You may be wasting money when you think you're saving. LearnVest shares eight of the biggest money misconceptions.
Frugalista. Recessionista. In the past few years, people have coined a lot of silly words describing women and their approach to money, but the thought behind each of them is the same: You care about your hard-earned dollars and want to make them stretch.
That's true of most of us: We scrimp, we pinch, we try to feed our proverbial piggy bank as much as possible. Yet sometimes, in our excitement to be financial overachievers, we overreach.
It turns out there are a number of things that sound like they'd be doing good things for your money, and make you feel like you're saving more . . . when, actually, they're having the opposite effect.
Paying Every Debt Equally
When you have multiple debts to pay off (a credit card here, a student loan there) you might feel like a rock star simply for keeping up with them all and dividing your attention in a lot of different directions. Which, in a sense, you are! After all, you should always pay at least the minimums on all your loans.
But, if you have extra money to pay down your debts, you’re doing yourself a disservice by dividing it equally. The debts with the highest interest rates grow the fastest, so you should focus your muscle on the most toxic debts first.
Read on for more.
A hypothetical example: You have $5,000 debt spread over three credit cards ($15,000 total) and the cards have interest rates of 15%, 20% and 25%, with a minimum payment of $100 on each. You have $600 to put toward all your credit card debt ($300 for your minimums and $300 extra). If you put the extra $300 toward the cards with the highest interest rates first, you'd get out of debt nine months faster than if you split it up equally between the cards—and you’d pay over $1,300 less in interest in total! The amount you put toward your debt is the same, but simply allocating it differently makes a huge difference.
So, before you let your enthusiasm run away with your wallet, check out the top eight mistakes people make when trying to do something good for their finances—that secretly set them back.
Falling for Flash "Sale" Sites
Buying a coat for $200 when it normally sells for $500 is a great deal—but only if you were planning to spend $500 on a coat, anyway. If you only bought the item because you were lured in by the promise of a deal, you've just blown $200, plain and simple.
Don't let coupons, sales and special deals make you spend more than you intended, all while pretending that you're saving money. This is especially true of flash sale sites that use limited time offers to lure customers into making a snap decision they might regret later.
Here are some more ways stores seduce us into buying, and how to see through them.
Insurance payments can definitely add up. Let's say you spend $30 a month on renter’s insurance. And $150 a month on car insurance. And $200 a month on health insurance. And $50 on life insurance. And we're not even including other insurance policies like disability insurance or travel insurance or pet insurance or long-term care insurance.
It's understandably tempting to save money in the short-term by simply skipping many of these kinds of insurance. Some kinds may not be right for you, but skipping the ones you actually need (like renter's or homeowner's insurance, health insurance, car insurance and life insurance if you have a family) can run you deep into the red later on. Choosing which insurance you'll buy is all about knowing how much risk you can take on. If you skip health insurance and later wind up in the hospital, are you prepared for $300,000 in medical bills?
For a rundown of different insurance types and which you do (and don't!) need, check this out.
Paying Minimums on Your Debt
Paying only the minimums on your loans may mean more cash in the short term, but it also means paying a whole lot more over time.
Let's say you had $5,000 in credit card debt, at an interest rate of 20%. If you made the minimum payment of $200 per month, it would take you 11 years and ten months to get out of that debt! When all is said and done, you'd pay more than $8,400, which is $3,400 extra above the amount you borrowed!
If you upped that monthly payment to $500, you’d get out of debt almost eight years sooner. You'd also save almost $2,500 in interest payments!
Buying Cheap Stuff
There's inexpensive … and then there's cheap. Buying something for almost nothing isn't necessarily a bad thing, but if you're buying something you intend to use for an extended amount of time, consider quality in addition to price.
An easy rule of thumb is to calculate cost per use. For example, compare buying a fancy pair of shoes for $100 that you'll wear once or twice, and a fabulous pair of jeans you'll wear twice a week for three years. The shoes would come out to about $50 per wear, whereas the jeans would come out to only 32 cents per wear! Spend your money where it will make the biggest impact.
And to figure out exactly which clothing investments make the best sense, sign up for our Priceless Style bootcamp — a 10-day program that will help you buy only what you truly need.
Hanging Onto Your Retirement Payments
If you contribute nothing or very little to retirement accounts like 401(k)s or IRAs, you'll have more money to play with now. But that's a shortsighted approach, because time is your most valuable ally when it comes to retirement savings.
For example, saving $5,000 a year starting at age 25 could let you retire a millionaire at 65, with about $1.4 million in savings. Starting just five years later, at age 30, would reduce your bounty to less than a million. You'd lose out on over $440,000 in investment growth just because you waited.
(These calculations are based on an expected 8% rate of return.)
Choosing Junk Food
Fast food is cheaper than healthy food, plain and simple. There's a reason that obesity rates are correlated with poverty.
This is a sad state of affairs, and it's unfair, but short of storming the McDonald's corporate headquarters, it's a reality we have to work around. Choosing ramen or a cheeseburger may save you money (and, let's be honest, taste delicious) in the short term, but could cause you long-term health issues like heart disease and diabetes. Good health is even more important than dollar signs can express, but even the dollar signs would agree that taking care of yourself now is a great way to save yourself in the future.
Forgoing Lawyer Fees
We're all about doing things ourselves whenever we can, but sometimes taking DIY to the extreme can have negative consequences. If you have children, you need to have an up-to-date will—not having one could leave your family in a bad place if, heaven forbid, something happened to you, and it could cost them thousands of dollars in court fees. Whether you craft a simple will for yourself on a site like LegalZoom or pay a lawyer, you're not saving money by skipping this step altogether.
Here's what you need to know about when you can deal with your own estate planning, and when to call a lawyer.
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