Decade by decade — These are the costliest money mistakes we make.
Mistakes. They happen. But the basic premise behind finance is: your money compounds over time. So, unfortunately, if you make financial mistakes, they compound over time, too, and can have bigger consequences down the road. With a little insight, some of the most common mistakes can be avoided. Based on a piece in The Wall Street Journal1, here’s a look at the costliest money mistakes we make decade by decade, and how to avoid them.
Mistakes to avoid in your 20s:
- Little financial knowledge
• Not tackling debt
• Investing too cautiously
It’s hard for 20-somethings. There’s very little education about finances in school – much less personal finance. As a result, they often don’t know how to invest, and make common mistakes like piling on debt, holding too much in cash when they have any, and not saving for retirement. There’s also the issue of debt/loans to contend with as they leave college with an average of $30,000 in student loans. With their first new job and bigger paychecks, the temptations of new lifestyle expenses can add up.
Don’t let a limited knowledge hold you back — get financial advice. Your goal is to tackle debt (highest interest cost first), and if possible, prioritize retirement savings before lifestyle expenses start to add up. At the very least target six percent for retirement savings. At that level, you’ll most likely max out on your employer match in your company plan.
Mistakes to avoid in your 30s:
- Living with high expectations
- Too many expenses
- Overwhelming debt
There’s a lot going on in your thirties. Often people are getting married and buying a home all at once. In the past, some of these financial responsibilities were tackled in the latter twenties. Nowadays these big life moments are all piling up within a short time of each other resulting in too many bills tugging at the budget.
Aim to reduce your living expenses so your lifestyle matches what you need and nothing more. A good target: 50% of your net paycheck to cover your fixed overhead (rent or mortgage, car and student loans, utilities), 30% for discretionary spending and 20% for savings and debt principal prepayment. Living with high expectations – or trying to keep pace with your neighbors – can lead to financial problems, such as overwhelming debt or even bankruptcy. Streamline your expenses so you can enjoy life more now while saving for future decades.
Mistakes to avoid in your 40’s:
• Taking on a big mortgage
• Saving too much for kid’s college
• Overly supporting aging parent costs
During your forties, the two big factors that can tip the scales against you are: a big mortgage and saving too much for your children’s college education. A third factor for some can be costs related to aging parents.
First, be careful about buying too much house. Limit your purchase to no more than three times your income. That may be difficult in high-cost areas of the country in which case try to limit your purchase to no more than four times your income.
Avoid a hefty 30-year mortgage that will last well into retirement. While a 30-year mortgage provides flexibility in case something goes wrong (i.e. unexpected layoff or illness), look to prepay on a fifteen or twenty-year schedule – no refinancing needed to do this.
Regarding college savings and parental costs, have a talk with both parties to let them know that you cannot be the sole provider of their financial needs. A good target for education funding is to assume that your children will cover 25% to 30% of the costs from their own savings, earnings in school and college loans. For elder parents, you may want to discuss an option that taps into their home equity without requiring a monthly payment – a Home Equity Conversion Mortgage (aka reverse mortgage).
Mistakes to avoid in your 50s:
- Being too risky
- Retiring too early
- Lifestyle cost creep
Unlike twenty-somethings, individuals in their 50s often take on too much risk trying to achieve certain money goals. Why? Time is short for your working years and folks try to play catch up by looking for each investment to be a ‘grand slam’. Now’s the time to evaluate your current trajectory and reduce any unnecessary risk. Consider downsizing to a smaller home or cutting lifestyle costs that have creeped up over the years. Remember that 50/30/20 budget target? It’s still important here, too.
Your fifties are a time for making decisions that are a sure thing. It’s best to avoid added risk such as starting a new business (“side hustles” are still a good idea), or withdrawing funds out of retirement accounts before the appropriate time.
Mistakes to avoid in your 60s and beyond:
- Lack of proper financial management
- Lack of communication
- Afraid to delegate
As we move onto the final phases of our lives, the lack of proper financial management can become a real problem — not only for you but for your loved ones. Consider adjusting your investment style as you’ll want to assume less risk. For instance, rebalance your investment allocation. A good target for the equity portion of your investments is 120 less your age.
Your health and life expectancy also come into play now as you’ll want to get an idea of how long your money needs to last. There are various calculators like this one that can give you a general idea, but they are vague at best. Overall, don’t wait to talk to the appropriate financial professionals about your affairs. Starting sooner rather than later can help make your transition into retirement much smoother.
While our mistakes can vary for each decade, the overall theme is the same — live within and preferably below your means. Whether you’re just starting your career or are preparing for the sunset years, the more you can keep tabs on your finances, the more successful you’ll be in the future.
To help you navigate these challenges, seek out guidance from a qualified professional, preferably one who is a fiduciary and not compensated exclusively by what investments they manage or products they sell you. You can start by searching for a fee-only financial planner through www.NAPFA.org or www.feeonlynetwork.com .