It’s no secret that good financial habits are important to have. But you may wonder what exactly those good habits are.
In order to know which habits are good ones to take up, let’s take a look at which habits are not. Below are ten ways many people run into trouble with their finances. If you can recognize these pitfalls and create a plan to counteract them, you’ll be on your way toward financial security.
1. No Emergency Fund
It is absolutely essential that you establish an emergency fund of at least three months’ worth of expenses. This should be closer to six months if your job is insecure. Periodically, things will happen that require an unexpected outlay of cash. Unfortunately several bad things frequently happen at the same time. Without an emergency fund, you may be forced to run up credit cards or sell investments at an inopportune time. This can start a debt spiral that is very hard to break.
2. Failure to Save for the Future
We have to save for the future! Eventually, there will come a time when we need to retire. We need to save for retirement as well as life goals, including a down payment on a home, a new car or college education. Everyone should always save at least 10% of their annual salary. You may need to save 15%-20% if you are getting started late.
3. Living Beyond Your Means
Spending more than you earn is a surefire way to sabotage your finances. Take the time to review your monthly expenses and develop a budget to keep from overspending. Avoid getting into the trap of charging more than you can afford on your credit card. If you want something beyond your current budget, look for ways to reduce spending in other areas or save for it. Don’t charge anything you can’t pay off at the end of the month.
4. Failure to Diversify
When investing for the future, it is essential to maintain a well-diversified portfolio in a wide spectrum of stock and fixed income securities. If your portfolio is heavily weighted in aggressive mutual funds, you take the chance of losing a lot of money if the stock market drops. If your portfolio is heavily weighted in fixed income, you may be unable to keep up with inflation and cover your retirement needs. If you hold large amounts in an individual stock or bond, you take the risk of losing your money should the issuing company go out of business. We can’t predict the future, but diversification helps to minimize the turbulence.
5. Spending Too Much on College
Many young people start out their adult life at a disadvantage with huge student loans. Reasonable student loans can be a good investment if your education prepares you for a better career and a higher paying job. However, there should be some correlation between your earning opportunities and the amount of student loan debt you accrue. Try to keep your loans to a minimum, there are many ways to minimize and cover college expenses.
6. Timing the Market and Reacting to Emotions
Numerous studies have found that timing the stock market is futile. Establish a diversified portfolio that supports your risk tolerance and your investment timeframe, and stick with it! We are emotional creatures and our intrinsic sense of fear and greed tempt us to overreact to changes in the market.
7. Failure to Manage Your Career
We often focus on saving money and earning more on our investments, but fail to work on managing our career and improving our income. It’s easy to become comfortable and complacent, so you need to proactively work to improve your career. It is crucial to stay current in your field and maintain your professional network. It’s also important to communicate with your employer about mutual expectations and what is required to move up or increase your income. You may need to ask for a well-deserved raise or promotion.
8. Sacrificing Financial Security for Your Family
You love your kids, but be careful not to sabotage your retirement and financial security to support adult children or to fully fund their college education. There are many ways to reduce education expenses and pay for tuition. However, you can’t get a retirement loan to get through retirement. Additionally, supporting an adult child for long periods of time creates bad habits and enables them to become dependent on you.
9. Failure to Consider Tax Consequences
When you start investing money, evaluate the type of account that will be most advantageous. For example, for retirement you may want to consider a Roth IRA or for education you may want to consider a 529 plan. When you pull money out of investments, take it from the account that will minimize taxes. Additionally, you can reduce the tax impact by managing the timing of your withdrawal.
10. Unhealthy Lifestyle
Eat healthy, get lots of exercise and give yourself time to relax and enjoy yourself. Healthcare can be very expensive and many of the most common health issues are caused by a failure to take care of ourselves.