Everyone makes mistakes. Small mistakes. Giant, colossal,
f-up mistakes. Sometimes we make financial mistakes. Today we’re going to talk
about some of the terrible mistakes I made that eventually led me to facing the
music, getting my sh*t together, and cleaning up my finances. Also, starting
this blog. Let’s go!
Carrying a balance to build credit
I’m not sure where or when it started, but there is a
malicious rumor in the world that carrying a credit card balance month-to-month
helps you build your credit rating. It is unequivocally false that doing so
builds your credit. In fact, carrying a balance and paying interest charges can
actually hurt your credit!
It’s true that if you have a credit card and you use it each
month you’re using up a portion of the credit available to you. A strong
history of doing so and paying it back consistently indicates to lenders that
you’re responsible with your money and will pay them back if they lend you some
of theirs. That positively impacts your credit. However, carrying a balance
month-to-month that incurs interest fees and late charges is not necessary to accomplish
this. Simply using your credit card and paying it off in full each month, never
needing to accrue any expenses, is all you need to safely and cheaply build
your credit. If you instead carry your balance month-to-month in an effort to
build your credit you’re actually paying Visa (or MasterCard or Discover…) a
fee to DAMAGE your credit score each month. Don’t fall for this trap!
Carrying a credit card balance month to month is expensive and can only
hurt your credit score.
Saving for retirement “some day”
Well out of college and approaching my 30s I knew I should
start saving for retirement. And I knew I would someday. But by waiting to save until someday I put off setting aside money and failed to harness the most powerful force in the universe. When I finally started
putting money into my Roth IRA a few years of potential market gains and
compounding had passed. I managed to stop myself before I lost $1,000,000 but you don’t have to repeat my mistakes.
No matter how old you are right now, what your future holds,
or where you’re at financially you can start saving for the future today. Not
sure how you can possibly afford to do so? Make sure you’re taking advantage of
the most powerful financial tool in the world (it’s free), and absolutely slay the lifestyle creep monster. Here are a few areas you may be able to save expenses from to put towards
retirement. Even saving just $100 each month can compound into thousands in
savings over time. I was wrong to wait to start saving for retirement and it
cost me thousands; you don’t have to repeat my mistake!
Overspending on credit
This is a huge problem for most of us, and I’m not
impervious to over spending with my credit card. The psychology behind this
over-spending is well studied; it’s why casinos, cruises, and resorts want you
to pay with a plastic club card instead of actual cash. When humans see how
much money they’re physically spending, they’re likely to spend less.
For me in college my credit card was a good place to get
money whenever I wanted to buy lunch out with friends or otherwise put off
studying. For the average American a credit card means holding $14,000 in debt
they wouldn’t otherwise need to have spent. The potential cost of that debt?
Thousands a year in interest and a debt yoke that can feel mentally draining.
To rid myself of my over spending problem in college I simply
cut up my credit card and saved to pay it off. If you’ve got standing credit
card debt, consider putting your credit card on ice (sometimes literally;
freezing it in your freezer prevents you from getting fast access to it) and
paying with cash. Pay off the credit card debt by making your repayment into a game or use the most powerful debt repayment method in the world.
What to do for paying for the things you need to purchase
while your credit card is “frozen”? For me I had to switch to the cash method.
That could mean a system that involves keeping an envelope of cash for each
expenditure you have in a month ($400 for groceries, $200 for gas, etc.) and
pulling the cash out to pay for things. Out of cash in an envelope? Then you’re
done buying that item for that month. That worked for me so that I could get my
spending under control. Seeing the cash going out kept me honest about how much
I wanted to spend and empowered me to stick with my budget.
Paying too much in taxes
I consider it a patriotic duty to pay taxes, but it’s also
my responsibility to ensure I only pay the taxes I owe. For years I paid far
more than I needed by not taking advantage of all the different savings
programs, tax credits, and tax deductions available to me. That was costly!
When you spend dollars on consumer goods or wasteful spending instead of
tax-advantaged savings options you’re throwing away money to the government that they want you to keep! Don’t fall
for that trap!
Instead, when you’re done with your budget each month take
the extra money you have left and contribute to your 401(k), which reduces the
taxes you pay this year. Make sure to fully fund your Health Savings Account
(HSA), which can reduce your taxes forever and is the most powerful retirement account. Consider saving in a traditional IRA,
which cuts your taxes down this year, or a Roth IRA which cuts your taxes down after you retire.
The government wants you to cut your taxes in so many ways, one (hypothetical) family of three managed to drop their tax burden on $100,000 in income all the way to just $11! It’s our patriotic responsibility to pay
the taxes we owe, but the government wants that amount to be as low as
possible!
Don’t follow in my footsteps!
It was a long, hard journey to get to a point in my life
where I felt comfortable enough to talk about the mistakes I’ve made with money
and how you can avoid them. You don’t have to repeat my mistakes! Don’t do what
I did with the items I’ve laid out here today and save yourself time,
headaches, and most importantly a whole lot of cash.
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| Photo "illustration" by Willard Pierce |
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