We all make mistakes. We say the wrong things to our friends, we get into vehicle accidents, and we drop our phones. Some mistakes are so common that people don’t even know they are making a mistake. Some money mistakes seem insignificant; however, when you do the same mistake year after year this ends up costing you tens of thousands of dollars or even hundreds of thousands of dollars over 20 years. Avoid the following money mistakes to help you build wealth.
Not Setting W-4 Correctly
One money mistake is not setting your W-4 correctly. If you work for someone, your employer withholds some of your income for your federal income tax. This gets sent to the government and most people don’t even know how much this amount is. When you file your taxes, most people file their taxes and receive a refund. This refund is not free money in a lot of cases. It is your money that you sent the government based on your W-4. Essentially what you did throughout the whole year was give the federal government a loan at a 0% interest rate. If you have debt, you could have paid off some debt with that money instead of accruing interest for a year. The money you lost over one year is maybe a couple hundred dollars, but compound this over 10 years, and it’s thousands of dollars in some cases.
The flip side of the coin is that you are not withholding enough. People in this situation who do not withhold enough have to come up with money when they file their taxes. This is another money mistake because a lot of people in this situation end up borrowing money to pay their taxes or owing money to the IRS which is one of the worst situations you can get yourself into. The IRS has unlimited power to collect their money. They will take it however they want, and rightfully so.
My suggestion is that once a quarter you review your taxes and W-4. Ask your employer how to update your W-4. You can find a W-4 worksheet here. Get as close as you can to not having a large refund or having to pay in too much. You should be able to get within 10% of your total tax bill.
Bank and Credit Card Fees
Another money mistake you need to avoid is bank and credit card fees. These fees include overdrafts, late payments, and other banking fees. Being charged these fees is ridiculous. If you are working your budget each month and doing a zero-based budget, there is no reason why you should be charged these fees. These fees hold you back. They can add up to thousands of dollars a year. Get on your budget and stop spending money that you don’t have. If you have debt, another way bank fees hurt you is that your interest rates increase. You become a greater risk to a bank. Now instead of paying 17% on your credit card balances, you can pay up to 30%. Combine this with your W-4 withholdings not set correctly and your money mistake doubled. These money mistakes start compounding on each other.
Spending Money You do not Have
Spending money that you do not have is another money mistake. Making your monthly purchases and resorting to using a credit card because you do not have the money in the bank is spending money you do not have. It also includes buying things on payments, like a vehicle or 0% interest same as cash deals. Anytime you resort to using credit, you get yourself into a riskier financial position. Some people don’t pay off that furniture set and end up paying 30% interest because they didn’t have the money when they made the purchase. It’s the same with 0% financing for a new vehicle or even worse if you’re buying a vehicle with a standard interest rate or leasing a vehicle. If you don’t have the cash to buy something you add financial risk to your life.
Buying Too Much House
One of the biggest money mistakes that people make is buying too much house. It’s not that the house is too big, but it’s because their payment is so big. At the time when someone buys a house, they most likely can afford the monthly payment. However, as time goes by, they start wanting to do other things with their money. Soon they remember that they haven’t had a vacation in ten years, their vehicle needs to be replaced, or their kids need braces. They took a gamble that their income would be 50% more and that didn’t come to fruition.
They’re stuck. They’re stuck but they still want the next vacation or the new car, and their kids need braces. They reach for the credit card or use their home’s equity and now they’re back to where they started. Now they don’t have 5 years left on their mortgage; they have 30 and have no equity in their house. They have no savings, and they wonder how they will make retirement work. It was a money mistake they made 10 years ago because they took the advice from their banker. This money mistake hurts! And it hurts bad! This money mistake will cause you to make all the other ones, too. If you made this money mistake, don’t give up! Get on a plan to build wealth and pay off your mortgage early.
Fixing the Mistakes
Fixing one of these money mistakes can help you fix the rest. This is especially true if you have more house than you can afford. This is one of the harder money mistakes to fix because most people get attached to their home. You must consider selling it if you no longer can afford it.
Avoiding these money mistakes can save you tons of money in interest and fees over 20 years. You can avoid these mistakes by adjusting your W-4 withholdings, getting on a monthly budget, paying cash for purchases, and buying a house you can afford.