The most common financial mistakes people make & how to fix them

In today's complex economic landscape, many individuals seek effective strategies for personal finance management. Recent Federal Reserve data indicates that nearly one-third of Americans experience financial anxiety, highlighting the widespread need for improved financial literacy planning.

Whether you're not earning enough to make ends meet, overspending or just aren't sure how to get ahead, there are financial habits you can form to get and stay on track. Let's take a look at common money pitfalls and how you can overcome them.

No matter your age or how much you earn, it can be easy to mismanage money. Avoiding or recovering from these money mishaps will help you do more with what you have and feel more confident in your finances moving forward.

Are you trying to do everything with your money at once? Or maybe you're constantly trying the latest personal finance challenge only to feel like you've made no progress. Implementing a well-structured budgeting system, such as the 50/30/20 rule or zero-based budgeting, can provide clarity and control over your finances, reducing stress and fostering a sense of financial well-being. Should you stop dining out, cut back on coffee and download more coupon apps? Without financial goals and values, you're wandering in the wilderness, unsure of where to go or how to get there.

• Learn the benefits of budgeting. Define your north star by uncovering your values and setting clear financial goals. This helps you align your financial decisions with your values, such as saving for retirement, building an emergency fund or giving to your favorite cause. Identifying them and revisiting them often will help you focus on what's important so you can feel confident about your money management.

Overspending makes it hard to reach any financial goal. If all of your money goes toward things you want now, there's usually little, if anything, going toward saving and investing for the future. The trouble is many of us are unaware of how much we're actually spending.

• Cultivate the habit of living within your means by tracking expenses, identifying areas for potential savings, and creating a realistic spending plan that aligns with your income and financial goals. Whether it's lifestyle creep (spending more as you earn more) or living beyond your means (spending more than you earn), your money needs guardrails. A budget helps you know where your money goes so you can live within your means and create room for longer-term goals that will move you forward.

Having some optimism can be helpful, but excessively relying on luck doesn't usually pair well with financial stability. Most people don't expect to get sick or injured or figure that they'll cope just fine if an unexpected expense comes up. But the fact is more than 35% of Americans don't have enough to cover a $400 emergency expense, let alone get by for a few months without their current paycheck.

When you don't have a safety net, you risk taking on debt or struggling to make ends meet, both of which can be a big threat to your financial security.

• Establish a dedicated emergency savings account as a key piece of your financial safety net. It's considered ideal to save enough to cover at least three to six months of your expenses—more if you have a variable income in accounts you can access without a fee, consider using high-yield savings or money market accounts. Use any savings strategy that fits your budget and lifestyle, such as a set monthly automatic savings deposit from your paycheck or banking account. Start saving when and where you can so an unexpected cost or event doesn't set you back.

When you're drowning in debt, financial progress can feel impossible. "Bad" debt in particular, such as high-interest loans and lines of credit, can be difficult to pay off entirely because the longer you have them, the more they cost you. Living off credit cards and letting large balances linger can leave you paying hundreds of dollars in interest—money that could be going toward your savings.

• Reduce credit card spending. Implement strategies to minimize credit card reliance, such as paying off balances in full each month, utilizing debt snowball or debt avalanche methods, and exploring options for balance transfers or debt consolidation.

Savings accounts let you earn interest, maximizing the value of your savings. Just 5% on a $20,000 savings balance adds $1,000 over a year. You'll lose out on that additional interest if you hold on to too much cash. Although you won't get a tax deferral like you do with a retirement account, each type of savings account has its beneficial features. For example, traditional savings accounts may make it very easy to access or transfer money between your accounts. A high-yield savings account may pay more interest, but may not be available at your local bank.

• Start by paying yourself first. Prioritize saving by staying within your budget and paying yourself first. Prioritize savings by automating a portion of each paycheck into a high-yield savings account or money market account, leveraging the power of compound interest to maximize your financial growth.

Prioritize investing your money so you can get the most from it and set yourself up for the future. Reinvesting the dividends and interest you earn from your investments allows you to take advantage of compound interest, and it can have a dramatic impact. This works even if you start small. Saving just $100 per month can grow to over $46,000 in 20 years with a 6% rate of return.

• Invest according to your risk tolerance. Investing involves risk. Some investments are riskier than others, but the potential rewards are often greater. For an investment plan to work, you need to know your risk tolerance—your comfort level with taking losses to achieve a target return—and apply it to your investment choices. Develop an investment strategy that aligns with your goal risk tolerance and time frame. Consider consulting a financial advisor who can help you make the most of your investments such as index funds, ETFs and actively managed accounts.

Taxes impact nearly every aspect of your finances regarding the money you earn, how you save it and when you choose to spend it. Taking a proactive approach to managing your taxes ensures that you only pay what you have to. Ignoring it virtually guarantees that you pay more. Start by deciding how to divide your money between the three tax buckets—tax-free, tax-deferred and taxable—to achieve the most tax efficiency. Understanding how different types of investments or accounts are taxed can help you navigate your tax liability more effectively.

• Find out how to be more tax-efficient. Enhance your tax efficiency by strategically allocating investments tax wise. Taxable accounts, like brokerage or savings accounts, don't have the tax benefits that retirement accounts do. Interest, dividends and capital gains are all taxed when you receive or recognize them. That's why it's often better to use retirement accounts for long-term savings. Tax-deferred retirement accounts often provide an upfront deduction on your contributions, and earnings aren't taxed until you withdraw them. Others, like Roth accounts and life insurance, don't provide a deduction on contributions, but your earnings (or payouts) can grow tax-free.

If you live with another person, your finances typically will be intertwined to some degree. Even if you're not sharing a bank account, you have joint responsibilities. Whether you're married, have a roommate or care for an adult child or elderly parent, it's important to be on the same page about money. If you aren't, you may find that members of the household are working toward different goals or don't have any at all. Not only can this strain your finances, but it also can affect your relationships.

• Lay out your goals and work on a plan. People in a household need to have open conversations about financial goals and plans. Be deliberate about dedicating time for this conversation, such as during a meal together. If you have children, consider including them when appropriate so they can become comfortable discussing money and develop good money management practices themselves. Ask everyone to prepare to talk about what they value most and how they think money should be prioritized.

Nov 2, 2023

Are you setting the right financial goals?

Making money goals that are specific, measurable, achievable, relevant and time-bound can give you confidence in the future.

Learn how to set SMART financial goals

Your goals and priorities may change as you age and enter new stages of life. You're also likely to make certain mistakes at different ages, although these can be avoided with the right information. Here are some of the most common financial oversights and how you can bypass them.

If you've recently landed your first career-level job or still feel like you're getting started as an adult, watch out for these pitfalls:

• Waiting to build credit. The longer you wait, the longer it will take to establish your credit history and achieve a good credit score. While it may require strict budgeting, you can start building credit by making credit card or other loan payments on time and minimizing your debt.
• Ignoring tax-advantaged savings accounts. Understand the different types of savings accounts available to you. Look for those that provide tax benefits, such as tax-exempt earnings and tax-free withdrawals.
• Developing poor money habits. Even if you don't feel like you have much money, avoid spending beyond your means and taking on debt. Debt only makes it harder to get ahead later on in life.

Once you're through your early years and become financially stable, your goals and priorities often shift. Some common missteps during this phase of life include:

• Not saving for retirement. It takes many years to accumulate a sufficient nest egg. If you wait, you could miss out on crucial growth opportunities and employer-matching contributions to a workplace retirement plan.
• Failing to prioritize financial goals. Planning for financial milestones like buying a home, paying for your child's education or saving for retirement, requires you to set and prioritize goals. If you try to achieve everything at once, you may fall into debt.
• Being underinsured. If you owe money on a home you share with someone or have people who depend on you for financial support, it's important to consider having insurance. Not carrying enough life insurance or disability insurance can be disastrous.

Watch for these risks as you start to move through your peak earning years and then to retirement:

• Not having a retirement budget. Before you retire, develop a spending plan that you're confident about to help ensure you're prepared when the day arrives.
• Being too conservative in your allocation. Retirement can often last 20 to 30 years or more. It is important to keep a certain portion of your portfolio invested in equities to help provide needed growth and keep up with inflation.
• Ignoring medical expenses, lifestyle changes and inflation. Because retirement may last several decades, it's important to consider your current and future spending needs—including factors outside your control like inflation.
• Not calculating the best time to claim Social Security. You don't have to file for Social Security as soon as you retire. Consider the best time to file based on your plans, needs and other resources to maximize your Social Security benefits and tax efficiency.

If you're concerned with your money management skills, you can take small steps now to build healthier habits and, in turn, create a strong financial foundation. The strategies you adopt today can help you avoid common financial mistakes or bounce back from them. As you form a plan, a Thrivent financial advisor can help by providing expert advice to guide you along the way.