12 Money Mistakes that Cripple Your Net Worth
Earning a lot of money might make it easier to build your net worth, max out your retirement, and still be able to pay for the lifestyle you want.
But earning a high income is not enough. A big paycheck doesn’t mean you’re good with money.
There are countless stories of people going from rags to riches, and back to rags again, because they didn’t responsibly manage their finances.
It’s not how much money you earn that matters, but what’s really important and counts is what you do with that money.
Here are 12 money mistakes to avoid crippling your net worth and long-term wealth.
1. Buying a Bigger House than You Can Afford
When it comes to life events, purchasing a house is often the biggest expense you’ll have.
You may want a big house, but bigger doesn’t always mean better, and especially if the cost of the house is above your means.
Plus, there’s more to consider when buying a house besides just the monthly mortgage payment. A bigger house means higher utility bills. A larger house, more land, and even the location itself means higher property taxes. And there’s the cost of routine maintenance and remodeling.
A house is a place to call home, share with friends and family, and make memories. You should enjoy the house you buy. But you also need to pay for it. Buying a house within your means will allow you the financial flexibility to save, invest, and live a better life outside the house. And, the money you save now can even help you afford your absolute dream house when you’re ready to move and sell.
2. Defaulting on Current Debt
Before you start borrowing money, make sure you understand the interest rate, monthly payment, loan terms, and if there are any additional or associated fees.
Failure to repay the debt will get you handed over to collection agencies, bankruptcy and even seizure of property (like that big, beautiful house above).
If you don’t think you’ll be able to make the monthly payments, don’t borrow the debt.
3. Missing Debt Payments
Skipping a debt payment every now and then may not result in defaulting on your debt, but there’s plenty of bad things that can happen. You do still have a contractual commitment to pay that debt after all.
By skipping a payment, you’ll incur late fees and penalties until your balance is up to date. That means you pay even more, draining your hard earned money.
Missing payments also hurts your credit score, which might prevent you from obtaining loans in the future, and even worse, if you do get approved, your interest rate will be higher, which will cost you a lot more money.
Missing payments is a spiral that can quickly get out of hand.
4. Thinking You Will Out Earn Bad Spending Habits
Earning a lot of money doesn’t cut it if you’re only going to spend it all.
Big house, nice cars, lots of travel…we all want to live the high life or try to keep up with the Joneses.
It’s not a big deal, right? You’ll just pay it off later when you get your next raise, land that promotion, or hit the jackpot winning the lotto. It’s easy to justify.
But guess what? Even if you do start earning more money, nothing will change if you keep the same spending habits.
Having a saving mindset over a spending mindset, and investing in your future now is the only way to increase your net worth. Otherwise, you’re just wasting money.
5. Not Saving for Retirement
This is one of the biggest mistakes I made, since I didn’t start saving for retirement until I was 30. Being 18 or 20 years old, retirement just seems so far away, like it’s not real.
Saving money for retirement is absolutely crucial to be set for your future.
The longer you wait, the more you’ll have to contribute to try and catch up, and you’re missing out on compounding interest that multiplies your investment.
Most employers also match your 401(k) contribution, so take advantage as soon as you can, or it’s just giving away free money.
6. Not Having an Emergency Fund
Who needs an emergency fund? Everyone.
As the saying goes, hope for the best, plan for the worst. We never know when a disaster or unexpected expense can happen, and if one does and you don’t have the money to pay for it, you’ll just end up deeper in debt.
Recent studies state that 40% of Americans can’t cover a $400 emergency expense.
Experts suggest having a minimum of 6 months of cash in a separate account to cover necessary expenses should something unforeseen happen, such as getting sick or losing your job.
Having that safety net will keep you financially stabilized, as well as reduce stress and worry should something occur.
7. Not Paying Off Credit Card Debt
Credit cards can be great to have, if you pay them off. A rewards card can even save you money.
But, with an average interest rate around 18%, keeping a balance on a card becomes very expensive. Making only the minimum monthly payment can take years to pay off.
It’s best to pay that credit card off as soon as possible, and put that money saved from interest to good use.
For some tips, you can read our guide on how to get out of credit card debt.
8. Not Tracking Your Spending
No matter how much money you make, one of the best things anyone can do to help improve their financial situation is tracking their spending.
Having a budget and seeing what comes in and how much goes out can be a “Eureka!” moment. By tracking your spending, you’ll not only have a good idea on how much you generally spend each month on recurring expenses, but also be able to identify things you don’t need, or are spending too much money on.
There’s no sense wasting cash on things you don’t need, use or care about. Tracking your spending can free up that extra cash to jump start your savings.
9. Borrowing Against Your IRA or 401(k)
Borrowing against your IRA or 401(k) may seem appealing, given the favorably low interest rates most of them offer.
But an early withdrawal can be a big mistake for your net worth.
Early withdrawals may come with added penalties and taxes. There’s always a chance you may not be able to pay back the loan. The less money you have saved in retirement, the less interest it accrues, so the slower it grows.
Keep your retirement money for when you need it – in retirement.
10. Not Refinancing or Consolidating Loans
If you have credit card or other high interest debt, you should strongly consider refinancing your debt and loans.
Consolidating your debt makes it simpler by only having a single monthly payment, and with a lower interest rate, you can save hundreds or thousands of dollars when paying off your debt.
Leaving your debt in a high interest account is paying more than you need to, and who wants that?
Consolidating can also increase your credit score by reducing your credit utilization ratio.
11. Not Automating Your Savings
If you’re like me, money seen is money spent.
We can’t expect money to save or invest itself. You have to tell it to first.
Automating savings takes the guesswork out, and prevents forgetting.
Having money in a separate high-yield savings account makes it more difficult to access those funds, so you’ll spend less than if you kept it all in a checking account.
An important money habit is to pay yourself first before spending on other things. If you automate your savings, you know your net worth is always growing, and you’ll never have to wonder where your money went.
12. Blowing Your Tax Refund
Almost every time I ask someone about tax refunds, they’ve already planned what they’re spending it on before they even have it, and it’s usually on something materialistic or without any lasting value.
If your finances are all in order, then there’s certainly nothing wrong with spending all the money on something you want. But, if you have any kind of debt, or don’t have an emergency fund, that money is far better spent on improving your financial situation.
Saving your tax refund, or using it to pay down debt will give you relief and get you one step closer to having a net positive income.
We need to stop looking at tax refunds as some sort of gift or bonus, and realize that it’s money you already earned and gave away once (to the government), so why give it away again when you finally receive it?
It’s more important to make smart decisions with the money you have, than it is how much money you make.
You don’t have to be rich to acquire wealth.
It may not be as fun or glamorous as spending all your money now, but prioritizing a savings and investing mindset will put you on the path to financial freedom, increase your net worth, and escape the stressful paycheck to paycheck life.