Financial Wellness is one of the most crucial factors in achieving Total Wellness. It is sometimes considered that financial security is only available to those who have an unlimited supply of cash. In reality, you may be financially secure regardless of your income. The first step is to avoid typical financial blunders. This article explains several common blunders and how to avoid them in the future.
I'm Not Old Enough to Settle Down
More and more people are making the mistake of not investing in a home or buying one too late in life. The following example demonstrates why it is a financial miscalculation. Let's imagine Stephanie earns $60,000 per year, is unmarried, and pays $2000 per month in rent. When tax season arrives, she will have few, if any, deductions. She would potentially owe $10,558 in federal taxes alone. If she had instead placed the same rent payment toward a mortgage payment and bought a $315,000 home with a 6.5 percent 30-year fixed rate, her mortgage interest deduction would have been more than $20,000, saving her over $5000 in taxes!
Buying a home isn't just about saving money on taxes. Another factor is the financial investment it entails. Let's pretend Stephanie bought a $315,000 home in January and it improved in value by 5% in a year. By the following year, the 5% gain in value would have given her $15,750 in equity and she would have paid $3,657 toward principle. Let's do the math. Rent money saved, $24,000 + taxes saved, $5,000+ equity earned, $15,750 + principle purchased, $3,657 – interest paid, $20,236 = $28,230, or $2,352 per month saved. Even if she invested $1,000 per month in maintenance, she would have saved more than $1,300 per month by purchasing a home.
It Was on Sale! I Had to Get It!
The second financial blunder to avoid is accumulating debt rather than saving. It is advisable to avoid debt unless it can practically ensure you a future return, such as investing in a business, school, or your home. Even buying cars with cash is more cost effective in the long term. Consider the case of a family with a $10,000 credit card debt. If they pay $150.00 every month on the card and don't put anything else on it, their total interest and principle paid to the card will be $21,635 before it is paid off, assuming a 15% interest rate. At this pace, it will take them almost 12 years to pay it off. They are paying $80 per month in interest.
However, there is more to the debt picture. Debt isn't simply one-sided; it comes with opportunity expenses as well. If they weren't paying $150 a month on their credit card, they could be putting that money into a savings account. Putting $150 a month into a savings account with a 4% rate of return compounded monthly for 12 years would grow to about $28,000, consisting of $21,600 in principle and $6,400 in interest. So, the actual cost of a credit card is the interest paid, $11,635 plus the interest from the savings account skipped, $6,400, for a total of $18,035 over 12 years, or $125 per month in wasted money.
Will You Take Plastic for my Mortgage Payment?
Another place where you could lose money is if you don't have any liquid savings. A minimum of 3-6 months' worth of living expenses should be saved. This will assist in the event of a loss of income or a medical emergency. Only use this money for significant emergencies; it should not be used for things like holidays or weddings, which should be saved for in other accounts once the liquid savings account has been established. When there are no short-term savings, the chance of bankruptcy rises. With the new bankruptcy legislation, erasing debt is becoming more difficult.
Liquid funds are especially significant if you have a high salary that isn't typical in your business or if the type of work you do isn't in great demand. Finding new work with the same pay may be challenging in these circumstances. This can make you vulnerable to rash actions that can cost you money in the long run. For example, I have a friend who worked for a software company for 20 years and made a solid living. Because he had worked with the company for a long time, his salary was considerable. He was laid off after the company was eventually purchased. When it happened, he and his family had just finished building and furnishing their dream home and were strapped for
There are No Natural Disasters Here!
Many people make the mistake of having little or no insurance in the hopes of avoiding a natural disaster. In such a case, insurance is your best defense against financial catastrophe. The first step is to sit down and speak with an insurance representative. Check to see if the policy covers the issues you're concerned about. Set aside the funds required for the policy's deductible in the event of a disaster. Other items to consider in the event of a disaster include the risk of being out of work for several weeks or months, hefty medical expenditures, and being without a car if it is also wrecked. The solution to these issues is liquid savings. Remember that just because the house or car is no longer there, that does not mean the payments are no longer due.
I’ve Got Tons of Time to Save
An all-too-common blunder is failing to save for retirement. Even if you save, there is a significant chance it won't be enough to retire on. According to the Employee Benefit Research Institute's 2006 Retirement Confidence Survey, many American workers are unprepared for retirement and will have to work considerably longer than they think. Consider Jane, who is 55 years old and currently earns $60,000 each year. She plans to retire at the age of 65, and she has already saved $250,000. She expects to be able to live off 70% of her current income, or $42,000, when she retires. She will need to be self-sufficient for 25 years if she lives to 90. Let's say her $250,000 increases at a 7% annual rate until she retires, and then at a 6% annual rate once she begins withdrawing money. Inflation, which averages around 3% each year, must be considered as well (Inflation has been hitting record highs in 2022). She will need $1,151,243 in her retirement account by age 65 in order to have $42,000 every year for 25 years. As a result, she will have to get started right away.
This is the first step toward Financial Wellness and avoiding financial blunders. The first step in avoiding future troubles is to learn more about the numerous ways that financial blunders can harm you in the long run. The next step is to avoid or stop making those errors. It may take some time to modify your routines and behaviors, but it will be worthwhile in the long term.
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