5 Financial Shortcuts More Likely To Make You Poor Than Rich, According to Experts

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Society today is often spoiled by instant gratification. Our groceries and meals are delivered to our doorsteps, we shop online with next-day shipping, and movies and shows are available to stream on demand. But some things just can’t be rushed — and the pursuit of financial success is one of them.

Nevertheless, human nature being what it is, people are constantly on the lookout for shortcuts that promise quick riches and an escape from financial worries. In an era where the promise of “get rich quick” schemes and investment hacks frequently inundate our news feeds, it is vital to understand the perils associated with cutting corners on your financial future.

While they may seem tempting, each of these shortcuts harbors hidden risks and pitfalls. Here are five common financial shortcuts that experts warn are much more likely to make you poor than rich.

Stashing Your Savings at Your Traditional Bank

Most people have both their checking and savings accounts at the same bank. It makes sense — it’s the path of least resistance, it’s easy to transfer money between the accounts, and you can often link the accounts to avoid overdraft fees. However, according to budgeting expert Andrea Woroch, it’s worth shopping around for a better interest rate.

“[This] could be costly in the long run because you’re missing out on free money by not taking advantage of higher interest rates paid by high-yield online savings accounts. For example, Bread Savings pays a high 5% APY right now. Interest is compounded daily and deposited each month, so your savings makes money for you effortlessly,” Woroch said.

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Neglecting Your Emergency Fund

Managing your finances is often a matter of juggling a lot of competing priorities — investing for retirement, saving for life goals like buying a home or paying for a child’s tuition, and trying to make sure there’s something left over so you can live a little. An emergency fund is boring — you need to keep it very safe and easily accessible, which often means low returns that might not even keep up with inflation.

There’s a reason experts almost universally recommend having one, though. Life comes at you fast, and an unexpected expense can really derail your plans if you’re not prepared for it. Most experts recommend somewhere between 3 and 6 months worth of living expenses. Kevin Brady, CFP, vice president at Wealthspire Advisors, says it’s OK to start small if you have to. 

“For those in debt, starting with one month of expenses is okay to get in the habit of saving and to prevent going further into debt. It is less common now that savings accounts offer higher interest rates but do not invest dollars in an emergency fund. The whole point is to have it fully liquid, safe, and easily accessible, not to aim to beat inflation or achieve an attractive return,” Brady said.

Cheaping Out on Insurance

While there’s nothing wrong with shopping around for the best price on an insurance policy, it’s easy to forget that what really matters isn’t just your premiums — it’s the coverage you’re getting for the money. Ted Olsen, vice president at Goosehead Insurance, says a common shortcut consumers take is choosing the cheapest insurance coverage without really understanding what it does and doesn’t cover.

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“For example, when choosing auto liability limits, which is the maximum amount of money the insurance company will pay when a covered incident like a fender bender takes place, I’ve seen clients select their state’s required minimum coverage because it’s the cheapest option. After reading through what it actually covers, clients are often upset that they had no idea they had been putting themselves at such risk. Insurance is there for the things you cannot afford on your own. Do not settle for an insurance policy just because it’s cheap,” Olsen said.

Not Maxing Out Your 401(k)

Many employees have access to employer-sponsored retirement plans, such as a 401(k), which often includes employer matching contributions. A common shortcut is not maximizing your contributions to these retirement accounts. Doing this might increase your take-home pay, but you are missing out on a number of financial benefits.

According to Robert Johnson, CFA and professor of finance at Creighton University’s Heider College of Business, deciding to participate in an employer-sponsored retirement plan is one of the most important financial decisions anyone makes in their life.

“Perhaps the worst financial mistake anyone can make is turning down free money. If one does not contribute enough in a 401k plan that has a company match to earn that match, one is basically turning down free money. Many people put such a high priority on paying down debt that they do not participate in their company 401k plan. Contributing the max to your 401K also reduces your tax bill. People should do whatever it takes to participate in their company’s 401K plan to the level to get the full employer match,” Johnson said.

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Making Risky Investments

Meme stocks, cryptocurrency, NFTs — you’ve probably heard of someone who made millions overnight by making a high-risk, high-reward investment. It sounds like a dream come true, but so does winning the lottery, and they are probably equally likely.

Professor Johnson points out five different risky strategies that will not only fail to make you rich, but will probably end up losing you money. The first is day trading, which is essentially making frequent short-term trades in the stock market to try to capitalize on movements in stock price. Second is timing the market — trying to predict when the market as a whole will rise and fall and making stock trades based on that prediction. Third is investing on margin — when an investor borrows money from their broker to buy stocks. Next is short selling, where an investor makes a bet that a stock’s price will go down. Finally there’s cryptocurrency, which is still very trendy despite the obvious risks.

It can be hard not to get excited and chase a trend when you hear stories of others making piles of money on a speculative investment, but it’s important to remember that there is no substitute for consistent investing over time. “The bottom line is that investing is a marathon and not a sprint,” Johnson said.

Final Note: Avoid Mistakes by Thinking Long-Term

Experts agree that the road to success takes time. Shortcuts may look attractive, but they are more likely to lead you astray than get you to your goals. Have a plan, don’t get distracted, and keep your eyes on the horizon. Eventually, you can achieve the financial freedom you’re dreaming of.

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