Do you save and save, yet still can't seem to get ahead financially? If your answer is yes, these five common money mistakes could be coming between you and your savings goals.
1. Passing Up Free Money
Recognize that your compensation package may include more than your paycheck. Particularly if you work for a large company, your employer may offer a 401(k) match. For every dollar you save in your retirement account, your employer contributes a dollar, up to a certain percentage of your salary. Many companies also offer stock to their employees at a discounted price. Failing to take advantage of these benefits is like leaving money on the table.
People also shortchange themselves by choosing the wrong savings vehicle. If you open a checking account your bank will most assuredly ask you to open a standard savings account as well. They may even offer you a financial incentive to do so. While these accounts are certainly not bad things to have, they aren't the best vehicles for long-term savings. They pay an average annual percentage yield (APY) of just over one half of one percent.
These are fine for short term savings goals, like holiday shopping or a vacation, but look for a higher yield for longer term savings. You will likely earn more in interest from a mutual fund, a certificate of deposit, or even an online savings account.
2. Failing to Value Shop
Warehouse clubs like Costco and Sam's Club are brimming with customers, convinced they are saving money by buying in bulk. Other consumers spend hours poring over coupons. Are they really saving? While there is no sure-fire method to ensure savings, there are a few simple things you can do routinely to assure that you are getting a good value for your money:
- Ask yourself if you will really use the product. If you don't have a freezer and can't use 10 pounds of beef or six gallons of milk before they expire, suddenly even a great price is less attractive.
- Compare prices. Whether shopping for groceries or a flat screen television, look at pricing from a variety of merchants. You need only to read the Sunday ads to see that the price of a box of cereal or a pound of cheese can vary by as much thirty percent on any given week. You can save hundreds on the flat screen television, depending on when and where you buy.
- Set brands aside, and consider whether a particular product meets your needs. Some brands will represent genuine quality to you and, even if they cost more, this is not the place to compromise. In other instances you may find that a store brand works just as well and costs less.
3. Living Beyond Your Means
The old adage, "Take care of your nickels and your dollars will take care of themselves," really does hold true. Most people don't set out to sabotage their household budgets. Instead, they just stop paying attention, and that's when excessive spending happens.
For many, the pattern is to walk into a store, be taken with all the bright shiny objects, spend money, and then come home and assess the damage. A better plan is to review your budget and your bank account before going into a store, so you know how much money you have to work with. Be intentional about your shopping. That doesn't mean you can never enjoy a spontaneous purchase. But when you are mindful of your financial circumstances, it's easier to keep your spending in line with your resources.
Another pitfall for many is thinking of their available credit as disposable income. It isn't. If you don't have enough money to pay for an item, you definitely don't have enough money to pay for that item with interest added.
4. Carrying Revolving Debt
Saving money while carrying revolving debt can be like taking one step forward and two steps back. If you are paying an APR of 10 to 25 percent on short-term revolving debt, like credit cards, and your savings account is earning a much lower rate of return, you are losing money. A better strategy is to use savings to pay off your short-term, high interest debt.
This strategy does not apply, however, to longer-term debt, like a mortgage, a car payment, or student loan. Longer-term debt typically carries a lower APR and may be secured by an asset, which may even appreciate in value.
5. Failing to Plan
Fidelity reports that if you plan retire at age 70, you need to have saved eight times your annual income. If your typical annual income is $50,000, you need to have saved $400,000 by the time you retire.
Amassing that amount of money does not happen without careful forethought. Perhaps the most important things you can do to secure the future is to begin saving early and arrange to have your retirement savings automatically deducted from your paycheck and deposited into an investment account. The average 55 year old has saved only $255,000 according to AARP.
People with children often make the mistake of tapping that savings to pay for college tuition. This is problematic on two fronts:
- Students have time on their side; parents do not. Students have the option of taking low interest loans or delaying college while they save ahead for it. For parents, however, their retirement date is fixed and looming. They have no time to recoup their savings or the lost interest it would have accrued.
- When parents borrow from their 401(k) accounts to pay for their children's tuition, the IRS may view that loan as income, subjecting it to heavy taxes.
Just Do It
Avoiding these savings mistakes can help your nest egg to grow larger and more quickly, but don't allow yourself to become paralyzed with fears that you're somehow doing it wrong. The most important things are to begin saving as early as possible, to save consistently throughout your working life, and to be careful with the money you have.