5 Common Money Drawbacks to Avoid

Here are five common money missteps and the measures you can take to get back on track. For many of us, managing our finances can be about as fun as doing our taxes. But, just as software can make tax preparation easier, there are specific things you can do to make money management as easy as possible. Here are five common money blunders and what you can do to avoid them.

1. Postponing retirement savings

When you’re in your twenties, it’s easy to put off saving for retirement because it seems so far away, and sticking to a daily budget can be difficult when you’re just starting. When you reach your 30s, your priorities may shift to saving for a house or paying for childcare, making it difficult to save for retirement. The truth is that it may never be easy. However, it will always be necessary. Despite this, one-quarter of American families have no retirement accounts at all.

2. Underfunding an emergency fund

According to a recent Bankrate.com survey, 23% of all Americans have no emergency savings set aside to cover unforeseen (and costly) expenses such as home repairs, medical bills, temporary unemployment, or any number of other unforeseen (and costly) expenses. 73% of Americans do not have enough money set aside to cover six months of expenses.

Set aside three to six months’ worth of living expenses in a separate account. The figure is intimidating, but you don’t have to get there overnight. Automatically direct a portion of your paycheck to a separate account, and you’ll see steady progress over time. Remember to increase your savings rate as your income and cost of living rise.

3. Investing in the short term

Given the market’s performance this year, or even further back, from 2007 to 2009, it’s easy to see why so many investors react rashly when the market falls. During the Great Recession, the Dow Jones Industrial Average lost about 20% of its value between February and March 2009, and more than 50% between its peak in October 2007 and its lowest point in March 2009. However, long-term investors tend to win. Despite the market’s poor performance this year, the Dow Jones Industrial Average has risen more than 25,000 points since its low in 2009. 2 Investors who cashed out in 2009 or who delayed getting back into the market for many years may have locked in losses and thus missed some or all of the upswing.

4. Staying away from the market

Market volatility can be frightening, but while past performance is no guarantee of future results, there has never been a 20-year period in which stock returns have been negative. When investing in stocks, keep your time horizon in mind. When investing for retirement, having the majority of your money in the stock market can be quite reasonable for a young person. Even in retirement, you should consider some stock exposure.

5. Focusing your investments

Some of us may have an overabundance of one type of investment in our portfolio. It could be stock in the company where we work or municipal bonds inherited from a relative. However, there is an advantage to owning a variety of investments. Having variety in your portfolio, also known as diversification, tends to reduce volatility and risk. Each investment reacts differently to market or economic changes. If geopolitical events, for example, shake up your international stocks, U.S. bonds may rise, helping to smooth out your portfolio’s overall return.