6 Financial Mistakes That Are Costing You a Fortune

Is your New Year's resolution to be better with money? You aren't alone.

It seems like everyone wants to manage their money better this year; it’s the top New Year’s resolution for Americans, ahead of working out and eating healthier. Eliminating financial mistakes from your life can go a long way towards making 2020 a financially successful year, but sometimes mistakes can be difficult to correct or even hard to notice. Some mistakes are glaringly obvious, like credit card debt, and some are more subtle. Here’s my list of financial mistakes that are costing you a fortune, and how to fix them.

6. Eating out

Going out to eat frequently may not be as detrimental to your financial health as credit card debt, but dining out often can add up over time. Most Americans, 56%, eat out 2-3 times per week. 10% eat out 4-6 times per week, and 6% of the population eats out every day. Preparing food at home not only saves money, but is healthier too. If you think you eat out too often, try to dine in more this year. If you don’t like to cook, there are many healthy meals that are quick and easy to prepare.

5. Subscriptions

Americans love their subscriptions. A survey found that we spend about $237 a month on subscriptions (including the cellular service and/or internet service required to access those subscriptions). Imagine if that money was saved for retirement instead of spent on subscriptions. If an 18-year-old saved that amount each month, and earned 8% per year in the market and lost 3% per year to inflation, they would have $511,744 at age 65.

I’m not saying to immediately drop all of your subscriptions and save that money for retirement, but you should do a subscription audit and get rid of services you aren’t using a lot. 

One might wonder how we got to this point. Why does it seem like everything is a subscription now? We got here because companies like predictable revenue. They don’t like to guess if you are going to buy something; they want to know you are going to buy it, and how often you’re buying it. You can use Amazon Subscribe & Save to have almost anything sent to you on a recurring basis. Does anyone really need that? Of course not, but Amazon loves it; they make their revenue more predictable and, for most items, people likely overestimate how often they’ll need it and waste money on things they don’t need. The iPhone upgrade program from Apple is essentially an iPhone subscription/rental service. You get a new phone every year, but never actually own your phone, and pay Apple a monthly fee.

With all of the streaming services out there, I think we are getting to a point where it makes more sense to buy shows you like permanently, either digitally or physically, rather than pay for every subscription service. I’ve noticed that I go back to many of the same TV shows and movies over and over again, and buying them permanently means I will never have to pay a monthly fee to watch them.

4. Spending out of control

Do you spend a lot of money on things you don’t need? Does this negatively impact your ability to save money or pay off debt? If you answered yes to both of those questions, your spending might be out of control.

It’s important to remember that spending money does not provide lasting happiness. With the consumerist society we live in, where advertising permeates every part of our lives, that can be easy to forget. I wrote an article about minimalism last week and got rid of a bunch of stuff I didn’t need. One of my goals this year is to consume less than I did last year, which will be good for my wallet and the earth. If your spending is out of control, it may be time to stop using credit cards for a while (if you are using them) and start budgeting. My guide to creating a budget can be found here.

3. Credit cards

Credit card debt is very harmful because interest rates are high. The average interest rate right now is 17.30%. To figure out how to get rid of credit card debt, you first need to figure out how you got into credit card debt in the first place. If you’re spending a substantial amount of money on things you don’t need, you may need to strictly follow a budget to build discipline with credit cards. To get out of credit card debt, you must be a disciplined spender and pay as much as you can afford towards your debt.

2. Car loans

Not all car loans are bad, but they can be if you don’t know what you’re doing. Cars are quickly depreciating assets, so it’s important to pay off your loan quickly (you should have auto loans paid off in five years or less). If you don’t, you could easily end up owing more on your car than it’s worth. 33% of Americans who traded in cars to buy new ones last year had negative equity, which means they owed more on their vehicle than it was worth. That also means they rolled negative equity into a new car; so instead of taking out a $24,000 loan for a $30,000 car (putting 20% down), they were taking out loans for $35,000 or $40,000 to cover the negative equity on their old car.

If you do take out a loan to buy a car, you should aim to put at least 20% down. Putting money down on your car gives you a buffer between the value of the car and what you owe on the car loan, and makes it harder for you to end up underwater on your car.

Interest rates on cars should be low; you shouldn’t be paying more than about 5% in interest, and hopefully you’re paying less. If you are struggling with car debt, there are a few different options you can consider to get out of debt. If you have positive equity in the car, you may be able to sell your new car, pay off the loan, and buy a cheaper car. When selling your car is not an appealing option (if you have negative equity, for example), it’s best to get your car paid off as soon as possible. If your car were to break down before it’s paid off, you could end up owing thousands of dollars on a worthless vehicle.

Salespeople at car dealerships normally want you to take out auto loans for longer terms. This makes the monthly payment smaller, which makes the car seem more affordable. Dealers make more money now off the car loan than they do off the car itself. The average profit from a new car for dealers is $381, and the average profit from financing is $982. This is a fairly new development; 10 years ago, dealers made $837 from the sale of a new car, on average, and $516 on the financing of the vehicle. 

For more information about how to pay off debt, including credit cards, car loans, and student loans, check out my article from a few months back: How to Pay Off Debt.

1. Not saving for retirement

Failing to save for retirement could be the biggest financial mistake you ever make. 21% of Americans aren’t saving anything at all, and 20% are saving 5% of their income or less.

Starting to save for retirement at a young age is very important because you can take advantage of decades of compounding growth. If you aren’t sure how to start saving for retirement, one of the first articles I wrote is about how to start investing.

If you feel like you don’t have enough extra money to build a meaningful savings for retirement, contribute what you can. Any saving you can do is much better than nothing at all. Small contributions grow exponentially over time, and getting into the habit of saving for retirement is more important than the amount you are able to save.

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