In this article, we’re talking about the money mistakes that we all make. I personally made my fair share of money mistakes in the past, and I think that money mistakes are just things that are not talked about in school. And that’s the reason I wrote this article to kind of bring to light the types of money mistakes that you should be looking up for to save you the most money in the long run.
By reading this article, and spending some time with me, you’re going to learn about what money mistakes are, how to identify them, and how we can fix them. Some of these money mistakes are mistakes that I’ve made personally but also mistakes that I have noticed other young people making in their daily lives.
And with all the money that you save, you can probably invest it so that it can grow throughout your life and hopefully set you up for retirement, or what you can do is save your money for a big purchase like a honeymoon, or a new house, or maybe even a wedding.
Most of these money mistakes probably just don’t seem like mistakes to you because people just are not aware of if they’re actually mistakes or not. Let’s get right into the article and talk about the first money mistake which is,
1. Spending Way Too Much on a Car Payment
That’s right, you read right. Most Americans spend way too much on a car payments, actually, the average monthly car payment in the United States is not cheap. It’s $550 a month for a new car and $393 for a used car with an average term loan of nearly six years.
When it comes to a car payment, a good rule of thumb that’s going around in the financial community is called the 20-4-10 rule. The 20-4-10 rule stands for 20% of your down payment, four-year term, and no more than 10% of your pre-tax income.
I’m going to explain exactly what that is but, basically, your car payment should not exceed 10% of your pre-tax income per month. That rule is just basically a guideline, and whoever came up with that guideline was just trying to look out for the best interest of the consumer. The most important part of the 20-4-10 rule in my opinion is that you keep your car payment under 10% of your pre-tax monthly income.
That means if you make $50,000 a year, your monthly salary is actually $4,166, your car payment should not be more than 10% of that. 10% of $4,166 is about$416, if your car payment actually includes your car payment, plus your insurance, plus gas, if it exceeds more than $416, then it’s technically violating this guideline.
However, this is just a guideline as I said before, it’s just kind of a good way to keep your car payments in check, just to make sure that you’re not overspending on a car as most Americans do.
More on The 20-4-10 Rule
The other part of this rule is to put 20% down on your initial down payment. The reason I suspect they suggest 20%, is so that it reduces your overall loan amount. This was probably set up so that you’re not paying too much in interest, and you’re not drowning in payments all the time.
When it comes to buying a new car, one of my suggestions is to actually buy a car that’s three to four years old used. The reason is that three to four year old cars are still like new, they’re very close to being new. And if you find one with low mileage on it, actually most of the depreciation has already been chipped away, because most of the depreciation in a car comes from the first three to four years of use.
If you cannot fall into the trap of spending too much money on a car payment, I think this is going to be a really good money mistake that you can avoid.
The second biggest mistake that I think people are making is not sharing this article. Make sure to share this article, because it increases the views on this article, and it also helps me out tremendously. So if you can just share it, I would really appreciate it.
All jokes aside, the second biggest money mistake is,
2. Not Contributing to a Retirement Account
Not contributing to a retirement account especially when you’re young, it’s important to contribute to your 401k if your company offers it, or a Roth IRA. I wrote an article that talks about a Roth IRA, click here to read it. The advantage of compound interest is so huge that you need to take advantage of it when you’re young.
By not contributing to your retirement account, you’re basically saying “hey Prince. I don’t like compound interest, and I don’t really like money”. Most people, for example, started their Roth IRA a little bit late like 27 when they started their Roth IRA account, and they’re already pretty behind when it comes to people that started their Roth IRA at the age of 20 or 21.
The difference is starting a Roth IRA or any retirement account out seven years earlier can actually amount to a lot of money in compound interest. Let me show you an example, if you started your Roth IRA at the age of 27, by the time you’ll be 60 years old which is in 33 years, at a compound interest rate of 8% a year. Just investing $10 a day, you’re going to$620,000 in your account.
If someone else started their Roth IRA at the age of 20, that means they’re going to have seven years on me in terms of compounding interest. By the time they’re 60, at the same rate of investing of $10 a day, they’re actually gonna have $1.1 million in their account. That’s a big difference for just starting seven years earlier. Make sure you start your retirement accounts as early as possible, and always contribute up to the max if you can, obviously if you can’t, I definitely understand but save a little bit if you can, and a little bit even goes a long way.
If your company offers a 401k and a matching plan, or any type of matching program, you want to take full advantage of that. That’s essentially the company saying “hey we want to invest in your retirement if you invest in your retirement as well”. Any time a company offers to match your money, it’s just basically free money for your future. Definitely take advantage of that if you aren’t already.
And if you’re reading this and you are 35 or 40 years old, and you haven’t started saving for retirement yet, it’s not too late. The reality is that not many people are very consistent with their savings, especially for retirement. So even if you are starting later, it’s still not a bad idea, it’s actually a good idea because if you can be consistent with your savings, you can still actually have a large account balance by the time you retire.
The third money mistake that I see people doing is,
3. Spending Too Much on Drinks When They go Out to Eat
Now, when you do go out to eat, I definitely understand this, it’s a social event, and you don’t want to take away from the social gathering portion of it. I’m not telling you guys not to go out to eat. But when you do go out to eat, one of the worst things that you can spend your money on in terms of value is alcoholic drinks.
Alcoholic drinks and actually well, soft drinks as well, have the highest margins built-in for the restaurant. If you don’t like getting ripped off, I would just suggest drinking a little bit before you go to the restaurant, or maybe just having one drink instead of two, or three drinks.
I’m not telling you guys not to have fun or be social, but it’s just really easy when you’re at dinner to just tack on a few drinks, especially when the waiter comes by and says “hey would you guys like another margarita, or you do like another drink”. It’s really easy to say “yeah I’ll have one”, especially when all of your friends are saying “yeah, add it on”. So, if you can have that type of self-restraint, it’s going to be really beneficial for you in the long run.
This kind of ties into the fourth money mistake that I see young people, or actually anybody making is,
4. Not Tracking Their Expenses / Budgeting
A lot of people that I talk to especially when they’re in their 20s, don’t know how much they’re spending on a daily, weekly, or monthly basis. If you don’t know how much you’re spending, you can really get into debt really easily especially when you’re spending more than you make.
In my opinion, I’ve always tried to run my life as a kind of a business, I want to have a profit and loss statement for myself by the end of the year. So what I do is I track everything that I spend, and I track all the income that’s coming in. if you ever want to run a business one day, it’s a really great exercise because you yourself can be a business. All you have to do is track how much money is coming in, and how much money is going out, it’s that easy.
The other thing I really like about tracking my expenses is that if I track them on a monthly basis, I can tell if my spending habits are getting a little bit out of whack or out of sync. Especially when you start making a little bit more of an income or let’s say you get a raise at work and now suddenly you have an extra $10,000 a year. It’s really easy to inflate your lifestyle because you have this extra money. By tracking your expenses, you’re able to keep a good eye on your lifestyle inflation and if it’s increasing from month to month.
I find the biggest hesitation when it comes to tracking your expenses is that people have a hard time facing what they actually spend their money on. It’s really hard when you spend your money on something really stupid, to have that expense kind of just staring at you in the face at the end of the month.
Let’s say you spent $80 on like a camel statue, that’s not exactly the best purchase that you can make. I mean I wouldn’t be proud to see an $80 expense on my bill at the end of the month, and well I don’t know it actually kind of depends, I think that if you do like camels it could be worth it. You get the idea, you don’t really want to have purchases that you’re not proud of show up on your credit card statement, and I think that that is one of the biggest hesitations of tracking your expenses.
The fifth money mistake that I think people make is
5. Getting Into Debt
Taking on too much debt, especially credit card debt. The interest rates on credit cards are one of the highest across all of the types of debt that you could take on. If you have a really big balance and a high-interest rate on your cards, I would look into what’s called a balance transfer. What that means is, that you’re transferring your credit card balance from one credit card to the other, and hopefully, by transferring it from a really high-interest rate credit card, you can find a credit card with a low-interest rate for your balance transfer.
Now, one of the reasons why people get into credit card debt is they spend more than they make, or they just don’t know how much money they’re spending in general which relates back to my previous tip of tracking your expenses.
The other reason why people spend a little bit too much on credit cards could be for an emergency. So if they don’t have an emergency fund, which by the way I’ll talk about very shortly here, but if they don’t have an emergency fund, they could just spend it on their credit card, and basically, that could accrue credit card debt.
So the six money mistake is just
6. Not Having an Emergency Fund
it’s important to have one, I know that if you’re young you don’t really think that anything bad could happen to you, you’re young and healthy what kind of emergency will happen to me? is probably what you’re thinking. But, it’s important to set some money aside for when life just kind of throws you a curve ball.
I would suggest starting with at least $1,000 in your emergency fund. A $1,000 isn’t a lot for an emergency fund, but that’s just a good starting amount. Eventually what you want to build up to is three months’ worth of expenses, and then eventually once you have that saved up, you want to go up to six months worth of expenses if you can.
As far as where to actually hold the emergency fund, you can just put that in a savings account that is liquid. What that means is you can have access to that money rather quickly. If an emergency does come up, you want to be able to liquidate that emergency fund within one or two business days.
That’s money you don’t want to invest, or you don’t want to be putting into a retirement account because if you put that emergency fund into a retirement account, you actually pay a penalty when you withdraw. It. That’s just money that’s just best left untouched.
Those are my money mistakes to avoid especially if you’re young, try to avoid all these money mistakes. Thanks for reading my on my blog, I really appreciate you guys visiting here. If you did enjoy this article and find it useful, make sure to share it. Peace and Happy Hustling!