8 Alarming Signs You Could Be Sabotaging Your Finances

Managing your finances can be stressful, and many people make mistakes in the process. Unfortunately, mistakes you make with your money now can take years to recover from, so it’s a good idea to do whatever 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 damage their finances — and what you can do to protect yourself.

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1. Failure to Use Matching Contributions to Your Retirement Plan

In order to keep employees happy, some companies offer a pension contribution adjustment. If your company has an employer-sponsored pension plan such as a 401(k) or 403(b), it can cover a portion of your contributions up to a percentage of your salary. It’s a shared benefit. According to Vanguard’s How America Saves study, 51% of employers offered contributions.

Unfortunately, many people don’t take advantage of this because they don’t want to lose money from their paychecks. However, this is an expensive mistake that can cost you a significant amount of money in the long run.

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

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

  • Years of investment: 10

  • Initial 401(k) balance: $0

  • Your posts: $12,000

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

  • annual yield: 8th%

  • 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 on a low-interest account

While it’s a good idea to put your money in a savings account for when times get tough, keeping your money in a low-interest account could result in you missing out on interest.

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

For example, 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 that offers an APY of 2.35% (as of October 20, 2022). : October 20, 2022). 18th, 2022). Over time, the higher interest rate can help you earn significantly more interest on your savings.

Compare the best savings accounts.

3. Sell your investments when the stock market plummets

Watching the ebb and flow of the stock market can be scary. If your investments fall in value, you might be tempted to sell your stocks to recoup some of your money, but that can cost you in the long run.

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

By keeping your money in the stock market instead of selling it, you can weather market changes and make long-term profits.

4. Do not build up credit

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

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If your credit score is below average, 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 most important factors used to determine your creditworthiness. Make all your monthly payments on time to improve your credit score.

  • pay off debts. If you have credit card debt, student loan debt, or medical debt, focus on paying off your balances to lower your credit utilization.

  • Get a secured credit card. If you have bad credit or little to 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 the major credit bureaus.

  • Check your credit report. Check your credit report regularly and look for any 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.]

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5. Payment of only the minimum amount due by credit card

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

If you’ve only paid the minimum — that’s typically 2% to 3% of your account balance — it can take years to get rid of your credit card debt, and you’ll end up paying back thousands more than you originally calculated.

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For example, let’s say you have a $3,500 credit card balance at an APR of 16.17%. If your minimum monthly payment was $105 per month, it would take you 45 months to pay off your debt and 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 spend the difference on your paycheck on new clothes, eating out, or an updated apartment. However, lifestyle inflation can leave you living paycheck to paycheck despite your higher income, putting you at greater risk if an emergency occurs or you are furloughed or fired.

Instead, use your raise strategically. Put a portion of your pay rise – e.g. B. 10% to 15% – for fun expenses aside. Put the remainder of your raise into your savings account or retirement plan.

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For example, if you make $40,000 per year and get a 3% raise, your income would increase by $1,200 per 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 increased retirement contributions.

7. Don’t save for emergencies

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 millions of people who can’t pay for a sudden car repair, medical bill, or other emergency, you’re at risk of ending up in significant debt. A single unexpected expense could derail your finances.

Start building an emergency fund today. Although an emergency fund of three to six months is ideal, don’t let that number intimidate you. Set smaller goals, such as B. Building a fund of $500 or $1,000 to get started. Set aside a little money for every paycheck and increase it every month. Over time, you can build up your savings and get additional security.

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8. Borrowing money you can’t pay back

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 fund major purchases. Interest rates can leave you paying 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 unnecessary debt, borrow only what is absolutely necessary and borrow the minimum amount you need. Apply for loans that you can pay off within a few years and make sure you have a payment plan for scheduled repayments.

The final result

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

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This article 8 Alarming Signs You May Be Sabotage Your Finances originally appeared on FinanceBuzz.


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