How to Avoid (or Recover From) Most Common Financial Mistakes

As accountants, we are fond of saying that every person’s financial situation is unique. But no matter how different our situations are, there are certain financial mistakes that seem to crop up more often than not. In this article we’ll highlight some of the most common financial mistakes we see, and tell you how to avoid them… and how to recover from them (in case you didn’t read this article in time).

Mistake 1: Your Roaring 20s!

You’re fresh out of school, you have your first “real, grown-up job,” and you’re ready to celebrate. Most twenty-somethings have no concept of fiscal responsibility, and they have no idea that the lavish lifestyles they’re happy to “afford” now are wasting some of their prime years to save for the future. 

Your twenties are your best opportunity to take advantage of compounding interest—interest rates that include the principal sum and the interest earned. $1,000 saved in an account with a compounding interest rate will turn into roughly $4,300 over 30 years, but it needs time! In 20 years, that same money with that same interest rate is “only” worth around $2,650. That’s why it’s so important to start when you’re young.

How to avoid this mistake:

Avoiding this mistake is easy: as soon as you have a steady paycheck, it’s time to start saving. Even setting aside $50 or $100 from each paycheck will pay dividends over time. Setting up a savings account is easy, but it’s worth comparing interest rates across banks to find yourself the best deal. We also recommend, if possible, that you split your paycheck and automatically deposit your saved portion, then do your best to forget about it until it’s time to retire.

How to recover from this mistake:

The bad news is that there’s no making up for lost time—there’s just no way to make up for the incredible effects of compounding interest. The best thing you can do is to maximize your savings now, including contributions to your IRA and/or 401(k). There are limits on these contributions, though they are higher for those above the age of 50. To help come up with the right savings plan, we highly recommend scheduling time with a qualified financial advisor.

Mistake 2: Credit? Forget it.

If not saving enough is the first common mistake, spending too much is the second! And nothing makes it easier to overspend than your credit card. It’s not uncommon to see people rack up thousands of dollars of debt in very little time. And once those debts start to mount, interest rates can make it nearly impossible to dig your way back out.

How to avoid this mistake:

The easiest way to avoid credit card debt is to not use a credit card, and to only pay for what you can afford. But that’s not always possible. If you do use a credit card, we highly recommend paying it off in full each month. This will make sure that you never get too far behind on payments, and keep things from spiraling out of control.

How to recover from this mistake:

If you’re burdened by credit debt, we can help. The first thing you need is a plan, one that prioritizes digging your way out of debt. While the details will vary from person to person, the general approach is to find ways to cut your expenses and turn that money into chipping away at your debt. It just takes time.

Mistake 3: Ignoring Inflation.

Inflation is a measure of spending power. The average rate of inflation in the US is 3.22%. That means that, on average, your dollar is worth 3.22% less every year. This might not seem like much, but it’s guaranteed to catch up with you if you ignore it. If you’re not increasing your earnings to keep up with inflation, you’re going to find yourself slowly sinking into financial catastrophe. Inflation is especially insidious when it comes to saving for your retirement—it means that a dollar saved today is only going to have about 64 cents’ worth of buying power in 20 years. 

How to avoid this mistake:

There’s no avoiding inflation, but there’s plenty you can do to cope with it. Start by working to have your wages keep pace with the rate of inflation. Talk to your employer about annual cost of living increases, and/or contact your local politicians about adjusting the minimum wage to keep pace with inflation (you won’t be surprised to learn that the federal minimum wage was last set in 2009, meaning it’s now worth around 17% less than when it was then, and about 31% less than its peak purchasing power in 1968). Think of it this way—if your wages don’t change from year to year, you’re effectively allowing your employer to lower your pay by an average of 3.22% every year.

As mentioned, don’t forget to take inflation into account when planning for retirement. This is one of the reasons it’s so important to start saving early, as compounding interest rates can make an effective tool for staying ahead of inflation. Think about how much money you’ll need to live comfortably for a year, and remember that this number will effectively double in just 15 years.

How to recover from this mistake:

If your wages have been stagnant and your purchasing power has slowly slipped away over the past few years, it’s time to do something about it. Be proactive, talk to your employer, and fight for an increase in wages. If that’s not an option, it’s time to start job hunting (which is always less stressful when you’re already employed). Inflation is a natural force in economics, and the only thing you can do to stay ahead of it is to make sure your wages keep pace.
These are three big mistakes that we see an awful lot, and we hope this article helps you navigate them. If you’d like help planning your financial journey, we’re only a phone call away.