea to fully read any agreement you sign and understand the terms completely. If you don’t, this is another case in which you may want to seek professional help to save yourself frustration and possibly money further down the road.

These are the basics to setting yourself up to succeed financially. Of course, there will be hiccups along the way, but by staying on top of your finances and asking lots of questions, you’ll be able to avoid some of the common mistakes many people make.

Image: SIphotography

The post Your Financial Ignorance Could End Up Costing You Thousands appeared first on Credit.com.