How to Avoid Common Money Mistakes

Get more advice from Laura Adams by lisenting to the Money Girl podcastThere are some basic rules in personal finance that are so vital for success that they pertain to everyone, no matter your age. Tenets like spending within your means and never carrying a balance on a high-interest credit card apply across the board. But how can you know if you're making any serious financial slip-ups for your current age?

Here are some tips to avoid costly money mistakes when you're in your 20s, 30s, and 40s. I'll also share a secret method you can use to learn about money and wealth (or about any subject, for that matter) that's quick, easy, and maybe even kind of fun!

20-Somethings: The Three Mistakes to Watch Out For
If you're in your twenties, it's likely that you're staying in school longer, putting off moving out of your parents' home, or delaying marriage and children. You have high expectations for a career that pays well, suits your lifestyle, and inspires you get out of bed each morning. Dramatically improve your financial health by avoiding these three serious money mistakes that can come back to bite you later on:

  • Accumulating credit-card debt. Now that you're a working adult, you might think that you're entitled to lots of new clothes, nights out on the town, and vacations. The problem is that financing a lifestyle that you can't afford using a credit card is a terrible financial move. It's a grim mistake that sticks with you for years and will only get worse as interest accrues each month that you don't pay off the balance.
  • Ditching participation in a 401(k). You might be hesitant to start contributing to a workplace retirement plan (like a 401(k) or a 403(b)) if you aren't sure how long you're going to stay in your job, but letting that stop you from contributing — especially when you're offered free matching funds — is a big mistake. Contribute 10% to 15% of your income and then roll it over into an IRA or a retirement plan at your new employer after you leave the job. No one wants to feel behind; start contributing today and you won't wake up in your 30s with big financial regrets.
  • Not seeking professional advice. Don't think that you have to be self-sufficient when it comes to handling your money. Get help from a professional — like a Registered Investment Advisor, a financial planner, or a financial coach — to figure out how to set and achieve your unique goals.

30-Somethings: The Three Mistakes to Watch Out For
If you're past 30, you might be starting a family, moving into a larger home, and climbing up a career ladder. During this life stage you need to stay focused on your goals and make sure you can provide for your family if you lose your job or business. Shore up your financial defenses by avoiding these three financial oversights:

  • Forgetting about an emergency fund. Add up your monthly living expenses and multiply that number by six to figure the minimum amount you should keep on hand in an FDIC-insured savings account. Depending on your job stability, industry, and family situation, you might need to have a year or more of emergency savings stashed away. Doing this will ensure you're protected in case something unexpected arises (like an illness or job loss) and that you'll be able to keep your life plans on track.
  • Skimping on retirement savings. As you begin to earn more money, it might be tempting to spend more on fun trips, fancy cars, and designer clothes. Treating your extra money carelessly and not increasing your contributions to a workplace retirement plan, an IRA, or to both is a mistake. You might also have higher expenses now, but you still need to carve out enough from your budget to keep long-term goals like retirement and paying for a child's education on track.
  • Not being properly insured. Having enough of the right kinds of insurance is an easy way to reduce risk and ensure that you and your family can get through unexpected hardships like an illness, accident, or death. Insurance doesn't help you build wealth, but it certainly helps you protect it.

40-Somethings: The Three Mistakes to Watch Out For
If you're a parent in your 40s, you might be looking forward to launching your kids out of the house, doing a happy dance, and refocusing on your own financial needs. This life stage is a great time to simplify your finances and reevaluate your retirement dreams. Don't let these 3 money mistakes trip you up:

  • Failing to focus on retirement. Though you probably have about two decades to go before retirement, you're getting closer and need to take it more seriously. Enter your information into a retirement calculator at sites like aarp.org and dinkytown.com to make sure you're putting enough money aside each month.
  • Not eliminating debt. In addition to saving for retirement, free up as much discretionary income as possible to send extra payments to your debt. Getting rid of debt sooner rather than later saves a huge amount of interest and allows you to squirrel away even more for retirement during your 40s and 50s.
  • Ignoring “teachable” moments. Instead of allowing older children to drain your bank account, teach them how to earn and manage their own money. Help them create a job resume, open a bank account, stick to a budget, set savings goals, and invest for retirement. Even minors can open up and contribute to an IRA as soon as they get their first part-time job!

A Secret to Learning About Money and Wealth
Get more advice from Laura Adams by reading her new bookI'm sure you realize that these tips just scratch the surface and that there's a whole lot more to know about making smart moves with your money. Taking the time to learn about money and wealth pays off whether you're a young student, a grandparent, or somewhere in between.

Here's my secret for the best way to learn about money: Make getting the information fit into your lifestyle.

If you love being on the computer, subscribe to Get Rich Slowly so you never miss a post. If you like reading during your lunch break or while you travel, regularly read personal-finance books, such as J.D.'s Your Money: The Missing Manual or my own Money Girl's Smart Moves to Grow Rich. (You can download two free chapters of my book at SmartMovesToGrowRich.com.) If you spend way too much time in the car or don't want to get chatty during your pedicure, listen to a money podcast. If you need to be entertained while you're on the…in the…you know — take a money magazine with you.

You get the idea. See where you have time to squeeze in 15 or 30 minutes of reading or listening about money and you'll be amazed at how easy it is to take your financial game to a new level, build wealth, and get rich slowly.

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Derek
Derek
9 years ago

Well, I feel pretty good as a 20-something! My wife and I are nearly out of consumer debt and don’t plan on racking up a credit card ever again!

We have both started contributing to our 401(k)s. It’s not much, but it feels good to start!

I haven’t consulted a professional, but I have my degree in Finance, so I feel like I have a pretty good handle on things. I suppose it is always good to get a second opinion on things though too.

Pamela
Pamela
9 years ago

I’d add one thing to do at every age: occasionally get a copy of your credit report and check it for potential problems. (http://www.annualcreditreport.com is the site sponsored by the U.S. government to get your free report) Even if you’re a perfect money manager, most credit reports have mistakes. And a mistake can cost you when you get insurance or borrow money. If you have a very common name (like Smith or Lee) this is especially crucial. I once pulled a credit report for a woman who discovered a husband she never knew she had?! Another man’s information was being… Read more »

brokeprofessionals.com
brokeprofessionals.com
9 years ago

It appears that one of the toughest things for people of any age to do is to focus on retiring. I guess so long as it is “far off” it is tough for people to put aside money now for the far off, unknown future. Of course the unfortunate part of this is that the money you save when your younger (thanks to compounding interest) is so much more valuable then what you save later on in the game. I agree about the credit card debt, but I think it should be noted that debt of any type should be… Read more »

Everyday Tips
Everyday Tips
9 years ago

I would also state somewhere to only buy as much house as you realistically need and don’t take on any unnecessary debt at all (HELOCs have gotten people in plenty of trouble too, in addition to credit card debt.)

I don’t necessarily agree that consulting a financial adviser is a requirement in your 20s. I know a ton of people that have been steered wrong by ‘professionals’. Everyone should have a least a basic understanding of personal finance, starting with spending less than you make. If you do need a pro, make sure you get a ton of references…

Nicole
Nicole
9 years ago

I think we’re doing ok.

Chickybeth
Chickybeth
9 years ago

This post was too light on information and too gimmicky for me to get anything from it.

billie
billie
9 years ago

Am I the only one totally depressed after checking the retirement calculators (40-somethings)? I put away the maximum I can (which is $5000 this year, and it’s not much less than my self employed income for the year), my husband puts away 12% (including the company match), and the calculators say we will be $1 to $2 million short!!! We are not big spenders in any way. At this point, I feel like it’s not even worth trying, we’ll end up living in a van down by the river whatever we do.

Crystal @ BFS
Crystal @ BFS
9 years ago

It looks like we are in track. We are 20-somethings that are operating on the 40-something track, so woot! The only thing mentioned that we do indeed ignore is professional’s advice. Our stock portfolio and investments are doing well and our risk is balanced. I don’t think we’ll need to speak to a professional until we get closer to retirement, if ever…

Sara
Sara
9 years ago

I don’t think most students realize when they apply for school loans that while student interest rates are low right now, variable rates are permitted to go all the way up to 25%!!! So, from the generally-accepted premised that high interest credit card debt is bad, so is taking on variable rate student loans that cannot be paid off in a relatively short time (I know, hard to project, and a lot of people tend to think they can pay them off a lot faster then ends up being a possibility).

Kevin
Kevin
9 years ago

These are all great tips, but I think some of the big ones were missed. For example, specific mistakes that my wife and I made were: Buying too much house. Buying a brand-new car and financing it instead of saving up and paying cash for a reliable used car. Not educating ourselves about what a “reasonable” MER is for a mutual fund, and trusting that the funds the financial advisor was pushing us toward were reasonably priced. Buying too much life insurance (again, encouraged by the friendly financial advisor in whom we placed too much trust). Joining an “investment club”… Read more »

sarah
sarah
9 years ago

“share a secret method” ? This is so salesman-y. And doesn’t have any new info.

Wade
Wade
9 years ago

Some generic basics in this post. I do find theses basics useful, but more tips on how to save finances and steps toward retirement savings at each stage would be more useful.

I do like the tips given by “Kevin,” like financing for a car and buying too much house. These are areas where I have seen some friends get into trouble and need to work hard to get back to feeling secure financially.

retirebyforty
retirebyforty
9 years ago

Pretty good general tips for the various ages. It’s probably best to do all these while you’re in your 20s though. That way you’ll be way ahead of the pack on finance.

Diane
Diane
9 years ago

I agree that this article is too shallow to be useful for all but the newest of newbies. Kevin makes a lot of good points. Maybe a guest post from him would be in order. Kevin?

Ryan
Ryan
9 years ago

@Sara (#9),

Which lender charges a 25% variable interest rate? I need to make sure I never do business with them!

I have federal direct student loans, which is what most students use to pay for school. The highest rate I have is 7.9% fixed. The others are around 5%.

Mom of five
Mom of five
9 years ago

Personally, I’d add the teens and caution against taking out student loan debt. I don’t think any student loan debt is good, but I certainly wouldn’t force more than 30k on my worst enemy. Student loans kept us poor for years.

Even if I had to do my 20’s over, I’d still say I did the right thing getting the student loan monkey off my back in the early years instead of contributing to my retirement, which I didn’t do until I was 27 and just about done with the loans.

Tyler Karaszewski
Tyler Karaszewski
9 years ago

A lot of pigeonholing going on in the descriptions of what people are doing at each of various ages. That’s a bit ironic, since it turns out the advice is mostly the same regardless of age: save for retirement and pay off debt.

Mom of five
Mom of five
9 years ago

I also wholeheartedly agree about the don’t overbuy for your house. Having a nice comfortable mortgage, far cheaper than rent for a much much smaller place is one the smartest financial moves we’ve made.

So many people we know whom we guess have incomes similar to ours live in much grander houses, but don’t sleep nearly as well as we do. They’re all very concerned not only about their huge mortgages but their large tax bills as well.

rail
rail
9 years ago

Thank God I never had a student loan monkey on my back. I’m 41 and have a jr. collage education. Had a whopping 2,000 student loan. Lived at poverty level untill I was 27(wages in Iowa stink) and have lived the GRS lifestyle since at least 1990. Collage student loan debt has been a major issue to the Gen X populi and many that I know are still paying it off! If anything good has come out of the financel meltodown of the last 4 years, it may be the awakening of the U.S. to the dangers of lifestyle inflation… Read more »

Chickybeth
Chickybeth
9 years ago

@Ryan #15 Sallie Mae, Citi Bank, Chase, etc. Any private student loan can go as high as 25%. When interest rates were higher overall, my Sallie Mae loan was 16%, now it’s “only” 9.25%. We definitely need better laws regarding private loans and diclosures.

Tage
Tage
9 years ago

I thought this post was much too basic for most readers at GSR. In each post, two of the tips were repeated from the previous age group boiling down to 1) Contribute something substantial towards retirement and 2) Pay off debt/Watch out for accumulating debt. I was disappointed. While it is hard to develop new, relevant financial advice, I do not find it useful to rehash such simple information over and over. These are tips akin to “Eat less and exercise more.” Everyone knows what they should be doing (less debt, save more), but in most cases they do simply… Read more »

Ryan
Ryan
9 years ago

@Chickybeth (#20)

I’m not one to defend private lenders, but I’m not so sure more laws are necessary for disclosures. Both Chase and Discover tell you to take federal loans first. And I had no problem locating what the APR would be.

Maybe they just recently started doing that?

El Nerdo
El Nerdo
9 years ago

In my 20s I was partly insane. Went to therapy for years. Barely managed to eke out a living and got into serious credit card debt (but no student loans). I didn’t finally “settle” into living a reasonable life until I got married at 35. I have a lot of catching up to do in terms of finances. Luckily I don’t plan to ever retire, as I love what I do and would get bored playing shuffleboard. However, disability could put a huge crimp in my enjoyment of life and work. Which is what I worry about more than “retirement”:… Read more »

Chickybeth
Chickybeth
9 years ago

@22 Ryan: That may be recent because my loans are from several years ago when the colleges were actually taking money from the private lenders to push those loans. They were made to seem equal to federal loans and the best option.

Ryan
Ryan
9 years ago

@24,

Oh, I’ve heard about that. Private lenders also used to make federally guaranteed student loans to parents and students. They received subsidies from the government for this. The gov. would also repay the lender if the student defaulted. They couldn’t lose.

Now, all federal student loans come directly from the U.S. treasury.

Heidi Beckman
Heidi Beckman
9 years ago

Thanks, Money Girl, for your ideas. I wish I would have heard your advice for people in their 20’s when I was in my 20’s!! I agree with you that gathering information about personal finance (in a way that fits your lifestyle) is important. But unfortunately, it’s not just having the information that counts, it’s also BEING MOTIVATED enough to do something with the information. Too many people say “I know what I am SUPPOSED to do; I just can’t make myself do it.” For a sample of ideas on how to motivate yourself toward financial change, check out my… Read more »

Mikey
Mikey
9 years ago

Like so many articles, the advice ends at the 40s….what the heck? You still have a lot of life left to live at 50, and that’s when financial planning becomes really important.

Tara C
Tara C
9 years ago

I would like to see more advice about HOW to invest my money… being in my mid-40’s, I am not sure at what point and at what rate I should be rebalancing my portfolio towards less volatile investments. Since the estimates for how much I will need in retirement seem ridiculously high to me, I just ignore them and save as much as I can (which at this point is 30% of my gross income). I will make do with whatever I have on hand when retirement comes, but I would love to get some insight on portfolio management.

Peggy
Peggy
9 years ago

This was a quick read post and not one that would make me zip over to MG’s site to check out other strategies.

I agree w/#27…Nothing for after 40s and think there’s also a lot of life left to live after 60! 🙂

Sara
Sara
9 years ago

I have to disagree with the advice to seek professional advice in your 20’s. What is it that JD always says? Nobody cares more about your money than you do. I really think that most people (aside from the extremely wealthy) are better off educating themselves about investing than paying a professional.

Andrea
Andrea
9 years ago

Thanks for the tips, I still have some time left before I retire but I’m focusing more on my retirement goals. I also like the tips that Kevin post#10 gave. About mistakes he made like buying too much house, and saving for a car with cash instead of financing it. Learning from someone’s life experiences and mistakes helps.

Sara
Sara
9 years ago

@Ryan

None of the lenders I know of are at 25% right now (mine are between 2.1 and 6% now), but the point is that if you have a variable rate student loan, by definition it means the rate CAN fluctuate, and legally on these loans, interest CAN go up to 25%. Student loans are typically longer term (10 to 20 years-ish), so who knows what it will look like that far out? Just because the market does not bear it now does not mean that it won’t bear it before the borrower’s loans are paid off!

Luke
Luke
9 years ago

Guest post type articles are all well and good, but this was an overly basic roundup of lessons that the vast bulk of GRS readers are already going well beyond. Was it just me, or did the three life stages all contain something along the lines of ‘avoid debt, save for retirement’? I know the PF blogosphere is one big merry-go-round of guest appearances, but J.D. you normally manage to bring better thought out content to GRS. I also thought the ‘secret’ was hardly a top money hack – learn about money in a manner that interests you? This is… Read more »

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