3 Financial Mistakes to Avoid
Paying others first
Allison’s grandpa always said, “pay yourself first”. So simple, yet so many people don’t do it.
You will always have competing financial priorities. Every payday presents a savings opportunity, and if you are not paying yourself first every time you get a paycheck, you're doing a major disservice to your future self.
The fix: Treat your retirement account as another bill collector – not a discretionary item that may or may not get paid each month. Save every last penny. Even if you can only afford to set aside $100 per month, that money will make a meaningful difference in your nest egg over the years.
Retirement accounts offer immediate, ongoing, and future tax benefits. They also allow you to invest your money in high-growth investments, like stocks, which can multiply your savings many times over. Ordinary savings accounts offer neither of those advantages.
Using your retirement account as a savings account
Retirement accounts are for retirement. Savings accounts and emergency funds are for emergencies. The federal government is giving people the option to use their retirement accounts, without penalty, to help pay for some of the damage occurred from the last two hurricanes. Please don’t do this.
In general, if you withdraw money from your retirement account before the age of 59-1/2, you will owe ordinary income taxes on the money and may be subject to a 10% early withdrawal penalty -- unless you meet one of the exceptions to the tax penalty or have a Roth IRA which allows you to withdraw your principal (but not any earnings) at any time free of tax. But even more detrimental to the account is the loss of investment time -- the time that your money would have spent growing and compounding.
If you've been putting money into an IRA to save for anything other than retirement, then you're missing the point. The only way to prepare for retirement is to prefund it. Once you're in retirement, there are no do-overs. Retirement accounts should be earmarked exclusively for your post work life, not for big ticket items you want to buy now.
The fix: Use a savings account for purchases you'll need to make before retirement and leave your retirement savings untouched until you leave the workforce for good. And if you're saving to pay for your children's college education, look into funding another tax-advantaged account: a 529 education savings account.
Staying out of the stock market because it’s too high
I'm sure you've heard the line about how you can't time the market. Yet, that's exactly what millions of investors attempt to do when they stop contributing to their retirement accounts during steep market downturns or because they think we’re headed towards one. These shortsighted investors often spend years out of the market and miss out on the ensuing rebound.
Meanwhile, remember the upside of market crashes. If you are buying in each month through a retirement plan, then your money is buying more shares at lower prices. The best time to start investing was yesterday, the second-best time is today.
The fix: Write down your investment plan. If you're uncomfortable with your investments when the economy isn't doing well, you may need to revisit your risk tolerance and asset allocation. The stock market can't always be climbing, so you need an investment strategy that you can stick with through good times and bad.
As you probably know, the stock market can’t stay positive forever, and it most likely won't decline forever either. So, if you have decades before you need your retirement money, you'll likely go through various economic cycles which you will have time to recover from the losses and continue adding to your retirement account to make up for those losses.
Saving up enough money to last you through a 30- or 40-year retirement takes serious planning and discipline. Don't make it even harder on yourself by making unforced errors such as failing to save, raiding your retirement accounts early, or bailing when your investments take a dip. By keeping a level head and sticking to a well-defined plan, you'll stand a much higher chance of retiring in comfort.