By: Ana Gonzalez Ribeiro, MBA, AFC®
We all make money mistakes. It’s a tough pill to swallow, sometimes our mistakes can be costly and sometimes we learn from our mistakes and we move on, our ego a little bit bruised perhaps, but we move on. We move on with a better understanding.
Here are some mistakes we can avoid.
Not setting up a retirement account
Whether it’s an IRA or a 401 now is the time to set up a retirement account. You can do this through your job with a 401k or on your own by opening up a Traditional or a Roth account. A 401k is usually automatically set up by your employer, all you have to do is pick the plan that you prefer with the funds they offer. Another option is to open a Roth IRA through providers like Vanguard or Fidelity. The money that you invest in a Roth is after tax, so you won't get taxed again later on when you are ready to cash out. A traditional IRA is generally free of income and state tax when you put the money in (pre-tax), but when you reach 70 1/2 you must withdraw the money and yes, you will be taxed at that point.
Make sure that the fund you choose within the retirement plan, is a fund that you feel comfortable with. If you feel you can take on more risk, then pick a fund that is more invested in stocks versus bonds. If you are more of the conservative type then select funds with more long term, low interest investments like bonds. Whether you are a risk taker or more conservative, pick the investment plan that best suits your investment personality and know that the higher the interest rate on the plan, the higher the risk, but also the greater the gain if your investments go well. If you are starting this investing process in your 20s or 30s, it’s okay to be a bit riskier since you'll have plenty of time to recover in case of loss.
Not having a 529 plan
If you have children, it’s important to have a 529 plan set up.
A 529 plan is an educational savings plan that helps families save for future college costs. It is operated by a state or educational institution. These plans work similar to a Roth or a 401k in that you fund a mutual fund or similar investment account. Contributions to a 529 plan are tax deductible in some states, not all. New York, Georgia and Iowa are among the 30 states that do offer a state income deduction for 529 plan contributions. In New York for example, up to $10,000 of 529 plan contributions from a married couple filing jointly can be deducted. Single taxpayers can deduct up to $5,000 annually. The great thing about these plans is that the money you put in a 529 plan grows tax free and as long as the funds are used for college expenses, you will not get taxed on the withdrawals.
No funds in an emergency fund
Don’t forget the popular emergency fund. You never know what can show up around the corner of life, a broken car, a job loss, or an illness. Make sure you put some money aside from your paycheck towards your emergency fund. Do this BEFORE taking out money for anything else. Make it easy on you by setting up an automatic plan where a set amount of money is taken out of your paycheck every week. Trust me on this. You won't even know it's missing. You will just adjust around it and see your emergency fund grow and grow. The general recommendation is to have 3 to 6 months of spending saved up if you are single or 6 to 9 months if you have dependents. However, the optimal would be to have 1 years’ worth of spending in an emergency fund if you can do it without depleting something else that is important like paying down debt or your school and/or retirement savings.
Carrying too much debt
This is a big no, no when planning your finances. Take the bull by the horns and cut down your debt, first thing! There are two main ways to do this, you can either attack the loans that have the highest interest because these are the ones eating away at most of your income or you can chop down on the small loans so that it gives you the confidence and momentum you will need to continue making your debts disappear. It’s really a personal preference what you choose to do as long as it gets you to the goal of no more debt! Pay the debt down systematically, and try to avoid putting more debt on your plate for now. You don't want to sink further into the sea of debt; you want to swim out of it. If you are considering making a new purchase at this stage in your life like buying a car or a house, consider starting small by buying a "lightly" used car and a modest home in a modest neighborhood for now until you pay down your debt.
No life insurance
Having life insurance is SO important! If you have kids, it’s a necessity. What will happen to your family if you are not there to provide for them? A life insurance policy can help them with living, school and even medical expenses. If you have no children, it could still help if you have some debt you leave behind or perhaps you want to help your parents out. Either way, it’s important to have a policy in place. Term life insurance is generally more affordable and is only offered for a set period of time like 10, 20 or 30 yrs. whereas whole life insurance is for the duration of your entire life and can be a bit more expensive since it provides the flexibility of building cash value. What you choose in terms of life insurance is a personal pick based on your current needs and financial situation.
Not having a vacation fund!
Who says it’s all work and no play? Of course you can go ahead and have some fun. Come on, you’ve worked hard dang it! Save some money for that vacation to Spain you’ve been meaning to take. All work and no play is not living. Go ahead, have some fun and relax. When you have saved enough in your emergency fund, have paid down your debt and feel comfortable with the way you are saving for retirement and/ or school, go ahead and start building up that vacation fund!
Avoid these costly mistakes and start building a strong financial foundation for your future and the future of your family!