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Avoiding the Five Biggest Financial Regrets
Mar 31, 2021
Everyone makes mistakes, but financial mistakes can often take awhile to rebound from. Learning from the mistakes of others can hopefully put you in a better position to avoid or rectify these mistakes as quickly as possible.
There are many financial regrets, but we have chosen to focus on the following five we consider as the biggest regrets.
Not Saving for a Rainy Day
When an emergency strikes (and it will), having resources to fund the emergency will be welcome. Many, particularly young adults, do not have resources available for dealing with the unexpected. They likely will end up borrowing to cover these expenses.
By setting aside a small amount each month for an emergency fund the balance will quickly add up. To make savings easier, set up an automatic transfer each month from checking to savings.
If you must borrow to cover emergency expenses, try to borrow at the lowest rate possible and pay off the debt as soon as possible.
Delaying Saving for Retirement
The power of compounding is lost for every year that someone delays saving for retirement. Playing catch-up in retirement saving is a game most people have a hard time winning.
Dave Ramsey shares a wonderful example of the power of compounding:
Let us introduce you to our friends Jack and Blake.
When Jack turned 21, he decided to start investing $200 a month every year for nine years. At age 30, he decided to stop investing altogether. But his friend Blake started a little later, investing $200 a month every month starting at age 30, all the way until the age of 67.
So, at age 67, who do you think had more money in their account? Let’s do the math.
At the end of nine years, Jack invested $21,600 and ended up with more than $2.5 million. $2.5 million! That’s the power of compound interest.
And Jack’s friend, Blake, invested a whopping $91,200 over the course of 37 years. At age 67, he had built up $1.4 million, but he never caught up with Jack.
So how did Jack do it? He didn’t invest nearly as much as Blake did but ended up with over $1 million more. That’s the power of compound interest! It turns more than $20,000 invested in nine short years into almost $2.5 million over 37 years!
Taking on Credit Card Debt
Using credit cards as a “loan officer” is a dangerous bet. The monthly interest (many cards assess interest over 20% per annum!) and time necessary to pay off a balance (sometimes years) can lead to undue stress.
A recent Bankrate survey stated 30% of Americans have more credit card debt than emergency savings. That is a concerning statistic.
Accessing credit cards should really be used for convenience only, and balance in full paid off each month. This requires a great level of discipline and keeping track of purchases, so they don’t exceed the ability to pay off.
Living Above Their Means
Will Rogers once said, “Too many people spend money they haven’t earned to buy things they don’t need to impress people they don’t like.”
Few things can derail your financial plan as quickly as “keeping up with the Joneses”. This need to compete, coupled with a mindset of immediate gratification, results in overspending. Once stepping onto this treadmill, it is difficult to get off.
Try to avoid lifestyle creep, which is matching your increase in expenses with any increase in income. Instead, a good practice is to implement the one-third rule…for every increase in income, save one-third towards short-term, one-third towards long-term and spend one-third.
Not Saving for Children’s Education
The cost of continuing education continues to rise every year – typically faster than the cost of inflation. Many parents regret not saving for their children’s college education and feel compelled to either borrow or rob from their own retirement savings. Both options will simply erode your own financial well-being.
Putting aside a small amount in a 529 plan each year can certainly help towards this goal. Also, encourage your child to apply for scholarships and grants.
There are many vehicles available to fund a college education, but not many to recoup lost retirement savings.
Many of these regrets are related for individuals. For example, if they are overspending then they begin to rack up credit card debt. In an effort to pay the minimum monthly payments on the credit cards, they chose to delay saving for retirement. Or, because of failure to plan for children’s college, they rob their retirement savings or take on additional debt.
While it is impossible to go back in time and rectify your financial mistakes, you aren’t doomed by them either. Start working towards solutions. Even if you can’t totally unwind past financial actions, you can make steps to progress. Develop a solid plan and stay focused on the future.