Six of the Most Life-Changing Financial Mistakes and How to Avoid Them
Financial literacy is a lifelong journey. Fortunately, avoiding major financial mistakes can help you become financially secure without becoming an expert.
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Personal finance is such a broad and deep body of knowledge, so it's hard to feel like you can completely master financial literacy. The good news is, you don't have to become an expert to be financially secure. In many cases, avoiding the biggest financial mistakes—split second decisions or habits that spiral out of control—can change the entire course of your life.
Not having the right insurance.
Insurance premiums can feel like a waste until you have to cover significant losses out of pocket. Imagine having to cover the cost of a rental car that was totaled while you were driving it because you declined coverage, didn't use the right credit card, and didn't confirm that your personal insurance covered it. Adequate insurance is important for protecting yourself and your assets. For most people that includes homeowners, long-term disability, health, and life insurance.
Sinking money into trendy investments.
Social media hype and fear of missing out will tempt you to jump on the hottest investment trends even though you're not completely sure what you're investing in or why. Fast moving investments often crash just as quickly as they soared which could cost your entire investment if you're not careful (more if you borrowed money to invest). Because investing always involves some degree of risk, it's important to consider what you're willing to lose before committing your money.
Not saving for retirement early.
In your 20s and 30s, retirement seems so far away that you may not make it a priority. However, waiting until your 40s or 50s to start saving means you've lost years of compound interest—where interest added to your deposits multiplies your earnings. Postponing your retirement savings means you'll work longer or save more aggressively to be able to retire comfortably. Investing $250 each month at 7% will give you $304,992.75 after 30 years. If you only have 15 years left until retirement, you'd have to invest $960 each month to reach the same amount.
Not focusing on your credit early enough.
Living with a low FICO® Score comes with challenges. Many of your options are constrained by your credit, which means you may have to make some expensive choices. For instance, you may have to rent longer instead of purchasing a home and building equity. Poor credit can leave you vulnerable to high interest rates and predatory loans and may raise your insurance costs. Prioritizing your FICO Score doesn't just allow you to qualify for better loans, it improves the quality of your life.
Blowing an inheritance.
Most people aren't prepared to have access to a large sum of money all at once. When beneficiaries don't have the behaviors and skills to preserve a large amount of money, it often gets spent pretty quickly—it's been observed that 70% of wealth is lost by the second generation. If you learn you're going to receive a sizable inheritance, consult with a finance professional to help you make the most of it. A tax attorney, accountant or financial advisor can advise you on your options.
Not negotiating your salary.
Taking a salary offer without negotiating can cost you hundreds of thousands of dollars over your lifetime. ZipRecruiter estimated a loss of $750,000 over the course of a career, for a person accepting a $40,000 offer versus negotiating up to $45,000. That's because your current salary impacts the raises you receive and serves as a baseline for negotiating new job offers. It's natural to be worried about asking for more. Try preparing to boost your confidence and refine your approach. The long-term payoff is worth the risk.
While some money mistakes affect you more than others, every situation is an opportunity to learn and do better. You may never make 100% of your decisions correctly, but learning to avoid the biggest blunders can add to your lifetime earning potential, relieve a lot of financial stress, and make life much easier.
LaToya Irby is a financial writer with over 14 years of experience. She's been quoted and published as a credit expert in several major publications including USA Today, U.S. News and World Report, TheBalance.com, and The Chicago Tribune.