It was an all-you-can-eat buffet, costing around $12.95, as Mim King recalls. About 10 years ago, King, a professional organizer and money manager in St. Paul, Minn., learned that one of her clients had gone to a restaurant, and he was determined to eat all he could.
"He stayed beyond what most people would consider a reasonable time, simply in order to eat," King says. Before the day was over, his family took him to the hospital to get his stomach pumped. King never learned the cost of the hospital bill, but she is betting that it far exceeded her client's meal.
Everyone makes money mistakes, but if there's a theme connecting many of them, it's that if we stopped and thought about it, we'd realize what we're doing isn't going to end well. While King's client didn't predict he'd wind up in a hospital, if he had thought through his plan beforehand, he might have left after, say, the third or certainly the fourth helping.
In that spirit, here are a few common money management mistakes -- and why these decisions are likely to haunt you.
Going to Graduate School Without Thinking It Through
Why it will come back to haunt you: Graduate school isn't cheap. Price tags are all over the map, ranging from a relatively low $21,000 a year for business school at Brigham Young University's Marriott School of Management to $63,200 a year at Harvard Business School. The last thing you need is to graduate and realize you really aren't cut out for your new career.
The consequences: That realization is not uncommon. Shane Fischer, a criminal defense attorney in Winter Park, Fla., says he sees it all the time. He knows many lawyers who hate what they do "but went to law school because they hadn't 'found themselves' at 22. They racked up $100,000 to $200,000 in debt before their 25th birthday. Unless they hit the lottery or get lucky with a big case, their student loan debt will be an albatross around their neck for the rest of their careers, as they will never make enough money to bounce back from the debt as well as the lost income from taking additional years off to go to school."
Which may not be so bad if you love what you do. But if you hate it, the decision will plague you, quite possibly for the rest of your life.
Taking Out an Expensive Loan You Can't Afford
Why it will come back to haunt you: Maybe you'll be able to pay it back, but if you're honest with yourself, you probably won't. After all, the reason the high-interest loan you're considering is so expensive is that you had trouble paying back the previous loans you've taken out. How is this one going to be any different?
The consequences: Desperate times, as they say, call for desperate measures. But some loans are so punishing that desperate consumers would be better off taking whatever lumps are coming to them.
While some credit cards have exorbitant interest rates, and payday loans are well-known as an expensive way to borrow money, among the worst of the worst are car title loans.
The Center for Responsible Lending reported earlier this year that approximately 7,730 lenders give out $1.6 billion in car title loans every year, and to get that money, consumers spend $3.5 billion a year in interest. It's a form of predatory lending that is illegal in about half the states, which says a lot.
Here's how it works: A typical borrower receives cash equal to 26 percent of the car's value and pays 300 percent APR. If consumers don't pay back what they borrow, they lose the car. Because most people are determined not to let that happen, they renew the loan -- paying back only the monthly interest and renewing the loan for another 30 days. Consumers who borrow $950 typically take eight months before paying back the loan and spend more than $2,140 in interest.
Failing to Save for Retirement
Why it will come back to haunt you: The reasons are obvious: Nobody wants to find out what happens when you have to choose between buying food or medicine.
The consequences: If you're making this mistake now, you're not alone. A new Wells Fargo (WFC) study, which surveyed 1,000 middle-class Americans from their 20s into their 70s, reports that 37 percent of people don't expect to ever retire, and they plan to work until they're too sick to do anything else -- or die -- whichever comes first.
Two years ago, Ken Bodnar, then 55, was pretty sure his future was going to involve being "the most educated greeter that Walmart would ever have."
Bodnar surely means no offense to minimum-wage earners, but from a salary standpoint, it would have been a step down. %VIRTUAL-article-sponsoredlinks%He had just lost his job as the chief technology officer at a prepaid debit card and money transfer company in Nassau, Bahamas, a position he had been offered two years earlier when he was toiling in a cubicle in Ottawa, Ontario. It was 2011, and Bodnar was an unemployed expat supporting his 24-year-old daughter. He had nothing saved for retirement.
As it turned out, Bodnar was able to save himself from being a cautionary tale. For the next two years, he worked in a series of odd jobs, proving his worth to employers and bringing in what money he could. Bodnar eventually landed at SelectBidder.com, a wholesale inventory website for the auto industry, where he is currently the chief technology officer.
And, yes, he is finally saving for retirement and has a healthy amount of money already stashed away. He also no longer has any debt, which he abhors and suggests everyone in their mid-50s and beyond start hammering away at if they haven't already.
"Debt puts you further behind the eight ball than you really need to be," says Bodnar, who is able to put a lot toward retirement partly due to scaling back his expenses. "I live frugally, and it doesn't kill me."
But Bodnar can see another alternate reality, one that he came awfully close to, and it haunts him to think about it. He imagined himself "slinging fries at McDonald's, knowing how to fix the malfunctioning electronic sales register and the global networking that it was connected to."
For the best chance of maintaining your lifestyle in retirement, aim to contribute 15% of your salary, including any employer match, to your 401(k) or other savings account throughout your career (see What's Your Retirement Number?). Most people fall short of that benchmark. The average employee contribution to a 401(k) is 6% to 8%.
Saving 15% may seem like lifting weights at the gym for several hours. Try it anyway, says Stuart Ritter, a financial planner and vice-president of T. Rowe Price Investment Services. "Kick your contribution level up to 15% for three months. At the end of the three months, you can lower it, if necessary." But rather than dipping back to single digits, go with 10% or 12%, he says. "People find they can settle on a much higher amount than they were contributing before."
Procrastination is another risk: With each year you neglect to save, you lose an opportunity to fuel your accounts and to let compounding keep the momentum going.
So powerful is the effect of saving early that you could have less trouble catching up if you take a several-year break-say, to pay for college-than if you wait until midlife to start. At that point, says George Middleton, a financial adviser in Vancouver, Wash., "the amount of money you have to put away can be ungodly."
Still, you can make headway, especially if your kids are grown and you have fewer expenses. Say you're 55, earn $80,000 a year and have nothing saved for retirement. You put the pedal to the metal by setting aside $23,000 in your 401(k) each year for the next ten years. That $23,000 combines the annual maximum for people younger than 50 ($17,500 in 2013) plus the annual catch-up amount for people 50 and older ($5,500). If your employer matches 3% on the first 6% of pay and your investments earn an annualized 7%, you'd amass $434,700 by the time you reached 65.
For some investors, a bad case of the jitters became a bigger derailer than the recession itself (see How to Learn to Love [Stocks] Again). "People got very nervous and became more conservative, so when the market came back up, they had less of their portfolio participating in the rally," says Suzanna de Baca, vice-president of wealth strategies at Ameriprise Financial.
You can get back in (and stay in) by investing in stocks or stock mutual funds in set amounts on a regular basis. Using this strategy, known as dollar-cost averaging, you automatically buy more shares at lower prices and fewer shares at higher prices-an antidote to market-driven decisions. Once you decide on your mix of investments, use automatic rebalancing to keep it that way, advises Debbie Grose, of Lighthouse Financial Planning, in Folsom, Cal.
Most financial planners recommend that your portfolio be at least 80% in stocks in your twenties, gradually shifting to, say, 50% stocks and 50% fixed-income investments as you approach retirement. But formulas don't cure panic attacks. "Set your risk at the level you're willing to withstand in a downturn," says Middleton.
Amassing hundreds of thousands of dollars for retirement is challenge enough, but parents are also expected to save $80,000 to $100,000 per kid to cover the college bills. In fact, half of parents don't save for college at all, and the average savings among those who do runs about $12,000, according to a 2013 report by Sallie Mae, the financial services institution. Faced with a shortfall, two-thirds of families say they would use their retirement savings to pay for their children's college education, if necessary.
Don't wait until your kid is 17 to discuss how much you'll contribute. Have a conversation early about how much you can afford to give, says Fred Amrein, a registered financial adviser in Wynnewood, Pa.
A Roth IRA can be one way to save for both college and retirement, although it won't get you all the way to either goal. You can contribute up to $5,500 a year ($6,500 if you're 50 or older) in after-tax dollars, and the money grows tax-free. You can withdraw your contributions for any reason, including college, without owing tax on the distribution. You will pay taxes on the earnings (unless you're 59 1/2 or older and have had the account for at least five calendar years), but you won't have to pay a 10% early-withdrawal penalty if you use the money for qualified higher-education expenses.
Leaving the workforce, even temporarily, deprives you of current income and makes it tougher than ever to save for retirement. You might even find yourself tapping your retirement accounts to cover day-to-day expenses. You'll owe taxes on distributions from a traditional IRA plus a 10% penalty if you're younger than 59 1/2.
The best way to avoid that dismal situation is to have an emergency reserve that covers at least six months or even a year of living expenses, says Jim Holtzman, a certified financial planner in Pittsburgh. He acknowledges, however, that "that's easy to recommend and hard to implement." Avoid further disaster by hanging on to health insurance: If you can't get coverage through your spouse, look into keeping your employer-based coverage through COBRA. You can extend that coverage for up to 18 months, although you'll pay the full premium plus a small administrative fee. As of January 2014, you'll also have access to coverage through state health exchanges.
Married couples who depend on each other's earning power need life insurance to cover the gaps when one spouse dies. You can get a rough idea of how much coverage you'll need on each life by calculating what you each contribute to annual living expenses and multiplying that amount by the number of years you expect to need it, says Steve Vernon, of Rest-of-Life Communications, a retirement consulting firm. (For advice on how to do a more precise calculation, see How Much Life Insurance Do You Need?)
If you have a pension, you'll have the option of choosing a single-life benefit, which ends at your death, or the standard joint and survivor's benefit, which pays less while you're alive but keeps paying (typically at 50% to 75% of the benefit) for the rest of your spouse's life. Your spouse is legally entitled to the survivor's benefit and must sign a waiver to forgo it. Don't be tempted by the higher-paying single-life option if your spouse will need the survivor's benefit later.
Decisions you make in claiming Social Security are similarly key. If you're the higher earner (typically, the man), "you will really help your spouse by delaying Social Security as long as possible," says Vernon. The benefit grows by about 6.5% to 8% a year for each year you delay after age 62, when you first qualify, until you reach age 70. If you die first, your spouse can qualify for a survivor's benefit up to the full amount you were entitled to, depending on the age at which she files.