Mistakes – we’ve all made our fair share.
Some mistakes, however, are worse than others (we’re talking to you, gas station sushi.)
Yet one of the most painful and hard-to-correct mistakes Americans make is with their money management. That’s right – one false move with our finances, left uncorrected, can significantly damage one’s financial standing.
Make no mistake, the bigger the mistake, the more damage that’s done.
So given the immense stakes involved, why do so many U.S. adults continue to make personal financial mistakes?
According to a recent study by Finder.com, 126.5 million Americans admit to making a significant money mistake in their lifetime, with 52% of men owning up to money malfeasance compared to 48% of women.
Another survey from DepositAccounts.com states the problem is worse, with “a whopping 85% of Americans admit to making financial mistakes over the last decade”.
Annual incomes are also a big factor when assessing personal financial mistakes. This from the Finder.com study:
“People in lower-income brackets are far more likely to admit to making a money mistake than those in the top two income ranges,” the study noted. “For example, a whopping 37.5% of people earning up to $25,000 a year admit to making a mistake with their finances, while just 1.8% of Americans earning $300,000 or more who make these mistakes admit the same. Similarly, 44.7% of Americans earning $25,000 to $50,000 a year admit to making a money mistake, compared with 8.2% of Americans earning $150,000 to $300,000.”
Millennials are most likely to admit to making a money mistake (33.9%), followed by boomers (30.3%) and Gen X (25.7%), the Finder.com report said.
The Biggest Personal Finance Mistakes
What are the biggest and most avoidable personal financial mistakes? There’s no shortage of them, but these money management malfunctions top the charts.
1. Frivolous Spending
This is more a series of mistakes more than a single egregious one, but according to the Finder.com study, “spending too much on fun” is the leading money management mistake in the U.S., with 51.1% of Americans surveyed “regretting” frivolous spending.
Wasting household dollars on fun includes pricey vacations, dining out, and shopping at retail businesses, offline and online, Finder.com reports.
2. Letting Your Spouse or Partner Monopolize Household Finances
The study also noted that approximately 20% of Americans (and 24% of women) say their biggest money mistake was allowing a partner/spouse to handle all the household finances.
Going the solo route can be a big mistake as “buy-in” should be a huge factor in any couple’s money decisions. Excluding one spouse from agreeing to a big-money move is paving the way to big trouble down the road. In the same study, 32% of divorced or separated consumers say letting a spouse handle the family money was their biggest mistake.
3. Not Saving Enough for Retirement
A separate study from New York Life on American’s largest financial regrets says that not saving enough cash for a decent retirement was deemed a huge money mistake by survey respondents.
According to the survey, “not starting to save for retirement” was the biggest money mistake it recorded. Interestingly, most Americans say they knew at age 34 they were already behind on retirement saving and, on average, it would take them 11 years to fully catch up on their retirement savings, and that it would take a great effort to do so.
4. Abusing Credit Cards
The New York Life survey also cited “relying too much on credit cards” was another common lament of U.S. households.
Those that made that statement and eventually recovered said it took them eight years to do so, with tens of thousands of dollars wasted on credit card-related interest rate payments. The additional credit score hit that late credit card payers absorb is another negative impactor, according to consumers who abused their credit cards.
5. Not Having an Emergency Fund
The New York Life survey also places “not having an emergency fund” high up on its list of consumer financial regrets.
While the study gives consumers credit for admitting the mistake of ignoring an emergency fund, it also points out that that the longer you wait to build an adequate emergency fund (which usually amounts to six months of equitable annual income) the longer it takes to build one.
The study states it takes nine years to build a good emergency fund if you start at age 32 – an age when many younger Americans are struggling with expenses related to raising a family, buying their first homes, and paying down substantial student loan debt.
6. Overspending on a New Home
According to a recent report from Fidelity Investments, “spending too much on housing” is another pervasive and critical consumer financial regret.
A good rule of thumb on buying a home is to never spend more than 30% of your pre-tax annual income (this goes for individuals and spouses) on a home purchase. That number should decline, however, if you’ve already accumulated significant debt on things like student loans and high credit card debt.
If you do commit to a home purchase that costs more than 30% of your pre-tax annual income, and you do have high personal debt, know that you’ll likely be struggling to make your monthly mortgage payments and paying your other debts off at the same time
That scenario not only leads to personal angst and worry over money limits every month, it can also lead to a lower credit score if you’re late paying bills, which can further send you into a deeper financial spiral.
7. Not Stashing Enough Cash for Children’s College Cost
With student loan debt soaring to $1.6 trillion in 2020, more Americans regret not saving enough money for their kid’s college funding needs. That financial regret lands high on the list of a “money mistakes” list compiled by Bankrate.com in May 2019.
That regret is particularly high with Americans with high student loan debt, and who can’t afford to stash away as much money as they’d like for future family college spending needs, as the household budget is too tight to do so.
Millennials reported having the most regret over their student loan burdens, with 17% of the demographic citing it as a regret compared to 10% of the general public,” Bankrate stated. “Their regret over student loans was more than twice that of Gen Xers (7%) and more than three times that of Boomers (4%).”
“Considering education costs have more than tripled since the 1980s, millennials are likely to have much larger student loan balances than those who are older than them, perhaps leading them to higher levels of regret,” Bankrate reports.
The Takeaway on Major Money Mistakes
While financial regrets seem to be multiplying in many consumer financial demographics, the good news is that there are proven ways to avoid making big money mistakes.
For instance, a sharper focus on spending less and saving more (especially for tax-advantaged opportunities in retirement plans and 529 college savings plans) can eliminate major financial regrets on their own.
In that regard, avoiding major money mistakes simply means learning to live below your means, and do so on a long-term basis.
Master that financial habit and you’ll likely find you’ll be stacking personal financial success stories and accumulating fewer financial regrets as you go through life.