There’s no time like the present to start developing and practicing good money management habits.A recent survey from Bankrate showed that 77% of American adults surveyed have a financial regret, with 22% of respondents indicating their biggest regret is not saving for retirement early enough. One way to stave off regret is to take control of your money as soon as possible. Here are five money mistakes you might regret if you don’t start creating better financial habits now.
1. Not choosing the right financial tools for your stage of life
There are certain financial accounts and regulations that are beneficial at different stages of life. For example, a student checking account can offer benefits like a sign-up bonus and waived monthly service fee for students ages 17-24 while they’re enrolled in school. Similarly, catch-up contributions to a retirement account can help individuals aged 50 and over save more for retirement in the critical years leading up to leaving the workforce. Taking advantage of these financial tools when you’re eligible can help you sock away precious money for later in life or save on everyday transactions.
2. Not learning basic financial literacy
Like any other subject, personal finance can be learned. If you put your mind to it, understanding concepts like credit, debt, and investing can simplify overall money management. Many financial education classes, podcasts, websites, and books can also help you educate yourself.
When you become financially literate, there’s a higher likelihood that you’ll:
- Be able to think long-term about your financial goals
- Manage a budget and be able to save money each month
- Avoid making big financial mistakes
- Be more confident in managing your money
- Be prepared to handle a small or large-scale financial emergency
3. Failing to take advantage of compound interest
Compound interest is an important financial concept to understand and take advantage of if you want to invest and grow your wealth. Unlike simple interest, which is calculated only based on the principal or the initial amount you put into an account, compound interest is the money you earn on top of existing interest.
Each time you earn an interest payment, depending on whether the account compounds interest daily, monthly, quarterly, or annually, it becomes part of the principal for the next calculation. Over time, compound interest can help you grow money exponentially in a savings or investment account.
Let’s look at an example of the power of compound interest.
Say you’re gifted $10,000, which you decide to put in an investment account when you’re 18 and choose not to add any other money. If that money earns 5% simple interest, you’ll earn $500 each year or $23,500 after 47 years when you turn 65. That puts the account total at $33,500 when you’re ready to retire. It’s not bad, but it could be better if the interest compounds.
If the money instead earns 5% interest, compounding daily, by the time you’re 65, that $10,000 can turn into $104,839. As you can see, there’s a huge difference in how much your money can grow over time with compound interest. And making ongoing contributions can accelerate the impact even more.
4. Not experiencing the freedom of an emergency fund
Many people understand they need an emergency fund, but it might not be clear why until it comes time to use it. As the name implies, the emergency fund is a savings account meant to be used only in emergency situations. For example, you might dip into an emergency fund to pay for a flat tire, cover utility bills after a job loss, or pay medical expenses for a sudden injury.
Having the money readily available in these times can alleviate some of the stress from an often already stressful event. It’s far easier to set your mind on finding a new job or looking for new transportation when you don’t have to worry about paying rent.
5. Investing too little toward retirement
When you’re young, retirement might feel like a lifetime away. And it is, but the reality is that it’s going to be here before you know it. And one day, you’ll likely want to shift from earning a paycheck to living off your investments.
If you’ve yet to figure out your ideal retirement savings goal, you may find it helpful to work alongside a financial professional to do so. A financial planner or advisor can help determine how much you’ll need to save today to safeguard your financial future.
The bottom line
The more you engage with money at a younger age, the less likely you may be to have financial regrets later. Learning about basic money management concepts to become financially literate can go a long way in helping you achieve goals like saving for retirement, building an emergency fund, or taking advantage of the power of compound interest.
Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a financial professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.
