Are you at your financial goal?
Is your net worth what you’d hoped it would be at this age?
For many of us, the answer is no.
It could have been some setbacks in your twenties or thirties that put you behind schedule. Or, maybe a divorce or failed business sucked your assets dry. A wrongly timed move in the market or just not having the financial knowledge to be successful could have also set you back.
Regardless of what happened in the past, it’s not too late to turn the tide and get your financial life back on track.
And, even if you’re satisfied with your finances, there’s always room for improvement.
But first, let’s ensure you’re not making these 5 major money mistakes:
- Paying Yourself Last
Ask yourself this – when you get paid, what do you first? The most common answer is paying bills like rents, mortgages, utilities, credit cards, etc. You might treat yourself to a gourmet dinner or buy something nice, and then say you’ll save whatever’s left over.
But, what if there’s little or nothing left over? If that’s the case, then you are guilty of paying yourself last.
Solution: Pay yourself first. This means that before you pay any bills or make any purchases, put a set percentage of your income into your own pocket first. Then pay your bills and live on what’s left.
This single trick is what most millionaires will attribute to building wealth. Make yourself richer before making other people richer.
- Keeping up with the Jones’s
We live in a society where, like it or not, we are judged on certain appearances. There can be a lot of pressure to have what our neighbors have. Feeling a need to have a new car, fancy landscaping, and go on lavish vacations are all signs that you’re trying too hard to keep up with others.
Or, you might have friends that live expensive lifestyles, and spending time with them means racking up huge credit card bills each month.
Just because your friends or neighbors have expensive tastes doesn’t necessarily mean they can afford it, either. Or, their priorities might be different than yours.
Solution: Be authentic. Buy what you need and like for you, not others. And, if you’re feeling pressure to spend, don’t be afraid to be transparent with your friends and opt out of certain activities that are out of your budget.
- Being Tempted by Credit Card Rewards
Yes, getting airline miles and cashback on your credit card purchases is a fantastic way to earn free flights and get some extra dough.
The problem is that you might be justifying spending extra just to get those rewards, which totally defeats the purpose!
Solution: Make sure you are paying off your credit cards in full every month. If you’re not, then evaluate the purchases you’re making and begin crossing items off your list. Whether it’s the $7-a-day latte habit, the Prada blazer, or a closet full of gadgets, find out what’s causing you to overspend and exercise some discipline to cut the fat out of your budget.
- Not Being Prepared
We’re all busy, but not being prepared for things can be costly.
For example, having to buy an umbrella from a street vendor because you didn’t check the weather, paying late fees on bills because you forgot to pay on time, or having to take an Uber when you would normally walk because you’re running late are all expenses that add up.
These expenses may be small, but they add up over time.
And, those are the little ones. Needing to replace a roof because you didn’t take care of your gutters would be an example of a bigger expense due to lack of preparedness.
Solution: Take a step back and look at where you’re being caught unprepared. Are you bad at saving warranty information and receipts? Create a folder and store it in a specified drawer? Do you forget to check the weather? Keep an umbrella in the car or at your office so that you’re always prepared.
- Paying Too Much in Taxes
Taxes are one of, if not, the biggest expense you’ll pay in your lifetime. That is, unless you know how to avoid overpaying.
We’re not advocating running away from taxes, but there are legal ways to reduce your tax burden. Given that the average American forks over nearly a third of their income in taxes, this financial burden is the biggest hurdle most people face to accumulating wealth
Solution: In a nutshell, the only way to avoid taxes is to reduce your income, but that doesn’t mean quit your job or earn less money. Instead, lower the amount of income that the government views as taxable. You probably already have a good idea of how to do it, but here’s a quick and dirty list of tips:
- Contribute to a retirement account like a 401(k), which allows you to contribute pre-tax income, lessening your overall tax burden (at least until it’s time to withdraw).
- For freelancers or self-employed people, put money into a SEP-IRA (Simplified Employee Pension Individual Retirement Arrangement). This is like the self-employed equivalent of a 401(k).
- Open an HSA (Health Savings Account). This account lets you save for health expenses with tax-free money. Everything from contact lenses to acupuncture could be covered by your HSA.
- Invest in municipal bonds funds. These funds hold bonds from a variety of municipalities, and the interest income you get from investing in them is tax-exempt.
- Do a 1031 Exchange. We’ve discussed this topic in a previous newsletter, but if you need a quick reminder, a 1031 Exchange helps you avoid capital gains tax when you sell real estate. The only caveat is you have to purchase another similar or equivalent property within a short timeframe.
- Invest using a Roth IRA. Any stocks, bonds, or assets you hold in your Roth IRA can grow tax-free until you retire. The amount you can contribute is admittedly limited, but if you max it out, you will see some savings.
- Start a side hustle. You can claim business deductions if you have a side hustle. This includes home office space, a portion of your Internet fees, mileage, office supplies, and more. Keep careful records of all expenses associated with a part-time business and share them with your accountant when it’s tax season.
We’ve all heard by now that Warren Buffett pays less in taxes than his secretary. Though the average person won’t have all the deductions he has, this list is a great start!
The Bottom Line: If you’ve formed bad money habits over the years, they can be hard to break. But, it’s never too late to turn over a new leaf.
