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This post was originally published in March of 2017. Here is the new and improved version!
We all make mistakes. Pencils have erasers, yadda-yadda.
If we’re being honest, some mistakes are well-worth making – you know what we mean! These 5 financial mistakes, however, are so not worth it. Lucky for you, these are the easiest financial mistakes to correct!
Mistake #1: Playing the Lottery
Why people do it
Each ticket costs only a dollar or two, which is a super low price for you get to dream of your future millions. And someone’s got to win, might as well be you!
One problem: You will not win the jackpot! Ever.
Wired wrote a fascinating article about your odds of winning Powerball. About 1 in 292,000,000 for the Powerball Jackpot if you’re wondering. So even if you buy a ticket every day of your adult life, you’re overwhelmingly likely to never win the jackpot, and you’ve lost about $46,000 ($2/day x 63 years, assuming you live to 81, which is the average life expectancy for US women).
Second problem: Even if you are the 1 in 292 million to win, your finances, and your life in general, will likely get worse. The Certified Financial Planner Board of Standards found that nearly 33% of lottery winners file for bankruptcy, (source). What?!
Federal taxes are a huge expense for lottery winners, taking about 40% of winnings. On top of that, most states charge 3-8% in local taxes (source). Oh, and if you want to give some of the money to friends and family, you may be subject to the Gift Tax of up to 40% of the gifted amounts.
Third problem: Many studies have also proven that lottery winners are more likely than the average American to experience depression, alcoholism, divorce, and even suicide. How is this possible?
Well, if you win the lottery, people are going to find out. Many states require the winners to come forward publicly to claim their winnings, but even if your state lets you stay anonymous, people will notice when you start buying cool stuff with your new money. And they will all want a piece!
Once people know you have money, they expect you to always pick up the tab, always be willing to invest in their business ventures, and always give spectacular birthday presents. Get ready to see your relationships suffer!
What to do instead
Stash that $2/day in your Dream Fund instead to save yourself the misery of winning the lottery!
Mistake #2: Smoking
Why people do it
Smoking is an addiction. It probably started out innocently enough when you were just trying to fit in in high school, but it chemically hijacks your body. And after a while, it’s not a choice to smoke, it’s a compulsion!
One problem: Holy cow, a pack a day is expensive! Because of the added state taxes, a pack can range anywhere from $5.25 in Virginia to $12.85 in New York (source). Using $7 as the average, a pack a day will cost you $2,555 every year! Of course, you’ll live about 10 years fewer than if you didn’t smoke, so that saves you $25,550 😐
Second problem: It’s not just the cost of the pack of cigarettes that’ll cost you! You’ll also be paying about $100/month more than non-smokers in healthcare costs. If we assume you’ll live to 71 years old, you’ll pay an extra $63,600 for insurance over your adult life. Add that to the $135,415 cost of a pack of cigarettes every day from the time you’re 18 til you’re 71, and you’re looking at a $199,015 expense.
Third problem: Are you ready to check out at 71 years old?
What to do instead
Ave your $199,015 instead of blowing it on cigarettes and added healthcare. You could buy a house for $200,000 in many markets. A house! Side note: if you’ve never really considered buying property, here are 3 reasons you totally should, even if you plan to be a life-long renter.
So pay the crazy high prices for the nicotine patches, nicotine gum, and even hypnosis. Do whatever it takes to stop smoking. You’ll be saving a fortune over the long run. And your run will be longer!
Mistake #3: Paying your bills late
Why people do it
Many time, paying bills late is a simple oversight. You just forgot to submit payment. Sadly, there are also times when people don’t have the money to pay every bill, so they have to choose which get paid on time and which will have to be late.
The problem: You can’t get your finances under control when you’re racking up late fees every month. And you’re not getting any benefit for the money spent on late fees. And it’s not always a small percentage of your bill amount. Some late fees are a flat amount, so as an example, you could be paying a $25 late fee on a $20 gas bill! That’s a 125% late fee!
Another problem: Many credit card company terms and conditions say that if you’re late on any of your bills, not just your credit card bill, your credit card interest rate will automatically jump to the max allowable rate. That can be up to almost 30%! And yes, they can find out if you’re late paying your other bills because they can access your credit report, which states how many late-pays you have.
What to do instead
Luckily, there are multiple solutions here.
- You can automate your bill payments. If you’re accidentally paying late, please consider auto-pay. Your bank will automatically pay your bills before they are due, so you never have a late fee again! I personally used to be leery of auto-pay because I want to review each bill for accuracy before paying. But I am a convert! I still review each bill, but if I can’t get to it before the due date, I’m covered by my bank and can always review the bill after the bill’s been paid and dispute if needed.
- If you have one accidental late-pay, you can call your provider and see if they will waive the fee “just this once” because you’ve been such a good customer all these years. It usually works as long as you don’t do it repeatedly.
- If you are in the unfortunate position of choosing which bills you can pay on time this month, consider getting a 0% APR credit card to pay bills without incurring a late fee or an interest charge. It’s not a permanent solution, and you have to be really careful to not abuse the credit, but it can get you through when you’re in a pinch! Here are some other survival strategies for months when you can’t cover all your bills.
Mistake #4: Misusing credit cards
Why people do it
Credit card debt is weird. It like sneaks up on you! One day you’re putting groceries on your card because you don’t get paid til Friday, and before you know it, it’s a bi-weekly habit and you’re not able to pay off the balance each month like you originally planned.
The problem: All the money you charge to your card has to be paid back. If you’re charging more than you can pay back each month, you’re digging yourself into a deeper and deeper hole that will be harder and harder to climb out of.
The bigger problem: Interest. The average credit card interest rate is 15.07%. If you carry only a $1,000 balance on your card this year (low by average credit card debt standards), you’ll be paying $150.70 in interest. The average credit card debt for indebted American households is $16,061. At 15.07%, the average American household will be paying $2,420.39 per year in interest!
What to do instead
There is a right way to use credit cards. Find a card with good benefits, like cash back or travel miles. Use this card for your monthly expenses and pay it off in full every month. This way, you get the benefits of the card, but never pay late fees or interest.
You could also put bigger purchases, like new appliances, on a 0% APR credit card, and pay it off in full before the 0% APR rate expires (usually 6-24 months, depending on the card). This will let you make smaller monthly payments on big-ticket items without paying interest or fees.
Check out our other credit card hacks!
Not everyone has the personality for proper credit card use. You know yourself. You know if you’ll be able to keep your spending under control while using plastic and have the self discipline to pay it off in time. If you can’t, please for goodness’ sake, cut up your credit cards and stick with cash and debit cards!
Mistake #5: Ignoring your employee retirement benefits
Why people do it
Signing up for a 401(k) can be daunting. There are so many investment options in a 401(k), and you’re supposed to know how to choose them and how much of your money to put in each one? You’re not a Stock Analyst or Financial Planner! What if you choose wrong?
The problem: You’re missing out on a golden opportunity to start your nest egg and take advantage of compound interest to grow your retirement savings exponentially! If you haven’t already read The $831,751 Reason to Save for Retirement While You’re Young and Broke, you’re going to want to.
Another problem: You could even be missing out on free money from your employer! Many employers offer “contribution match” benefits. This means when you contribute money to your 401(k), your employer will match your contribution up to a certain point (often something like 3-5% of your income). Free money!
What to do instead
If your employer offers retirement benefits, especially with contribution matching, you MUST take advantage!
The only exception is if you have a fully-funded Roth IRA and your employer doesn’t offer matching. Even then, you might want to sign up for the 401(k) as a supplement to your Roth. Lucky for you, our 3 Easy Steps to the Retirement of Your Dreams covers the different types of retirement accounts and even addresses choosing the investments for your retirement accounts. If you don’t already have a retirement account, please, please sign up for one this week. It will change your life!
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