5 Crucial Money Missteps That Can Undermine Your Long‑Term Wealth
Knowing how to make the best financial decisions isn't innate for everyone. If you don't fully understand how to best manage your finances, you're likely to make mistakes that can take your net worth from well-cushioned to barely getting by -- or force yourself to stay stuck in a constant financial struggle.
What if you could avoid certain money pitfalls altogether? Below, we'll examine five common mistakes that deplete your wealth so you can sidestep them and achieve financial freedom.
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1. Neglecting To Save for Retirement
Even if you think that you have plenty of time to build up a healthy retirement savings, it's important to practice saving early and consistently into your retirement accounts.
Take advantage of 401(k) plans that are set up through your employer, especially if your employer is willing to match up to your contribution. If you don't have that benefit available, set up an individual retirement account (IRA) or a Roth IRA that you can contribute to on your own. Aim to contribute as much as you reasonably can each year, prioritizing at least enough to capture any employer match.
2. Making Early Withdrawals From Your Retirement Accounts
Your retirement account should not be treated as an extra savings account that you can dip into for money as you need it. While it can be tempting to consider tapping into your retirement account for non-retirement purposes like paying off a student loan, the best advice is not to touch the funds.
"It's important to remember that the funds you are saving in those retirement accounts are meant to be long-term investments and grow over several decades with the market," said CFP Kenny Senour. "On top of that, you are looking at some significant tax penalties for tapping your retirement savings early, which has the potential to derail your progress and set you back for years to come."
3. Lacking an Emergency Fund
You may not be facing a financial emergency today, but anything could happen tomorrow. Katie Ross, executive vice president for American Consumer Credit Counseling, said when we're doing well for ourselves, we don't always think about the possibility of an economic crisis or unexpected expenses. Those that take the time to prioritize creating a fully funded emergency fund can rest easy knowing they are prepared in the event of an unforeseen circumstance.
"If you prioritize saving a part of each paycheck now, you'll thank yourself in the future," said Ross. "If you lose your job or have an ER bill to pay, you can lean on your emergency fund rather than taking away from your living expenses to pay for it -- or worse, relying on credit cards or loans."
4. Ignoring Your Interest Rates
One reason debt grows and becomes difficult to manage so quickly is interest rates. The higher the rates, the harder it becomes to pay off debt you're actively growing month to month.
If it has been a while since you last reviewed your interest rates, it's time to look at these percentages and take action steps for lowering them. Set aside 10 minutes to review your debt terms. Reach out to the lender to see if there's an opportunity to refinance or another option to get a lower interest rate so you're paying less each month.
5. Investing Blindly
Brian Stivers, investment advisor and founder of Stivers Financial Services, said one of the biggest mistakes that depletes wealth is investing in areas you have no experience in or don't truly understand.
"The media and internet are filled with fringe investments that promise great wealth with little risk," he said. "Yet, many of these are extremely aggressive and have a substantial downside. It is important for those who are accumulating wealth or have already accumulated wealth to make sure they fully understand the risk involved in any new investment and how that investment works. For most investors, it makes more sense to stay with traditional investment strategies that are easy to understand and have a long track record of success."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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