Financial mistakes I see the most

For most of the past three decades, I’ve given advice to thousands of people on the radio and counseled hundreds of private clients. Today we’re also working with their children and grandchildren. Financial success, we tell them, comes from doing a small number of things the right way – and avoiding big mistakes.

Here are the top 10 mistakes I encounter, and the advice I give:

1. Spending more than you earn. It’s the cardinal sin of finance and if it becomes a habit, you will simply never be able to achieve financial independence. The fix is just as simple: pay yourself a percentage of your income – automatically if possible – and then find a way to live on the rest.

2. Living paycheck-to-paycheck without a safety net. You’re just getting by, waiting for the next disaster – losing your job, getting sick, etc. – to knock you down. Solution: once you’re living on less than you earn, build an emergency reserve equivalent to 30% of your income. It will keep you from borrowing to get through next time.

3. Wasteful spending. A pack of cigarettes, a lottery ticket, a caramel macchiato on the way to work every morning. Some people blow $25 a week or more on things that don’t help them and wonder why they’re living paycheck-to-paycheck. How about rewarding yourself with one little luxury every time you add $100 to your emergency reserve?

4. Not investing. Unless you plan to work for money forever, you have to learn how to make money work for you. First, you save. Second, you invest. Third, you compound. Do that for long enough and your money could eventually earn more than you do.

5. Not getting the 401(k) match. A no-brainer. If your boss is giving you free money to help you save for retirement, why would you not take it? Once you’ve built your emergency reserve, make this your next savings priority.

6. Not making Roth contributions while you can. Tax-deferred beats taxable, and tax-free returns beat them both. Fund a Roth IRA before your income makes you ineligible, and if it makes sense, take advantage of Roth 401(k) opportunities if you have them.

7. Obsessing over your credit score. You know what hurts your credit score? Borrowing too much money. You know what helps it? See Item #1 above. Pay your bills on time, whittle down your debt, and let your credit score recover on its own over time. Don’t fall for gimmicky strategies to game the system. You can’t “hack” your way to wealth.

8. Paying off debt with savings. Does it make financial sense to pay off a 20% credit card with an investment that’s been earning less than half that much? Of course, it does. But it’s a bad idea, for at least three reasons: 1) you lose the wealth-building power of compounding; 2) until you get your spending under control you’ll probably keep borrowing anyway, but this time you’ll have no savings; and 3) this will only make you discouraged and less likely to do what you need to do. If you want to make progress, you have to pay down debt and save at the same time.

9. Using your home equity as an ATM. In the current hot housing market, it might be tempting to borrow out some of your inflated home equity to use for something else, especially while interest rates are low. But most HELOCs have adjustable rates, which begs two questions: 1) do you think interest rates might go up from here, and 2) do you really want to go deeper/back into debt?

10. Not enjoying yourself after mastering Items 1-9. If you’ve done it right, you’ll get to stop working one day with no debt and more than enough money to live on for the rest of your life. So instead of living like you don’t have two nickels to rub together, have somebody help you figure out what you can safely spend each year – and start doing it! Enjoy the wealth you created by being responsible and frugal. Don’t run the risk of one day regretting what you might have done.

Any opinions are those of The Mike Brown Financial Group and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Raymond James Financial Services, Inc. does not provide advice on mortgages. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. Roth 401(k) plans are long-term retirement savings vehicles. Contributions to a Roth 401(k) are never tax-deductible, but if certain conditions are met, distributions will be completely income-tax-free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72 (70 ½ if you reach 70 ½ before January 1, 2020).