We all make money-related mistakes, and this past year was no exception. Without further ado, here were Americans' top 10 financial mishaps in 2017: :
Not saving enough.
Accumulating too much credit card debt.
Taking on more general debt.
Not budgeting properly.
Not saving for retirement.
Failing to invest.
Tapping an emergency fund.
Borrowing from a 401(k).
Investing at the wrong time.
Most of these aren't surprising. It's a known fact that Americans are glaringly behind on savings, with 57% of adults having less than $1,000 to their names and 39% having no money in the bank at all. Throw in the fact that credit card debt reached an all-time high this year, with borrowers accumulating over $1 trillion in outstanding balances, and it's no wonder so many Americans are now bemoaning their fate.
The good news, however, is that we're about to kick off a new year, and with that comes an opportunity to right our money-related wrongs and take steps to improve our financial outlook. Here's how.
RELATED: Here are some of top financial mishaps that aren't mishaps at all:
7 things people think are terrible for their finances that actually aren't
7 things people think are terrible for their finances that actually aren't
Strictly looking at the numbers, it's smartest to pay down the accounts that carry the highest interest rates first. That way, you're staving off as much interest as possible and don't end up owing even more. But HBR researchers concluded after a series of experiments that it was more motivating for participants to see small balances disappear.
"Focusing on paying down the account with the smallest balance tends to have the most powerful effect on people's sense of progress — and therefore their motivation to continue paying down their debts," writes Remi Trudel, one of the HBR researchers.
"I suggest that people pay off their debts from smallest to largest and ignore the interest rates entirely," he writes on his blog. "Sure, that 18% credit card debt might freak you out like crazy. But if you tackle the smaller debts with intensity like I know you want to, you'll get to it sooner than you think — and then bust it out sooner than you ever thought possible!"
2. Keeping finances separate from your partner
One of the most important conversations to have before marriage is the money talk. What's the status of your partner's financial life? Are they overcome with debt? How much do they have saved? Are they investing? For some couples, these questions are the preamble to merging finances, but that's not the case for everyone.
A conscious decision not to share a bank account is perfectly fine, as long as you're not hiding anything from your partner. As Business Insider's Shana Lebowitz reports, there are many cases where it could be smarter to keep finances separate in a relationship, like if one partner is much better with money than the other or if you're blending families. But regardless of whether you share an account or not, it's crucial to have an ongoing open and honest discussion about your money habits and goals.
Another option, suggests Sophia Bera, CFP and founder of Gen Y Planning, is setting up a "yours, mine, and ours" system. That is, a joint account for household expenses and separate accounts to maintain some individual freedom.
3. Renting rather than buying
Although many financial experts laud the long-term benefits that come with homeownership, don't think you're wasting money if you're renting.
"I think for young people, renting is underrated," wealth manager and blogger Ben Carlson told Business Insider. "When you're young, renting gives you more options. People say they don't want to pay someone else's mortgage, but I think especially when you're young and not tied down, it gives you the ability to pick up and move to another city for a job — a little leeway. A house is much more expensive than people think. It's more than just a mortgage."
If you're grappling with the decision to rent or buy, check out this flowchart to help you figure out what makes the most financial sense for you.
4. Accruing debt
The notion of being in debt isn't inherently attractive. No one likes to owe someone money, or anything for that matter.
But being debt-free isn't all it's cracked up to be. In fact, consider two cases where going into debt could actually help you get ahead: Financing an education and buying a home.
"The income advantage provided by post-secondary education makes student loans one of the few forms of debt that can pay off for the borrower over time," reports The Motley Fool's Todd Campbell. "Additionally, interest on Federal student loans is relatively low, and often, that interest can be deducted on your taxes." Payments for this debt can also be paused if you're in a financial emergency, or forgiven completely in some cases, like if you're a public-service worker.
Likewise, if you can get a good interest rate on your mortgage that'll keep your monthly payments at or below 30% of your income, you're in good shape to build some equity over the long-term. You can also deduct mortgage interest on your taxes.
The bottom line: Going into debt isn't bad if it can unlock a clear financial gain.
5. Having multiple credit cards
It may seem financially reckless to have a wallet full of credit cards, but it's actually smart — so long as you're paying your balances off in full every month.
According to John Ulzheimer, credit expert at CreditSesame.com, having a single credit card can damage your credit score, thanks to something called your credit utilization ratio — that is, how much of your available credit you're actually using.
"That percentage is very, very influential in your credit score," explains Ulzheimer. "People say that you're in good shape if you keep your utilization within 50% of your available credit, or 30%, but really, it should be below 10%."
Available credit counts all the cards you have: If you have one card with an $8,000 limit and one with a $6,000 limit, your total available credit is $14,000, even if you only spend $1,000 a month. With a single card, you have no unused credit cushioning the impact of your spending. The closer you get to your limit, the harder the hit on your credit score.
6. Spending without a budget
Budgeting can be an incredibly useful tool for some people, especially reckless spenders. But that doesn't mean it works for everyone. It's still possible to be financially responsible without a hardline budget.
"People will try and go on a budget and then after two or three months, they lose their mind, they hate it," bestselling author and self-made millionaire David Bach told Business Insider.
Bach likens budgeting to dieting or exercising: If it's not enjoyable, the chances that you'll stick with it are pretty slim. But if you're not a fan of budgeting, you should at least be tracking your spending through sites like Mint or Learnvest, or create a customized spreadsheet. This frees you from any guilt that might bubble up should you fail to follow a budget, and instead allows you to spend as you normally would and make adjustments where appropriate.
You should also get on board with the pay yourself first plan, he says. Anytime you get paid, put money into your investments, retirement savings, and emergency fund before anything else. Even better, make this transaction automatic so you don't even have to think about it. Then you're free to use the rest of your paycheck for bills, groceries, and other expenses after you already have at least 20% put away for yourself.
7. Investing when you're not an 'investor'
Though it may seem intimidating, investing is anyone's game. You don't have to be a stock-picking genius or a earn a massive paycheck to make great returns over the long term.
In fact, according to John C. Bogle, the legendary founder and former CEO of the Vanguard Mutual Fund Group, the best way for the average person to make money in the market is to invest in index funds.
The "classic index fund," which he defines as holding many, many stocks, and operating with minimal expenses and high tax efficiency, works for two main reasons: They're broadly diversified, which eliminates individual stock risk, and they're low cost.
"It is a simple concept that guarantees you will win the investment game played by most other investors who — as a group — are guaranteed to lose," Bogle writes in his book "The Little Book of Common Sense Investing."
You can start by opening an account online with Bogle's company, Vanguard, and invest in their index mutual funds, which charge relatively low fees for investing directly (an average of 0.13%).
Many of these issues boil down to one glaring mistake, and a fixable one at that: not having a budget. It's estimated that a good 60% of Americans don't follow a budget despite the fact that it's probably the single most effective money management tool available. Once you have a proper budget in place, you'll see where your money is going and where you need to make changes. And that will help you avoid overspending, accumulating debt, and neglecting your savings.
Thankfully, creating a budget is simple. All you need do to is list your existing expenses (including those once-a-year bills that tend to creep up on you), compare what you're spending to what you're earning, and see where there's room for improvement. For example, if you're on the hook for a $200 monthly student loan payment, you probably can't do much about it. But if you're currently spending $300 a month on entertainment and restaurant meals, you do have the power to cut back in that category and bank the difference.
Even expenses like your rent or vehicle costs might be more negotiable than you thought. If the former is eating up too much of your income, look at downsizing or moving to a less popular neighborhood. If the latter is doing the same, consider unloading that vehicle if you can get by with the local bus. If you want a clean start to the new year, then you'll need to step up and start making some (reasonable) sacrifices.
Other mistakes to avoid
Though following a tight budget can reduce your chances of falling victim to several of the above blunders, you'll still need to understand the dangers of doing things such as neglecting your retirement savings, failing to invest, and depleting your emergency fund prematurely.
Let's start with retirement. Simply put, Social Security won't provide enough income to sustain you in retirement, no matter how much you earn or how frugally you think you'll live as a senior. It's therefore on you to start saving for the future independently, and the longer you wait, the less opportunity you'll get to take advantage of compounding.
Compounding is what allows you to turn a series of relatively small contributions into a decent nest egg over time. It's also the reason so many average earners end up retiring as millionaires. But if you don't start saving for retirement early on, you'll lose out on the beauty of compounded returns.
Still not convinced? Check out the following table, which highlights the importance of saving for retirement sooner rather than later:
If You Start Saving $250 a Month at Age:
Here's What You'll Have by Age 65 (Assuming a 7% Average Annual Return):
Data source: author.
Waiting even a few years to start funding your nest egg could put you at a serious disadvantage by the time retirement rolls around. Furthermore, notice that the above table assumes a 7% average yearly return, which is actually a few points below the stock market's average. What that sort of return allows us to do is take a total of $120,000 in out-of-pocket contributions and grow it into nearly $600,000 (as would be the case for someone who starts saving at age 25). But when we reduce that return to 2%, we wind up with just $181,000 after a 40-year period. And there lies the danger of failing to invest properly.
The solution? Go heavy on stock during your working years, and slowly move away from them as retirement nears. You need stocks in your portfolio if you really want to let the magic of compounding do its thing.
Finally, resist the urge to tap your emergency fund unless you're truly desperate for cash. Overindulging on your vacation isn't an emergency, nor is getting a new cellphone. Those are things you should, and can, actively save for, and if you use your emergency cash to cover non-essential expenses, you'll end up deeper in debt when a true calamity strikes, like a layoff or costly injury.
It's natural to have regrets about the things you botched financially this past year, but don't make the mistake of repeating those errors in 2018. Rather, understand where you went wrong and take steps to change your habits. With any luck, you'll be in a much better place financially come this time next year.