We know that some financial mistakes will occur, but the big ones are what can set us back from reaching our financial goals like retirement. There are some preparations you can take, though, to avoid those big financial mistakes or to at least lessen the blow.
It’s like wearing a seat belt. We always wear seat belts (or I hope you do) so a minor fender bender doesn’t turn into a hospital visit. We best protect ourselves from accidents worse than fender-benders with our seat belts as well. These simple straps give us the best chance to avoid harm.
That’s why we have gone through and put together five “seat belts” for your financial situation.
1.Don't Carry A Credit Card Balance
One of the biggest mistakes that we see preventing people from retiring early or even reaching a goal like buying a home is having too much credit card debt. Credit can be a great thing if used correctly. However, it can be a huge financial setback if used the wrong way. So, how do we avoid the big pitfall? Don't think of your credit card limit as the amount of credit you're approved to spend on the card. Instead, spend only the amount that you will be able to pay off at the end of the month. This financial seat belt is to not carry a credit card balance. To avoid falling into a huge debt pitfall is to pay off your credit card every month.
2. Make Saving Automatic
Many people talk about not earning enough to be able to save… and thus the reason why they can’t retire. We're currently working on a new eBook following a couple who recently retired with $1 million in their retirement account, but they didn’t even know it until he recently opened his 401k statement. This was a family making under $40K a year. The reason they were able to save such an amazing amount is because they made savings automatic. They automatically contributed to their 401k and didn’t account for that money in their budget. So, automatic savings is the seat belt to avoiding getting to 65-years-old and not having enough savings to retire.
3. Dollar Cost Averaging
This is the key to keeping you from trying to time the market. A mistake many people make is trying to outsmart the markets. Let’s be honest… nobody can outsmart the markets. A steady strategy of diversification and long-term investing gets you to your goal of retirement. Dollar cost averaging - investing a small amount of money every month, quarter, or year - at a specified time, keeps you from trying to analyze whether it’s a good or bad time to invest. That’s your seat belt from freezing up when things are bad and allows for you to instead buy when things are on sale.
4. Keep Your Mortgage Payments Low
Avoid the pitfall of being house rich and cash poor. Basically meaning that you buy too much house and aren’t able to cover the unknowns that pop up in life. We suggest that your monthly mortgage payment does not exceed 28% of your monthly income, before taxes. But that’s at the high end. Our recommendation is to have your mortgage payment be closer to 20% of your gross income. This is your seat belt to becoming house rich and cash poor.
5. Have An Emergency Reserve
This is actually the biggest way to avoid falling into a financial pitfall. Have 3-6 months worth of expenses in cash at all times. Why? So a medical emergency or a housing issue doesn’t lead you to incur debt or interrupting your financial plan… both of which will set your retirement goals back. This is your seat belt to avoiding financial unease.
Maybe you are already wearing your financial seat belt, but you still just want reassurance that you are on the right path to retirement… well, that’s why we built yourwela.com. You can sign up for free and fill out a game plan. This game plan is a set of questions which will then be reviewed by one of our advisors. They will analyze your situation and get back to you with action steps and a review of your situation. This is how we are leveraging technology to deliver financial advice. You are able to take action while at home and even while watching your favorite show.