I’m going to guess you’ve made a financial mistake or two in your life. Who hasn’t? For some of us, it was more than an occasional late fee or random urge to overspend that brought us to our financial knees. But I’m not talking about the kind of blunders that got us into trouble—we could list those in our sleep. Instead, I want to focus on the mistakes people make while they’re working their way back to financial health.
Whether you’re recovering from a season of unemployment or from a financial mess you created on your own, avoid these goofs and you’ll get where you want to go much faster.
1. Not saving. You’ve heard this plenty, and here it comes again: Jump to the front of the line—ahead of your creditors—when you divvy up your paycheck. Get over feeling guilty about keeping money for yourself.
You’ll need enough in your fund to pay all your bills for at least six months. But don’t let that big number discourage you. Start by saving enough to live on for two weeks, then up it to one month, and so on until you reach goal.
Put your savings on autopilot—you won’t miss what you don’t see. Commit to saving 10 percent of every paycheck. If you can’t start there, start with 2 percent. Then in a few weeks, change it to 5 percent, then 7 and so forth until you reach at least 10 percent.
2. Paying for college. If you must make a choice between adequately funding your own retirement and paying for your kids’ college education, put retirement first. The best gift you can give your kids is to make sure you won’t become a financial burden to them in your sunset years.
Kids have far more options for funding their college education than you have for your retirement. They’ve got scholarships, grants, financial aid, student loans, work-study programs and the not-to-be-forgotten method of working their way through college. Once your own future is secure and you’re out of debt, that’s when you’re in a position to help pay for education.
3. Paying off the mortgage too soon. Paying extra on your mortgage each month is laudable, but not if you time it badly. Your mortgage should be the last debt you pay off. Why? First, its interest rate is a lot lower than the interest you’re paying on your other debts (credit cards, student loans). Second, mortgage interest on your primary residence is tax-deductible. While you’re in debt, having that deduction helps to ease the pain by lowering your tax bill.
Once you’ve built up a fat emergency fund and all of your high-interest, unsecured debts are paid in full—only then should you consider putting money toward paying off your mortgage.
4. Investing in the wrong thing. If there’s one thing we’ve learned over the past year, it’s that money invested in the stock market is at risk. You could lose it! Don’t jeopardize any of your hard-earned money while you’re carrying high-interest, unsecured debt.
Instead, invest in your debt—it’s a much smarter move. Let me explain: If you have a $2,000 credit card balance at 14.5 percent interest, you’re paying $290 per year in interest, or $24.16 per month. Instead of taking a $2,000 gamble on the stock market, put it toward reducing your credit-card debt. Now each month, rather than paying that $24.16 interest to the credit card company, you get to keep it. That’s a 14.5 percent return on the $2,000 investment you made in your debt.
As long as you’re carrying unsecured debt, do everything you can to pay it down each month. You’ll get a return equal to the amount of interest you would have paid to the credit card company.