Let’s be honest, we all waste money from time to time. It’s an inevitable part of being human. Maybe you’re guilty of throwing too many of those end-of-the-check-out-aisle products in your cart at the store. Perhaps you buy too many of those $7 froofy drinks at the coffee shop. Or maybe you have the bad habit of falling for the upsell every time you buy new technology.
All those little wastes of money can add up over time. The good thing is there are lots of great ways you can kick those bad habits to the curb:
- Start a money saving challenge
- Get creative with the way you save money
- Develop a budget (or reevaluate the one you use)
- Refocus your wealth building and savings plan
But while those smaller money wasting habits are important, there are some even more crucial ways you likely wasted money this year and may not have even realized it. This article is focused on the money and opportunity wastes that likely cost you big this year.
Before you get too anxious, remember that recognition is the first step to solving any problem. So if you’re guilty of any of these, take a deep breath and then focus on step two: implementing your solution.
1. Waiting to invest
There are a lot of factors that go into determining how much money you need to retire. Lifestyle choices, health, spending habits, familial responsibilities, etc. However, according to most financial experts, a good rule of thumb is to have one million dollars socked away. So, if one of the reasons you haven’t invested yet is because you don’t believe you need to, ask yourself this question:
Can you realistically save up at least a million dollars without the help of compounding interest?
For many of us, that answer is no. We need to acknowledge that investing involves risk. However, it’s critical to understand that choosing not to invest is also a risk. If you do all your retirement calculations and you aren’t able to accumulate the amount of wealth you need to retire, then you’re taking a risk by not investing. The risk is that you won’t have what you need in order to be able to retire.
Perhaps you fall into the camp of folks who know they need to invest, but they’ve been putting it off for reasons x,y, and z. You’re waiting for the market to settle. You had some unanticipated expenses this year. You don’t think you have enough money to start investing… Whatever the reason is, you keep telling yourself that there will be a better time than right now to start investing.
Sorry to ruin your excuse. As the saying goes,
The best time to invest was yesterday. The second best time is today. The worst time is tomorrow.
The reason that yesterday was better than today, and today is better than tomorrow, is because time in the market is everything. Time is what allows compounding interest to truly work its magic. Time in the market will outperform timing the market. And that goes for trying to find the perfect timing in your life too. If you don’t pay yourself first, you will always find another reason as to why now just isn’t the right time.
The graph below shows what missing just a few of the best days in the market can do to your growth potential over the span of 30 years.
2. Not paying off your credit card each month
Credit card debt has one of the highest interest rates of any form of debt. The average credit card APR in 2019 was 14.87%. Couple this with the fact that the average American household that carries a balance on their credit card, has $9,333 in credit card debt. Some quick math will tell you that those same families are likely paying $1387.82 in interest each year, if not more.
To make things worse, credit card debt is also one of the more common forms of debt. In 2020, 47% of Americans carried a balance – meaning they did not pay off their statements in full. The trouble is that the less you pay, and the longer you carry a balance, the more you’ll pay in interest.
3. Neglecting high interest debt
Credit card debt isn’t the only form of debt that can really cost you. Debt incurred from things like payday loans, personal loans, auto loans, and other forms of unsecured debt can come with incredibly high interest rates. Payday loans are by far the worst offenders with an average interest rate of 398%. Yes, you read that right – three hundred and ninety-eight percent. Personal loans, on the other hand, have an average interest rate of 9.41%, but can be as high as 36% or more.
It’s important to note that none of the aforementioned loans are always considered high interest debt (except payday loans). For instance, there are plenty of auto loans that charge less than 6% interest, which is a common threshold for classifying debt. But it’s important to understand what the APR is before signing on the dotted line. You’ll want to make sure you know exactly what you’ll be paying in interest (i.e. the cost of borrowing money). Just like credit card debt, the less you pay and longer you carry a balance, the more you’ll pay in interest.
Let’s look at a quick example. Say you take out a personal loan for $1000. You’re charged an interest rate of 15% and make monthly payments of $25. In doing so, it will take you 56 months to pay off the loan, and you’ll have paid $395 in interest. On the other hand, if you make monthly payments of $50, it will take you just 24 months to pay off the loan and you’ll have paid only $158 in interest. By making the higher, $50 monthly payments, you’d save $237 in interest.
4. Not maxing an employer matched 401(k)
An employer matched 401(k) is a retirement fund in which an employer will match, up to a certain percent, your annual contributions. It is, quite literally, free money. Employers may structure their match in a variety of ways.
Some offer dollar for dollar, others will contribute a percentage of your salary, and some may match a percentage of what you contribute, up to a specific dollar limit. However it’s structured, make sure you are familiar with the terms of your match and take advantage of the maximum amount available, otherwise you’re leaving that free money on the table.
The crazy thing is that one third of Americans with an employer matching 401(k) in 2019 didn’t contribute enough to receive their full match. If time in the market is the most important factor in investing, investing free money into your retirement account might be a close second.
5. Leaving a 401(k) at an old job
In 2015, Americans lost track of over 7.7 billion dollars in retirement accounts left with previous employers. If you’ve accidentally left a 401(k) open at an old job, it’s time to reclaim it. If this applies to you, reach out to your previous employer first. If you’re unable to, the US Department of Labor and the National Registry of Unclaimed Benefits have resources to help you track them down.
What’s so bad about leaving a 401(k) at your old job?
In the worst case scenario, your employer may have terminated your account and let the money sit idly by, not growing and not accruing any interest. In a mediocre scenario, your previous employer may still be maintaining your portfolio. But without you paying attention to it, it may no longer be diversified appropriately or aligned with your growth goals and risk tolerance.
Even in the best case scenario, it’s probably in your benefit to consolidate your old 401(k) and roll it over into another one of your active retirement accounts. Because if it’s out of sight, it’s out of mind, and that’s no way to treat your nest egg.
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