One of the great joys of growing up is getting to the point where you eat mac & cheese because it sounds good and not because it’s all you can afford. Earning a steady paycheck is awesome. No need to scramble when the rent is due and no more scrounging under sofa cushions for beer money. But entering the world of financial freedom brings about a fresh new set of accountability and responsibilities. In this post we’ll cover five of the most common money mistakes and what you need to do to evade them. Related: 4 credit mistakes to avoid
1. Maximize Savings by Minimizing Waste
Watching the balance rise on your savings account is a glorious thing – particularly after half a decade or more of living week to week. But, you are missing out on even greater savings if you’re not using a budget. Setting a budget helps you limit frivolous spending on non-essential commodities like lattes and meals out. Cutting just five bucks a day for a year will pay for a relaxing week in Mexico. If you aren’t confident in your ability to set up a budget on your own, check out YNAB or Dave Ramsey’s Envelope System.
2. Want to be a Millionaire?Compound interest is your best friend when it comes to amassing an enormous bankroll. Putting off retirement saving for later is dumb with a capital D. Let’s look at a quick example that will be sure to frighten you into calling up Human Resources to activate your 401K plan tomorrow:
Say two friends annually contribute $5,000 to their 401K with an average of 10% ROI over the life of the account. Friend A starts at the age of twenty and Friend B starts at thirty. If they both retire at 65, Friend A’s 401K will be worth a whopping $ 2,239,402 more than Friend B’s. Yes, you read that right. $50,000 has grown to over two million dollars. But don’t sweat it if you’re already approaching the big three-oh. Friend B’s account will still be worth 7 figures. The lesson here is simple. The time to open your 401K or Roth IRA is now and the amount you should be contributing is as much as you can reasonably afford. Keep Reading: Are you making these 6 critical spending mistakes?
3. You Can’t Beat Free!When you’re young and irresponsible credit cards are the enemy to financial stability. Once you’re sufficiently organized to pay the balance off each month you’d be foolish not to use plastic for everything. From cash back to free travel or reward points, credit card companies offer all sorts of goodies simply for purchasing the stuff you’re going to buy anyway. Check out this post on five killer air miles credit cards to get a better idea of how participating in reward programs is money in the bank.
4. It’s Not Your Father’s Savings AccountHistorically (60’s, 70’s, 80’s) your standard savings account provided an APR of between 4 and 6 percent. Certificates of Deposit garnered even better guaranteed earnings. But those times are long since in the past. Nowadays you’ll need to take on a little more risk if you want to clear more than 1.5% on your savings. There’s not enough space here to cover all the ins and outs of building a well-diversified financial portfolio but all you really need to know for now is that today’s savings accounts don’t even cover the cost of inflation. Once you’ve got more than a couple grand in the bank you need to be “saving” less and investing more. Keeping all your cash reserves in a plain old savings account is literally just one step better than stuffing it into a shoebox under the mattress. Keep Reading: Money traps to watch out for in your 40s
5. Are you Getting Nickel and Dimed?Speaking of bank accounts it’s important to note that not all checking accounts are created equal. Unfortunately navigating the plethora of choices out there can be dizzying. The secret to selecting the perfect account for you is to first evaluate how you plan on using it. Online banks generally offer the best rates and the lowest fees but if you’re the type that prefers to visit a branch this option might not work. Credit unions are great for those who tend to stay local whereas a national chain bank might be better for someone who travels a lot. Maybe you’ve already got the perfect account. Maybe you don’t. The bottom line is it’s worth a couple hours of your time to look into it.
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