Trying To Hit $100,000 in Savings? Avoid These 6 Costly Mistakes Along the Way
Only about 12% of Americans have more than $100,000 in checking and savings. If you’d like to become one of them, you’ll need a great financial strategy and plenty of discipline.
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It’ll also be important to avoid key mistakes that can derail your progress. The best way to prepare for these is to learn about them. Here are the mistakes you want to avoid on your way to $100,000.
Failing To Begin
Failing to start is one of the key mistakes people make when setting savings goals, said Elle Kaplan, CEO and founding partner of LexION Capital. She previously told GOBankingRates that she found that many clients wait for the right financial weather to begin accumulating savings.
The better approach is to save what you can now, even if it’s a very small amount. This helps you get into a savings habit faster. Then, when you have more spare funds available, you can increase your monthly savings contribution over time. You’ll feel good about not having to start from zero when that time comes, too.
Another reason to start now is the potential for compounding interest to grow your savings at a faster rate. You can put the money into a high-interest savings account to start earning interest payments on it now, instead of at some vague point in the future.
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Not Having an Emergency Fund
Steve Azoury, ChFC and owner of Azoury Financial, previously highlighted the mistake of not having an emergency fund. Consistency is key when you want to reach $100,000 in savings. If you have to stop saving, or worse, pull money out of your savings each time you have an unexpected expense, progress will be slow.
It’s better to set up an emergency fund first so that you can confidently focus on saving no matter what the future brings. Experts say to save between three and six months’ worth of living expenses. If that sounds like too much, start with one month and build it over time.
Once you have an emergency fund, keep it separate from your main savings account. This helps you avoid getting into the habit of withdrawing from your savings.
Using a Low-Yield Savings Account
David Levi, founder of Cryptoner, previously told GOBankingRates about the mistake of using a low-yield savings account. He warned that storing money with banks that pay low interest rates effectively depreciates your savings over time.
Inflation causes this by growing the overall monetary supply at a higher annual percentage rate than what you earn from your savings account. For example, if inflation is 5% and you earn 2.5%, you’re effectively losing 2.5% in purchasing power even though you’re getting paid to save money.
You can visualize this effect by using a simple savings calculator. Consider these numbers:
Initial deposit: $10,000
Monthly contribution: $200
Savings interest rate: 2.5%
If you followed this savings plan for 10 years, you’d end up with almost $6,000 in interest earned. But if you put your money in an account that paid 5% interest instead, you’d end up with a little over $13,000 — a difference of $7,000.
This shows that if you don’t use a high-yield savings account, you can leave a lot of free money on the table. That’s why shopping around for the best rates is important.
Falling Victim to Lifestyle Inflation
Lifestyle inflation has the potential to derail your savings goals. This problem happens when previous luxuries start becoming necessities to you.
For example, you might enjoy eating at a nice restaurant on the weekend but only do it once a month to save money. After getting a raise at work, you might start going every Friday. When you apply this same philosophy to each of your favorite luxuries, you can suddenly find yourself with little left to save even though you earn more.
If you get a raise or have a sudden influx of cash, don’t fall victim to lifestyle inflation. Instead, allocate the extra amount to savings so you can reach your goal faster.
Saving Too Much (Investing Too Little)
Dewan Farhana, founder of Doctor Finances, previously told GOBankingRates that saving too much money can also be a mistake. He said it’s better to invest your extra capital because it helps you fight inflation and grow your money faster. Farhana said to keep just three to six months of cash in an emergency fund, then invest the rest in the market.
The average return of the S&P 500 was 10.22% over the last 30 years. That’s significantly higher than what high-yield savings accounts pay. But this approach has some risks.
Although the S&P 500 grows by an average of over 10% annually, it can decline significantly in any given year. These corrections can decrease your savings, unlike a savings account. That’s why experts recommend only putting money into the market if you know you won’t need it for at least several years. Even if you lose money one year, history shows that your capital will grow over time. You just need to make sure you can leave the money in the market long enough for that to happen.
Not Maxing Out Your 401(k)
It’s important to max out your 401(k) contributions, especially if your employer matches them. Employer contributions are essentially free money. You should do what you can to qualify for them so that you can reach your savings goals faster.
However, don’t put yourself into a financial bind pursuing your maximum employer contribution. Make sure that you have at least an emergency fund in place first so you don’t have to pull from your 401(k) and face potential penalties.
The Bottom Line
Every person’s path to $100,000 in savings is different. But you can make yours easier by avoiding common savings mistakes. As long as you have a plan and stick to it, you should be able to reach your goal eventually.
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This article originally appeared on GOBankingRates.com: Trying To Hit $100,000 in Savings? Avoid These 6 Costly Mistakes Along the Way
