5 Financial Mistakes My Coworkers Make (Including 1 I Made!)
For the last 6 years of my professional career, I’ve had coworkers ask me where I get all my money. “We do the same thing, so where is all of your money coming from?” is usually how it goes. Long story short, there is no big secret or scam, just smart placement of my money! Compared to my peers, I have the same (exact!) salary, I live in the same city with the same housing and food costs, I drive a similarly priced car (though, some do splurge unnecessarily on this), and I wear roughly the same clothes. So when I look at my friends’ budgets and bank accounts to help them pinpoint the problems, they’re usually not that obvious. Then again, some of them are.
Here are some of the silly things I’ve seen.
1. $60,000 in her checking account. What’s wrong with having money available to spend? Nothing if you also don’t want to make any more money. Checking accounts don’t pay you for the money you put in. My checking account pays .01% on the money I put into it. I keep a balance of over $2,000 most of the time and I managed to receive only $0.13 on my last statement. My checking account isn’t working for me. I leave that to my investments. Over 5 years of growth even at only 2%, that $60,000 could be well over $65,000. A 10% increase in just a few years. Conversely, a checking account would earn you only pennies.
2. 90% of his money in one stock. If that stock goes up then you make a lot of money, but what happens when that stock goes down? A rule of thumb I use is to not put more than 10% of my portfolio into one single stock (and even this would be well outside of market matching that my partner mostly attempts). If you’re going to play stocks, spread your money out, hedge your bets. Better yet, if you want to play it safer, you can put your money into mutual funds that spread your money out for you and are professionally managed. Even better than that are low-cost index funds that just attempt to match benchmark performance but do not have a manager constantly changing the equity within them (and charging YOU for it).
Mutual funds come in all shapes and sizes. Just because it spreads money out doesn’t mean that it has no risk. All of those spread out funds may be in low cost stocks and carry an extremely high level of risk. Conversely, a fund may have a spread of federal bonds (guaranteed to be paid back with interest from the government) and a hundred well respected stocks (like Walmart) or maybe just major stocks that define the market. Generally speaking, higher risk means higher reward and potentially greater losses. Market funds tend to be a safe and common option for retirement conscious investors.
3. $500 total in his savings account. Don’t confuse a savings account for a checking account. They have different benefits and purposes. For example, a savings account earns substantially more interest than a checking account with almost no risk compared to a stock market investment. Many people consider their savings account to be their ‘rainy day’ fund. Money that they’re saving up to purchase something or money in case their world goes to hell. Like the stock market crashes and they lose their job to layoffs or something like that. I recommend working to put and keep 2 to 3 months’ worth of your income into your savings account to keep you on your feet in case some shitty luck befalls you. This is where you keep your liquid cash assets and if the market takes a dump, cash is king. If your job is unstable, consider stashing away more.
4. No Retirement or Investment Account. When I took a look at her accounts I asked where her brokerage or IRA account was located. She had none. I asked if she was putting money into a 401k type plan (TSP for federal workers is the closest thing to this). She asked what that was. So where was her money going? Car payments, rent, food, clothing, restaurants, bars, electronics, various subscriptions, and other general ‘things’. The money that she didn’t spend was left sitting in her checking account (see above). I’ve seen this a few times and one of the worst responses I’ve gotten as to the ‘why’ was “my retirement plan is that I’ll deal with it when I get there.” That is a stupid plan. A smart plan is to start investing and saving for retirement as soon as possible. Mathematically, if you start saving later in life when you realize you need to, it will be a lot tougher for you to reach your retirement goals than if you had started saving just a few years earlier.
Want proof? Here’s an example. Let’s assume 7% annual return on your investment. If you start saving at age 25 and put away $3,000 each year until you are 35. Over ten years you’ve contributed $30,000. If you let that money sit until you are 65, you will find that you’ve accumulated $338,000!
Now let’s say that you are like most people and don’t start saving for retirement until you’re in your thirties. If you start saving at age 35 and put away $3,000 each year until you’re 65 (a total of $90,000 contributed), you will end up with only $306,000. That is a huge difference! Start saving early!
5. No Credit Cards. So this one was me. I never cared about credit. I had no credit card, no loans, no debt, no car payment, and no mortgage. So when I put in an application to rent an apartment and saw my credit score for the first time, I had no reason to be too surprised by the sub 500 score. At the time this meant nothing to me. As I continued studying about finances I realized I needed to boost my credit if I ever wanted to buy a house or pay less on a car. So I started a line of credit with a card that has no annual fee; something that I can keep for a long time (the longer the existing line of credit, the better your score).
If that doesn’t get you wanting a credit card, maybe this will. Most cards offer benefits like 1% or 2% cash back that can be used to pay your balance. That’s like getting 2% off everywhere you go in addition to any other coupons. If you get one of the higher end cards which often require an annual payment, you may get even more benefits like earning 5x points on travel points going twice as far when being used to purchase travel. These cards are often called high yield cards. You can expect that we’ll get into them another time. Suffice it to say that there are enough benefits to warrant getting yourself a line of credit. Just make sure not to overspend and try to pay off your balance each month.
