We all want to feel financially secure — even if that means different things to different people. And there are different steps we can take to attain financial security. But part of that means doing our best to avoid major blunders that have the potential to do a lot of harm. Here are three ways you might be damaging your finances without realizing it.
1. You're waiting to invest until stock values come down
The stock market has had a pretty strong year. The S&P 500 index, which is generally considered a benchmark of how the market is doing on a whole, is up almost 17% year to date as of this writing.
Because of this, you may be inclined to keep your money out of the stock market so you can wait for prices to come down before adding more assets to your brokerage account. But in doing so, you could be missing out on a big opportunity to put your money to work immediately.
A better bet? Don't try to time the market. It just doesn't work. Instead, invest on a regular basis if that's something you can swing financially.
A good bet is to set up an automatic transfer to your taxable brokerage account or IRA and commit to a regular investing schedule. It's true that the S&P 500's value might decline at some point from where it is today. But over the past 50 years, it's delivered an average annual 10% return. So if you're investing on a long-term basis, you don't have to worry about how exactly the stock market is doing today.
2. You're not maintaining an emergency fund
You might do a good job of keeping your expenses pretty low relative to your income. But that's not enough. You also need cash reserves in case there's a random month when an unplanned bill comes your way.
A good 63% of Americans don't have enough money in savings to cover an unplanned $500 expense, says SecureSave. But if you don't leave yourself with any savings, you'll be vulnerable to credit card debt the next time an unplanned bill arises. That could force you to lose money to interest and make it hard to bust out of that cycle.
The general convention is to try to maintain an emergency fund with enough money to cover three months of essential expenses at a minimum. But if you're starting from a place of not even having $500 to your name, that's obviously going to be a long road.
In that case, do your best. Save $50 next month, $60 the month after that, and $70 the month after. You may not be able to go from, say, $300 in your savings account to $6,000 in savings in 12 weeks. But maybe you can go from $300 in savings today to $900 in savings in a year, thereby tripling your cash reserves.
3. You're pushing yourself to buy a home even though you can't afford one
Some people will tell you that renting a home is the same thing as throwing money away. It's not.
Not only is renting not necessarily a mistake, but it's far less of a mistake than stretching your budget to purchase a home you can't afford. If you take on too much house, you might end up in a situation where it becomes difficult to pay not just your mortgage, but your bills on a whole.
Falling behind on bills could damage your credit. And if things get bad enough where you end up losing your home to foreclosure, guess what? You'll be looking at a black mark on your credit report for seven years. Ouch.
Instead of giving into the pressure to buy a home, buy one when you're ready. And if you don't think you'll ever be ready, keep renting. It may be just the thing that allows you to better manage your money because your costs are nice and fixed during each lease term you sign up for.
We're all human, and we all make mistakes. You might think you're doing the “smart thing” by buying a home rather than spending money on rent, and you might assume you're being savvy by trying to time the stock market. You may also feel like you don't need an emergency fund since you have a steady job or relatively low expenses. But do your best to avoid falling victim to the above blunders, because they do have the potential to cause their share of long-term damage.
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