Outlooks & Setbacks Saturdays

“The worst sin you can ever commit to yourself is to sit and wait for someone to give you money” ― Mac Duke

1. Unnecessary Spending

It may not seem like a big deal when you pick up that double-mocha cappuccino or have dinner out or order that pay-per-view movie, but every little item adds up. Just $25 per week spent on dining out costs you $1,300 per year, which could potentially go toward credit cards or other payments, if you have debt. If you're enduring financial hardship, avoiding this mistake really matters.

That said, the key word here is "unnecessary." That's subjective. Maybe you really look forward to or need those cappuccinos or dinners or movies to maintain your mental wellness. A healthy financial life can include all of that. This type of spending just needs to be part of your budget. If you plan for it, and you can afford it, then enjoy it.

Fast Fact

The number of adults who said their finances were worse compared to a year earlier was 35%, the Federal Reserve's 2022 Survey of Household Economics and Decisionmaking report found. 35%—basically one in three—is the highest ever since the study began in 2012.1

2. Recurring Expenses

Ask yourself if you really need items that keep you paying every month, year after year. Consider things like streaming services and high-end gym memberships. Are these needs or wants? A cheaper gym may get the job done, allowing you to save the difference.

When money is tight, creating a leaner lifestyle can go a long way to cushioning yourself from financial hardship.

3. Excessive Credit Card Spending

Using credit cards to buy non-essentials is kind of common. But even if some people are willing or able to pay double-digit interest rates on luxury clothing and a host of other expensive items, it's not always wise to do so—unless you can pay off the card before the end of the month. Credit card interest rates make the price of the charged items a great deal more expensive. In some cases, using credit can mean you'll spend more than you earn.

24.62%

According to research by Investopedia, the median rate of interest across all credit cards in the Investopedia database for June 2024 was 24.62%.2

4. Vehicle Purchases

Millions of new vehicles are sold each year, although few buyers can afford to pay for them in cash. But financing can get tricky. After all, being able to afford the payment is not the same as being able to afford the vehicle.

Furthermore, by borrowing money to buy a vehicle, you pay interest on a depreciating asset, which amplifies the difference between the value of the vehicle and the price paid for it. Worse yet, many people trade in their vehicles every few years and lose money on every trade.

Maybe you have no choice but to take out a loan to buy a vehicle. But do you really need a large SUV? Such vehicles are expensive to buy, insure, and fuel. Unless you tow a boat or trailer or need an SUV to earn a living, it can be disadvantageous to purchase one.

If you need to buy a vehicle and borrow money to do so, consider buying one that uses less gas and costs less to insure and maintain. Vehicles are expensive, and if you're buying more than you need, you might be burning through money that could have been saved or used to pay off debt.

5. Overspending on Housing

When it comes to buying a home, bigger is not necessarily better. Unless you have a large family, choosing a 6,000-square-foot home will only mean more expensive taxes, maintenance, and utilities. Before you buy a home, consider the carrying and operating costs beyond your monthly mortgage payment. Do you really want to put such a significant, long-term dent in your monthly budget?

As you consider your housing arrangement, think through what's important to you. For example, how passionate are you about having a large yard? If it's at the top of your list, that's fine. Just be mindful that upkeep and maintenance may cost you in the form of hiring services, buying machinery, complying with HOA requirements, and paying for various home repairs that arise.

6. Misusing Home Equity

Refinancing and taking cash out of your home means giving away ownership to someone else. In some cases, refinancing might make sense if you can lower your rate or if you can refinance and pay off higher-interest debt.

However, the other alternative is to open a home equity line of credit (HELOC). This allows you to effectively use the equity in your home like a credit card. This could mean paying unnecessary interest for the sake of using your home equity line of credit.3

7. Not Saving

The U.S. household personal savings rate was just 3.6% in April 2024.4

Many households live paycheck to paycheck—and there's no sign of improvement.

Unfortunately, this puts people in a precarious position—one in which every dollar matters, and even one missed paycheck would be disastrous. This is not the position you want to find yourself in when an economic recession hits. 

Many financial planners will tell you to keep three months' worth of expenses in an emergency fund account where you can access it quickly. Loss of employment or changes in the economy could drain your savings and place you in a cycle of debt paying for debt. A three-month buffer could be the difference between keeping and losing your house. 

Important

Household savings rose considerably during the pandemic.4 However, for many people, that pandemic nest egg has since been spent down.

8. Not Investing in Retirement

If you do not get your money working for you in the markets or through other income-producing investments, you may never be able to stop working. Making monthly contributions to designated retirement accounts is essential for a comfortable retirement.

Take advantage of tax-deferred retirement accounts and/or your employer-sponsored plan. Understand the time your investments will have to grow and how much risk you can tolerate. Consult a qualified financial advisor to match this with your goals, if possible. 

9. Using Retirement Savings to Pay Debt

You may be thinking that if your debt is costing 24% and your retirement account is making 7%, swapping the retirement for the debt means you will be pocketing the difference. But it's not that simple.

In addition to losing the power of compounding, it's very hard to pay back those retirement funds, and you could be hit with a 10% early withdrawal fee if you're younger than age 59½. With the right mindset, getting a loan from your 401(k) might be a viable option, but even the most disciplined planners have a tough time placing money aside to rebuild these accounts.

When the debt gets paid off, the urgency to pay it back usually goes away. It will be very tempting to continue spending at the same pace, which means you could go back into debt again. If you are going to pay off debt with savings, you have to live like you still have a debt to pay—to your retirement fund. 

10. Not Having a Financial Plan

Your financial future depends on what's going on right now. Maybe you spend a lot of time watching streaming services or scrolling through your social media feeds, but haven't carved out any time to go through your finances. That's too bad, because you need to know where you are going. Make this a priority now.

Why Are Credit Cards a Problem?

Relying on credit cards can worsen financial difficulties. While it may provide a short-term solution, the long-term consequences, such as high-interest payments and accumulating debt, can lead to a cycle of financial stress. This financial stress can snowball, leading to higher expenses in the future that continue to make it harder and harder to catch-up.

How Much Is Too Much for a Home?

Overspending on a home can strain monthly budgets due to higher taxes, maintenance costs, repairs and maintenance, and utilities. Consider using the 28/36 rule, which recommends that you spend no more than 28% of your gross monthly income on your home and no more than 36% of your gross monthly income on total debt.

When Should You Not Use Your Home Equity?

Using home equity like a piggy bank, whether through refinancing or a home equity line of credit (HELOC), can have detrimental consequences. While it may provide access to cash, it comes at the cost of increased debt and interest payments.

Why Is Having a Well-Defined Financial Plan Important?

Having a well-defined financial plan is essential for securing a stable and prosperous financial future. A comprehensive plan helps you set clear goals. It also encourages you to allocate money wisely and navigate economic uncertainties. Your financial plan serves as a roadmap for making informed financial decisions, including budgeting, saving, investing, and preparing for future milestones such as homeownership, education, and retirement.

The Bottom Line

Though some factors may be out of your control, it's still wise to try to get your finances on track. At the very least, review where you are and create a sound financial plan. It's possible that there's nothing you can do differently. There are no extras in your budget. There's nothing you can cut.

But for many people, there are a few things that can change. Maybe you're overspending. So be honest with yourself. Review your credit card statements. Make a realistic budget. Try to stick to it. If you don't—and most people don't—give yourself grace, and try again. And before you make life-changing moves, such as buying a home, make sure to do your due diligence.

Finally, if you can, try to make saving some of what you earn a priority. You may not be able to afford much now, but hopefully your circumstances will improve. Have an attitude of growth. Keep trying.

Peace & Forgiveness

What is one money mistake that you have had a difficult time letting go of?