Have You Made These Foolish Money Mistakes?
If you've made these common money mistakes, you're not alone.
Here are 10 real-life financial missteps that can happen to anyone, and why and how to avoid them.
Learn from these examples so you won't be taken by surprise—on April Fools’ or any other day!
How people are fooled into wasting money is a popular theme for April Fools’ Day articles. It can be fun to read about "common" financial mistakes and shake our heads at how people—usually other people—can be so easily fooled. But if we were all honest with ourselves, would we admit to making some of the same mistakes?
To find out, this year I thought I'd take a personal approach by asking friends, family and colleagues about the money mistakes they'd be willing to share. So here are some real life examples (yes, some even from financial ‘pros’). But no names—that would be too much sharing!
1) I took out more than needed in student loans. Oh, how that student loan money can be tempting. It easily can be used for so many things other than tuition and books, right? Don’t take the bait! Student debt is a huge burden, sometimes for years to come. And that reality only rears its ugly head after you've gotten yourself deeply in debt. Before you take on those extra loans, think about alternatives such as living on campus or getting more roommates to lower living expenses, or work part-time to offset some expenses. It may not be pleasant in the short-term, but long-term you'll thank yourself.
2) We had the down payment and were ready to buy our first home, but waited and were priced out of the market. Trying to time the market—any market—is rarely a good idea. Sure prices may go down, but they also may go up. The right time to buy is when you have run the numbers and are confident that you can handle both the personal and financial responsibility, even if you can't afford your dream home right away. A home should be treated as a place to live, not an investment.
3) I didn't start investing until my 30s because I didn't think I had the money or the knowledge. Having a small amount of money shouldn't keep you from investing in the stock market. You can open an IRA with as little as $500. (In some cases there's no IRA minimum if you sign up for automatic deposits.) As for investing information, there are lots of resources—financial advisors, trusted websites and books, or even a knowledgeable friend or family member. You don't have to be an expert. The most important thing—especially for something like retirement—is to get started early and enjoy the potential for long-term growth.
4) My wife and I went into debt to pay for our daughter's wedding. As a parent, of course you want the best for your child, but a dream wedding shouldn't become a financial burden. Every parent—and every couple—should look closely at their values, set a realistic budget, and realize that beautiful memories aren't dependent on the amount you spend. And even if you can afford a dream wedding, be sure to think about the trade-offs. Chances are you might rather have the extra funds for a house down payment or other long-term goal.
5) Instead of saving for the future, I banked on getting a big inheritance. The possibility of an inheritance should be considered an extra, not a substitute for your own savings. You never know what will happen to your potential benefactor or their estate. The only sure way to help secure your future is to plan and save for it yourself.
6) I figured I was healthy, so had minimal health insurance—then I had a major illness and fell into a financial crisis. Young people are more likely to think they don't need health insurance, but even a healthy older person can become overconfident and not have adequate coverage. The unexpected medical costs took a big chunk out of this individual's life savings. Adequate health insurance is a must!
7) I kept my daughter's college fund in the stock market until just before she graduated high school. As we all know, markets go up—and down. Leaving money in the stock market too close to any big goal is just plain risky, whether it's for college, the down payment on a home or anything else. In my mind, money you'll need within three to five years is best kept out of stocks. In this case, a gradual shift to less risky, more liquid investments as your child nears college age is a wise approach.
8) I ran up thousands of dollars in credit card debt before I even realized what I was spending. Behavioral economists have long said that pulling out the plastic is a budget buster. If we don't count out the cash, it’s just too easy to lose track not only of what we buy, but how much we spend. Credit cards are convenient and sometimes a necessity, but remember how interest and potential late fees can increase your debt if you don't pay off your balance each month. Need more convincing? Try a cost-of-debt calculator for a reality check.
9) My 401(k) seemed like an easy source for a loan. Now I'm struggling to catch up.
Borrowing from your 401(k) can seem like a risk-free solution for getting extra cash because you're borrowing from yourself and paying yourself interest. But it’s not that simple. Beyond the risk that you may lose your job and have to pay the loan back immediately, you're losing tax-deferred growth on the amount you borrowed. This can seriously jeopardize your retirement account, putting your financial future at risk.
10) I applied for Social Security benefits at 62 when I was still working. Taking benefits at the first possible chance can be tempting, especially if you’re questioning the future of Social Security. But while you may be supplementing your current income, there are two problems with that. First, depending on your income, your benefits may be temporarily reduced until you reach your full retirement age. Second, and perhaps more importantly, you're opening yourself up to a permanent reduction in benefits down the road. Best to investigate further and do the math before you apply.
Do you see yourself in any of these situations? If not, that's great. If so, you're not alone. But either way, don't be complacent. Even financial professionals can be fooled into making common mistakes. Try to learn from these examples so you won't be taken by surprise. Happy April Fools’ Day!
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