When it comes to financial matters, sometimes, all we can do is make the most of our situation and knowledge. But unfortunately, financial literacy isn’t something that’s widely taught in the US, so you could be the victim of a financial mistake if you didn’t know better.
The hard truth is that some financial mistakes are harder to recover from than others. But here are a few mistakes that can lead you astray for years.
1. Credit card debt collection
When you don’t have the cash to cover it, you may want to charge extra on your credit card here and there. But over time, these costs can add up. And if they add up to a large balance that you’re forced to carry for years, it can do a lot to your finances.
Let’s say you get a $5,000 credit card bill that will take you five years to pay off. At 20% interest, you’re looking at spending $2,950 in interest alone for all that time.
Additionally, if you carry a large credit card balance relative to your total spending limit, your credit score can suffer — even if you’re making your minimum monthly payments on time. And this makes it more expensive to get a loan when you need it. So your best bet is to try to pay off credit cards in full each month — even if you have to pick up the occasional side gig to scrape up the cash.
2. Delaying IRA contributions
You may not feel inclined to contribute money to an IRA when you are several years away from retirement. But if you delay those contributions, you may end up with a very small balance.
As measured by the S&P 500, the stock market’s average annual return over the past 50 years has been 10%. If you put in $3,000 at age 22, your IRA will grow to $129,000 at age 67 if you make an average annual contribution. 10% will also be returned. If you wait 10 years to make that $3,000 contribution, you’ll be looking at roughly $84,000 in projected returns.
If you have the ability to contribute to an IRA sooner rather than later, don’t wait. Even a modest contribution in the early 20s can grow to a significant amount in the 60s.
3. Buying an expensive car
Some people drive their car every day. So you might want to pay for a car because it’s something you’ll use a lot.
But remember, buying an expensive car doesn’t just mean a big car loan payment. It can also mean paying premiums for everything from car insurance to maintenance.
Meanwhile, your car is something you can look after for years. But what if your financial situation changes? What if you move or have children and your bills increase as a result? Suddenly, the high costs associated with owning your car can bite you even if your vehicle is already paid off.
Before choosing to buy an expensive car, consider the long-term consequences. And consider a much cheaper option that will still do a good job of getting you into town.
Sometimes, a seemingly innocent decision on your part can end up having not-so-great consequences. So be careful with credit card debt and expensive vehicles, and do your best to get some money into your retirement account as soon as possible.
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