6 Worst Financial Mistakes and Why You Made Them


Good Intentions Can Become The Biggest Financial Mistakes

Your financial situation is a combination of every financial decision you've made up to this point. If you're like most, you have had very little or no coaching, so you're just learning as you go. This means while many of your choices may spring from good intentions, they fall flat as a result of poor planning or lack of knowledge. However, identifying your mistakes - and precisely where you went wrong - will help you avoid making more down the road.

1. Paying Off Debt With Savings

What You Were Thinking: The debt is costing 19%, the retirement account is making 4%, so by swapping the retirement for the debt you will be pocketing the difference.

Your Mistake: Withdrawing funds is easy, but it's very hard to pay back those retirement funds. With the right mindset, borrowing from your retirement account can be a viable option, but even the most disciplined planners have a tough time placing money aside to rebuild these accounts. When the debt gets paid off, the urgency to pay it back usually goes away. It will be very tempting to continue at the same pace, which means you could go back into debt again - but this time five years of savings will have been wiped out too.

If you are going to do it, you have to live like you still have a debt to pay - to your retirement fund. Keep that need-to-pay mentality you had with your credit cards, and create a plan to pay yourself back. (Learn more in 8 Reasons To Never Borrow From Your 401(k).)

2. Not Building An Emergency Fund

What You Were Thinking: Emergencies won't happen to you, and if they do, you'll make it through with the cash in the bank or by relying on unused credit cards.

The Mistake: Most households are living paycheck to paycheck and an unforeseen problem can easily become a disaster if you are not prepared. Many financial planners will tell you to keep three months' worth of expenses in an account where you can access it quickly. Loss of employment or changes in the economy could drain your savings and place you in a cycle of debt paying for debt. A three-month buffer could be the difference between keeping or losing your house. However, a three-month buffer isn't always a realistic option, see Why Emergency Funds Are a Bad Idea for a critical approach and alternative suggestions.

3. No Budget, No Plan

What You Were Thinking: Budgeting takes up too much time, it's boring and you don't go into debt anyway.

The Mistake: Your financial future depends on what is going on right now. People will spend 20+ hours per week on the computer or watching TV, but setting aside two hours a week for their finances is out of the question. You need to know where you are to know where you are going; this makes spending some time planning your finances a must.

4. No Insurance

What You Were Thinking: It won't happen to me and I don't want to be persuaded into buying something I don't need.

The Mistake: Medical conditions and deaths are never expected. The point of insurance is taking care of the people who depend on the income earner. If you live alone with no dependents, then you may not need insurance. If you have a family who depend on your income, then you should consider it.

5. Not Investing

What You Were Thinking: You have a hard time trusting others or you feel the markets are too risky.

The Mistake: If you do not get your money working for you in the markets or through other income-producing investments, you cannot stop working - ever. Making monthly contributions to designated retirement accounts is essential for a comfortable retirement. Take advantage of the tax-deferred accounts and your employer's sponsored plan. Understand the time your investments will have to grow and how much risk you can tolerate, then consult a qualified financial advisor to match this with your goals.

6. Ignoring Additional Income Opportunities

What You Were Thinking: My current job pays the bills and I don't want to take away from my personal time.

The Mistake: Nothing is guaranteed and everything comes to an end. Why wait until it's too late to do something about it? The bad times will eventually turn around, and jobs will be available. When you do have a decent paying job, cash in on your skills and earn as much as you can. It's fine to hold out during a recession, but when the economy is strong, get in there and get earning.

Worst Financial Mistakes

It takes many people a lifetime to build significant wealth, but it's much easier to lose it. It won't be one dip or one bad decision, but a combination of a good intentions followed by poor execution might make it almost impossible to recover. To avoid major pitfalls, start tracking where your money is, planning for problems, making more money and spending less. The bottom line is that you actually have to do it, not just think about it.

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