5 Financial Mistakes That Will Follow You Forever

When it comes to creating a successful financial life, avoiding major mistakes is half the battle. That’s why it’s important to be proactive when it comes to how you manage your money.

Although some financial mistakes are quite common, if you take it upon yourself to learn what they are and actively work to prevent them, you’ll be well on your way to reaching all of your financial goals.

Here are some of the common financial mistakes that investors make so that you can get ahead of them and not allow them to come back to haunt you. 

There’s a saying that it’s never too late to start your retirement savings and it’s true. It’s always better to start late than never at all. But you’re really climbing up a steeper and steeper hill the later you start to save and invest for retirement. Here’s a look at the math, which makes quite a compelling case.

Imagine that you start socking away $500 per month at age 20 and you earn 8% of that money on average per year. By the time you reach age 65, you’ll have over $2.6 million. Even if you wait a full 10 years, at a time when you’re likely earning more and can more realistically invest as much as $500 per month, you’ll still end up with over $1.1 million.

But what if you wait until age 40, or even 50? In both of those cases, you might have to find a way to put aside much more per month to fund your retirement. Saving $500 for 25 years from age 40 to 65 will only generate about $475,000 in retirement savings. At age 50, your nest egg will dwindle down to just $173,000.

Debt is a huge drag on any financial plan because money that you could use for savings and investments is instead going to a bank or finance company. That both reduces the amount you can save and prevents you from enjoying the benefits of compound interest.

High debt loads can also be extremely stressful, as they can be hard to pay off. Credit card interest rates top 20% on average, according to the Federal Reserve, meaning your debt can easily double in as little as six years. Unless you attack your debt as early as possible, it could haunt you through your entire financial life. 

If you work for a company that offers a 401(k) plan, it likely matches at least a portion of your contributions. For example, if you earn $50,000 per year and contribute $2,400 to your plan, your employer might kick in anywhere from $1,200 to $2,400 per year on your behalf. That’s the closest thing to free money you’re likely to get anywhere, and it’s important to take advantage of it.

Imagine a scenario in which you contribute $2,400 to your 401(k) plan annually for 35 years. If you earn an average of 8% per year on that money, you’ll have about $458,000 in your account.

But, if your employer matched $1,200 of your contribution every year, you’d end up with closer to $688,000. Without you even lifting a finger, your nest egg would jump by $230,000, or look at it as 50% more.

If you habitually spend more money than you take in every month, you’re setting yourself up for long-term financial problems. For starters, this means you have trouble managing your money. But on a practical level, it means you’ll be going into debt every month, and you’ll always be racing to catch up.

The good news is that with some small changes, you can flip that equation on its head. By creating a budget and making a few small adjustments — including spending on needs instead of wants and prioritizing savings — you might find that you’re suddenly ahead of the game, spending less than you earn and building up your nest egg.

Speculative investments have a place in some portfolios, but most advisors recommend keeping them at an allocation of no more than 5% to 10% of what you own. If you put all your money into a single speculative investment — or even if you own 100 different types of speculative investments — you’re putting your entire financial future at risk. While risky investments offer the potential for huge gains, many investors lose all they have instead. 

Imagine, for example, that you put all your money into a single speculative stock and it doubles in the first month. Great news, right? Well, here are some of the likely scenarios as to what happens next:

• You avoid taking profits, thinking the stock is going higher, only to see it fall 50% or more in value over the following month or year
• You put even more money in, thinking the stock is hot and watch in horror as the price reverses and falls below even your initial buy-in point
• You actually take profits at the absolute peak of the stock, doubling your money…and then put it all into “the next big thing,” only to see it not work out as well

The bottom line is that when you’re speculating, it will always be difficult at best to know when is the right time to sell — if you’re even lucky enough to have a winner in the first place. And if you base your entire investment strategy on continually finding winning speculations, sooner or later it’s inevitable that your luck will run out.