Ask anyone and they’ll tell you that hitting the $50,000 savings mark is no small feat. It takes time and discipline to build up that kind of nest egg. But, according to money experts, your journey doesn’t end there.
There are many subtle traps savvy savers can fall into that can undermine their financial security. Here are the biggest mistakes you want to avoid.
According to David Bakke, finance expert at Dollar Sanity, while you probably tracked your investments on the way to $50,000 in savings, once you reach that goal, it becomes even more important to do so.
“You need to track performance over the long term and also make smart adjustments as you age,” Bakke said. “You’ve done a great job by getting to $50,000 in savings, but the work doesn’t stop there.”
Not Moving Money to Higher-Interest Accounts
“On the way to $50,000, you probably haven’t paid much attention to where your money actually is,” Bakke said. “But if the bulk of it is in a traditional savings account, you’re probably earning close to nothing.”
At the very least, he said, you should consider an online savings account or one with a local credit union, where you can expect to earn at least 4% on your money.
Eric Johns, CFP and owner of Equilibrium Financial Planning, said letting your money just sit is a big no-no: “A common mistake clients make is allowing dollars in excess of their emergency fund, typically 3-6 months worth of expenses, to sit in accounts that pay little to no interest.”
“Obviously, you’ve done a great job with spending if you’ve gotten to $50,000 in savings,” Bakke said. “That said, now is not the time to get lazy.”
Even though you probably have the cash, he said to remember that you don’t really need an 85-inch flat-screen TV or a $1,000 iPhone.
“Keep the discipline in place so you don’t lose all of the progress you’ve made,” he said.
Percy Grunwald, personal finance expert and co-founder of Compare Banks, said lifestyle inflation is the culprit for many people getting behind on finances.
“With increased savings or income, individuals often succumb to lifestyle inflation,” he said. “They start spending more on non-essential items, such as dining out frequently, buying luxury goods or upgrading to a bigger house.”
To avoid this trap, he said, it’s essential to strike a balance between enjoying your financial success and maintaining a healthy savings rate.
Splurging on a Brand-New Vehicle
Thomas Franklin, finance expert and CEO of Bitinvestor, said splurging on a brand-new vehicle can be especially tempting when you’ve significantly grown your nest egg. But he warned that just because you can make the monthly payments doesn’t mean purchasing a brand-new car is wise.
“Vehicles are assets that depreciate, meaning their value decreases over time,” he explained. “A new car typically loses about 20-30% of its value in its first year. Since depreciation rates slow after the initial years, opting for a pre-owned car often proves to be a more economical choice.”
Failure To Set Future Goals
Hitting your first $50,000 is satisfying, Franklin pointed out, particularly when it represents tangible gains like savings, investments, businesses or valuable experiences.
“However,” he said, “complacency can be costly. Without a new target to aim for, your initial financial achievement might just be a high point before a decline.”
As your wealth grows, he said, it becomes your duty to manage it wisely and consider its long-term impact. “Without future objectives, gauging progress and celebrating, further achievements become difficult.”
Johns suggested allocating funds based on the time horizon and your risk tolerance.
“But generally speaking, funds needed in less than five years can be allocated to short-term investments in a taxable brokerage account,” Johns added.
He said that more aspirational goals like college education or retirement funding should be placed in tax-advantaged accounts like 529s for education and a combination of tax-deferred and tax-free accounts for retirement.
“Beware of becoming overconfident as your wealth increases,” Franklin warned. “The temptation to chase after greater returns by taking larger risks can be strong.”
That’s why it’s important to focus on strategies that enhance your wealth without exposing you to the possibility of significant loss.
Franklin said insurance is a fundamental aspect of protecting your wealth.
“It’s a mistake to postpone, ignore or be underinsured, as this can leave you and your loved ones vulnerable in dire situations,” he said, adding that it’s crucial to assess the types of risks and what you need to safeguard against, whether it’s an accident, loss of income or health issues. “Essential insurance types include life, health, disability, home, auto and professional liability coverage.”
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