No matter who you are, what you do or how intelligent you are about money and finances almost all of us will make at least a couple of financial blunders in our lives. Most of these mistakes are simply due to lack of knowledge and experience but some of them, indeed the worst of them, are usually those that seem harmless at first glance. While we aren’t saying that the 5 financial blunders that we focus on below are the only ones that can be made they are probably the worst and thus should be avoided like the plague. And on that interesting note let’s get started. Enjoy.
- About 65% of Americans that were born during the ‘baby boomer’ years will receive an inheritance from a family member who has passed on. The median amount is $64,000.00 which is no small chunk of change. The mistake? Spending it all immediately on things that you might think are important or might think you need but actually don’t.
The problem is that most people who receive an inheritance are ill equipped to handle it correctly and use it to actually start making more money. Even if you think it’s a great idea to pay off your mortgage or buy a new car in cash the fact is that, if invested correctly, that $64,000 could generate enough interest to take care of the average person for the rest of their life.
- In 2012 over 40% of workers who left their jobs cashed out their 401(k) plans at the same time. It was also seen that the smaller the balance the more likely the employee cashed out. The mistake? Cashing out a retirement plan early means you’ll get hit with a 10% early withdrawal penalty and also get taxed on the entire amount. Not only that but any future interest that you would have earned will be completely wiped out. Financial advisors would recommend that, rather than cashing out your 401(k), you roll it into an IRA.
- Want to know the reason that it’s a great idea to have your 401(k) automatically take money out of your check every time you get paid? Simply put, if it were up to most people to put 5% of their pay aside every week their 401K plan would be practically empty. The mistake? Not taking advantage of automatic 401(k) deductions. Your 401(k) shields you from taxes and in most cases your employer has matching contributions. If you don’t put money into your 401(k) you lose both these, a substantial loss over a 30 year period.
- When the average person gets a raise they suddenly start spending more in many cases. For example, moving into a nicer but pricier apartment. The mistake? This ‘lifestyle inflation’ can eat up your raise and more, leaving you with a more costly lifestyle will that will not only be disadvantageous in retirement but will lower the amount of money you have when you get there. Better to take that raise and fund your retirement with it while keeping your lifestyle more or less the same. (We don’t have a problem with taking a little bit nicer vacation to reward yourself however.)
- With mortgage rates extremely low many people are using some of the equity from their home to make investments in the stock market, thinking that their money is better used and will make more interest there. The mistake? Historically, when the stock market is at a multiyear high it is the exact wrong time to enter the market. Not only that but investing in stocks is much more risky. And that to the fact that retirees who have paid down their house and were debt-free are in better shape than those who used their home equity to buy stocks and you’ll see that it’s not a very good idea.
Have you made any of these financial mistakes? We hope not and we also hope that this blog will help you to avoid them in the future. Thanks for reading and make sure to come back and visit us again soon. We’ll be here and we’ll have more excellent financial advice and tips for you. See you then.