Financial Literacy

As your life evolves, so do your financial needs - and potential pitfalls it's best to avoid. This week, we've compiled a comprehensive guide to the most prevalent financial missteps made by adults in each decade. 

Everyone's financial dilemmas will change over the years. Looking back even a decade in your life may reveal some surprising differences in your priorities and responsibilities. While your financial outlook, lifestyle, and priorities are unique, simple awareness of some of the most common pitfalls experienced by many adults in each decade empowers you to recognize potential similarities in your own life. 

Why Organize by Decade?

While we've broken down this week's theme into decades for clarity, it's crucial to recognize that these challenges and opportunities don't follow a one-size-fits-all timeline. Our unique life situations, societal changes, and economic fluctuations all deeply influence our financial independence and responsibilities. So please consider reviewing all articles, even if they don't technically apply to your specific decade of life.

That said, in our 20s, the journey towards financial independence begins. Building good credit, increasing income, and learning to save and spend responsibly are all crucial skills to develop. This decade is also the time to start planning for your financial future, as the decisions you make in your 20s can significantly impact your financial health later on. However, it's important to acknowledge that this path looks different for everyone. Some young adults may already have significant responsibilities like supporting a family or managing student loans. And while entry-level jobs may be plentiful, those jobs don't always offer a springboard to financial stability - especially in an economy marked by inflation and shifting job markets. 

In our 30s, new responsibilities like a spouse or partner, children, and a mortgage may take center stage. Your income is likely to increase, but so will your expenses. It's essential to resist the urge to keep up with others' lifestyles and focus on long-term financial security. Some in their 30s may also overlook increasing retirement savings to match any increase in income during this decade - a common mistake. By starting to invest as early as possible and increasing your contributions as early as possible, your money has more time to grow into a substantial retirement nest egg.

For many, entering their 40s means earning more than ever, but even so - is spending aligned with long-term goals? It's possible to earn a lot of money but waste too much because of a lack of budget priorities. For example, you may be able to afford to lease a new car every few years, but is that the best way to reach your financial goals? Ideally, as the reality of retirement becomes more apparent, those in their 40s will choose to revisit their long-term financial goals, ensuring that retirement investments are fully funded and appropriate for their risk tolerance. Not having a solid financial plan in place by now is one of this decade's most costly financial pitfalls.

Obligations vary wildly for people in their 50s and 60s - some still care for children (or pay the bill for college), others care for their aging parents, and many shoulder both responsibilities simultaneously. This "sandwich generation" faces many financial issues, which can often be summed up as one problem: placing the needs of others before their own financial future. While caring for family members is a must, putting one's financial needs on the back burner may come at the expense of long-term financial security.

Whether you're navigating the challenges of financial independence without a safety net, managing a non-linear career path, or adjusting your financial plans to fit a non-traditional life trajectory, our goal is to empower you to make informed decisions that safeguard your financial future.

Entering your 20s comes with a whirlwind of change and opportunity, from leaving home and potentially pursuing higher education to starting careers and even forming families. It's a decade marked by significant milestones and the challenge of establishing financial independence. 

As we explore common financial missteps among young adults, it's essential to recognize that not everyone begins this journey from the same starting line. For example, some young adults may be lucky enough for their parents to have paid for all (or most) of their college education. In contrast, others may be responsible for all higher education expenses. Still, others may not choose to attend college - opting to move directly into the workforce after high school. 

Regardless of your specific situation, many of the challenges young adults face are similar. Here are some of young adults' most common money mistakes - and how to avoid them.

Student Loans: Opportunity and Risk

Student loans are one of the few types of debt that offer a fantastic return - increased lifetime earning power. However, student loans must be repaid, and unlike virtually every other type of personal loan, they are generally not eligible for dismissal in the event of a severe financial setback such as bankruptcy.

There are two common mistakes to avoid regarding student loans. The first is taking on too much debt relative to your career choice. For example, assuming $100,000 or more in student loans for an entry-level career brings substantial risk, especially if for only an undergraduate degree. Why's that? Federal student loans for undergraduate study max out at just over $30,000 for dependent students and just under $60,000 for independent students. Borrowing more than that means accepting private student loans from a bank, credit union, or other financial institution. These private loans don't include the flexible repayment options of federal loans. They can potentially result in debt that's difficult to manage. 

The next mistake some people in their 20s make with student loans is exploring only some repayment options. The default repayment option for federal loans is the Standard Repayment Plan - equal monthly payments over a ten-year repayment period. While the overall cost for this plan is the lowest, the monthly payments start as the highest of all plans. New plans like the SAVE Repayment Plan adjust monthly payments to your income, ensuring that loan repayment doesn't take too much of your monthly income. So, a firm understanding of all repayment options is crucial to making the most of your money in your 20s, especially if you have a lower-paying job or a job with variable income.

Careless Credit Card Use

Overusing credit cards in your 20s can lead to expensive consequences later. A credit card gives you more financial freedom - that's clear. Credit cards make it easier to do everything from traveling to renting a car. Still, suppose you overspend or pay only the minimum amount due on your card. In that case, it will take literally decades to repay a credit card debt. Avoid this common pitfall by paying in full monthly and not relying on credit. If you put necessary expenses, like groceries, on a credit card and can't pay the balance in full each month, that's a sign that you may need to reevaluate your spending, income, or both.

Ignoring Your Credit Score

The way you use credit counts, and your 20s is an ideal time to work on building the highest score possible. Your credit score impacts everything from your ability to buy or rent a home to the cost you'll pay for insurance, and it is even commonly reviewed by employers when you apply for a job. It's easy to avoid thinking about your credit score until you need to apply for credit, but being mindful of the importance of your credit score is an important step. To keep on top of your credit, pay all bills on time and take advantage of AnnualCreditReport.com to get free copies of your credit reports (you have three - one from each of the major credit bureaus) every year. Review each report to ensure nothing listed could damage your score, including mistakes and accounts that may have been opened without your permission.

Debt On Wheels

One of the first things many young adults do as soon as their income allows is to finance a new (or used) car. If you live at home with your parents, a $500 monthly payment may seem like a little, but what happens if you move out? Or, if you're already living independently, what else could you do with an extra $500 per month? 

Many adults need a car to earn a living, but it's crucial to be mindful of how much you spend on a car. Remember, just because you can "afford" a loan doesn't mean it's the best use of your money.

Tax Surprises

That new job sounds fantastic, and you'll even be able to afford a new place, right? Not so fast! The more you earn - and your income will likely grow during your 20s - the more you'll pay you'll pay in taxes.

Buying a home or car or just planning your budget based on your gross income is a common error; make sure you receive a few paychecks and have an idea of your true take-home income before you commit to a costly mistake.

Some of the best things you can do in your 20s are not active at all – simply avoiding some of the most commonly made financial mistakes will help you avoid costly issues later.

Welcome to your 30s – a decade of significant personal and professional growth filled with exciting opportunities and unique challenges. As you navigate this transformative period, laying a solid financial foundation to support your goals and aspirations for years is crucial. However, many individuals in their 30s fall prey to common financial mistakes that can have lasting consequences. In this article, we'll explore these pitfalls and provide practical strategies to avoid them, setting you on the path to financial success.

Not Setting Clear Financial Goals

One of the most significant financial mistakes you can make in your 30s is not setting clear financial goals. Without a roadmap, it isn't easy to make informed decisions about your money.

How to Avoid: Take the time to set SMART (Specific, Measurable, Achievable, Relevant, Time-bound) financial goals. Examples of short-term goals include paying off credit card debt or saving for a down payment on a house. Long-term goals might include saving for retirement or your child's education.

Neglecting to Create and Stick to a Budget

Another common financial misstep in your 30s is failing to create and stick to a budget. A budget is a powerful tool that helps you understand where your money is going and ensures you're allocating your resources in a way that supports your financial goals.

How to Avoid: To create a budget, start by tracking your income and expenses for a few months. Then, identify areas where you can cut back and redirect that money toward your financial goals. Consider using the 50/30/20 rule as a guideline: allocate 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment.

Prioritizing Immediate Gratification Over Long-Term Savings

In your 30s, it's tempting to prioritize immediate gratification over long-term savings. However, this mindset can lead to financial strain down the road.

How to Avoid: To combat this situation, practice delayed gratification. Before making a purchase, ask yourself if it aligns with your financial goals. Consider waiting 24-48 hours before making significant purchases to avoid impulse buying. Automate your savings to ensure you're consistently putting money away for the future.

Not Growing Your Emergency Fund

Life is full of unexpected expenses – car repairs, medical bills, and even the loss of a job. Without an emergency fund, these situations can force you into debt or cause significant financial stress, especially as financial responsibilities increase.

How to Avoid: Aim to save three to six months' worth of living expenses in a separate savings account. Start small and gradually build up your emergency fund over time. Having this safety net will provide peace of mind and financial stability when life throws you a curveball.

Failing to Invest for the Future

Your 30s are a prime time to start investing for the future. Thanks to the power of compound interest, money invested now can grow exponentially over time.

How to Avoid: If your employer offers a 401(k) with a company match, contribute at least enough to capture the full match – it's essentially free money. Beyond that, consider opening a Roth IRA or investing in low-cost index funds. Aim to invest at least 10-15% of your income for retirement.

Taking on Too Much Debt

Not all debt is created equal. While some debt, like mortgages or student loans, can be considered "good" debt that helps you build wealth over time, high-interest consumer debt can be a major financial drain.

How to Avoid: To avoid taking on too much debt, live within your means and only borrow what you can afford to pay back. Focus on paying off high-interest debt, like credit card balances, as quickly as possible. Consider the debt snowball or avalanche methods to pay down your debts systematically.

Not Protecting Your Assets with Insurance

In your 30s, you may have more assets and responsibilities that need protecting. That's where insurance comes in.

How to Avoid: Make sure you have adequate health, disability, and life insurance coverage. If you own a home or car, review your homeowners and auto policies to ensure they meet your current needs. Consider working with a financial advisor to determine the right coverage levels for your situation.

Neglecting to Plan for Retirement

Retirement may feel like a lifetime away in your 30s, but the earlier you start planning, the more time your money has to grow.

How to Avoid: In addition to contributing to your 401(k) and IRA, consider your ideal retirement lifestyle and how much you'll need to save to achieve it. Use retirement calculators to get a rough estimate, then adjust your savings and investments accordingly.

Not Seeking Professional Financial Advice

Managing your finances can be complex, especially as your wealth and responsibilities grow. Don't be afraid to seek professional financial advice.

How to Avoid: A good financial advisor can help you create a comprehensive financial plan, optimize your investments, and make informed decisions about your money. Look for a fee-only fiduciary advisor who is legally obligated to act in your best interests.

The Takeaway

Your 30s are a time of great opportunity – both personally and financially. By avoiding these common financial mistakes and implementing smart strategies, you can set yourself up for long-term financial success.

Remember, it's never too late to start making positive changes in your financial life. Whether it's setting clear financial goals, creating a budget, or investing for the future, every step you take now can have a profound impact on your financial well-being for years to come.

Your 40s represent a unique financial crossroads. On the one hand, you may be enjoying career advancement and higher income; on the other, you're likely facing increased financial obligations and a growing awareness of your retirement needs. Navigating this balance is key to your long-term financial health. Let's dive into the financial mistakes that can derail your progress during this pivotal decade and discuss proven strategies to avoid them, positioning you for financial success now and in the years ahead.

Not Prioritizing Retirement Planning

With retirement closer on the horizon, failing to prioritize it now can lead to missed opportunities for growth and a comfortable retirement. According to an Employee Benefit Research Institute survey, 45% of workers aged 35-44 have less than $10,000 saved for retirement.

How to Avoid: Maximize contributions to your retirement accounts, including 401(k)s, IRAs, or any other investment vehicles you have. If you're behind, take advantage of catch-up contributions allowed for individuals over 50. If possible, aim to save at least 15-20% of your income for retirement.

Underestimating the Cost of College

If you have children, college expenses can loom large in your 40s. While the cost of college can vary widely based on the school, your family's income, and other factors, under-planning can strain your finances or divert funds from other important goals, like retirement.

How to Avoid: Explore various saving options early, such as 529 plans, which may offer tax advantages for education savings. Check out the "Net Price Calculators" offered by potential target schools. These calculators estimate actual costs based on your family's financial situation. Finally, have open conversations with your children about college expectations, your contribution, and your kids' contributions - including the pros and cons of taking out education loans.

Overlooking Health Care Planning

Healthcare needs typically increase as people age. According to a study by Fidelity Investments, a couple retiring at age 65 can expect to spend $315,000 on health care costs in retirement. Without proper planning, medical expenses can deplete savings.

How to Avoid: If you have a high-deductible health insurance plan, consider health savings accounts (HSAs) for tax-advantaged healthcare spending - contributions are even tax deductible, and those 55 and older can benefit from higher maximum contributions. Long-term care insurance, while not appropriate for everyone, helps to cover costs not included by health insurance in later life. Consider exploring the pros and cons of this insurance (consulting with a financial planner can be helpful). Finally, prioritize your health through preventative care and healthy lifestyle habits.

Ignoring Debt Reduction

Carrying significant debt into your later years can jeopardize your financial stability. High-interest debt, in particular, can eat away at your ability to save, especially considering the average credit card interest rate is well over 20%.

How to Avoid: Focus on paying down high-interest debts and consider consolidating or refinancing to lower interest rates. Aim to enter retirement with as little debt as possible. Avoid taking on new debt, especially for discretionary purchases.

Neglecting Estate Planning Updates

Estate planning isn't a one-time task. As your life circumstances change – think marriages, divorces, births, and deaths – so too should your estate plan. Outdated estate plans can lead to unintended consequences and family strife.

How to Avoid: In concert with a qualified professional, regularly review and update your will, trusts, power of attorney, and healthcare directives. Consider the impact of taxes and inheritance laws on your estate plan. Communicate your wishes clearly to your family to avoid confusion and conflict.

Succumbing to Lifestyle Inflation

As your career advances and your income increases, it's tempting to upgrade your lifestyle accordingly. However, this "lifestyle inflation" can quickly eat into your ability to save for the future. Without a conscious effort to manage your spending, you may find yourself living paycheck to paycheck despite your higher income.

How to Avoid: Adopt the mindset of living below your means and prioritize saving. When you receive a raise or bonus, consider directing a significant portion toward your savings goals before increasing your discretionary spending. Regularly review your budget and spending habits to identify areas of lifestyle creep and make adjustments as needed.

Not Having Adequate Insurance Coverage

Your 40s often bring a unique set of financial responsibilities and assets that require protection. Failing to secure adequate insurance coverage can leave you vulnerable to severe financial hardship in the event of unforeseen circumstances like a serious health issue, a disabling accident, or significant property damage. It's essential to be prepared.

How to Avoid: Set aside time each year to thoroughly review your insurance policies, which should include life, health, disability, homeowners, and auto insurance. Determine if your current coverage levels are adequate to safeguard your assets and maintain your family's standard of living. If you need guidance, don't hesitate to work with an experienced insurance professional who can assess your unique situation and recommend appropriate coverage options.

Not Planning for Aging Parents

As you find yourself in your 40s, you may face a new set of responsibilities: caring for your aging parents. This life stage often coincides with your parents' retirement years, and it's crucial to be proactive in planning for their potential care needs. Failing to do so can lead to significant financial and emotional strain, as you attempt to balance your own family's needs with those of your parents. 

How to Avoid: Have open conversations with your parents about their financial situation, health, and wishes for care. Then, plan for potential caregiving responsibilities and how they may impact your financial plans. If possible, it's also important to involve your siblings or other family members in these discussions and planning efforts. Sharing the responsibility of caring for aging parents can help alleviate the burden on any one individual and ensure that everyone is working together towards a common goal.

The Takeaway

The 40s are a crucial decade for solidifying your retirement security. Remember, proactive planning and adjustment to your financial strategy during this time can have a lasting impact on your comfort and security in the years to come. As you work towards achieving a balance between meeting your current needs and securing your financial future, don't hesitate to seek professional financial advice to navigate the complexities of this life stage. 

As you enter your 50s and 60s, retirement is no longer a distant concept but a fast-approaching reality. This crucial period is your last opportunity to solidify your retirement plans and make the necessary adjustments to ensure a comfortable and financially secure future. However, it's still possible to make critical financial missteps during this time that can jeopardize your retirement security. 

Failing to Maximize Retirement Savings

One of the most significant mistakes people make in their 50s and 60s is not taking full advantage of catch-up contributions to their retirement accounts. Once you turn 50, you can contribute additional amounts above the standard limits to your 401(k) and IRA.

How to Avoid: Review your retirement accounts annually and adjust your budget to allocate more towards these savings. If your employer offers a match, ensure you contribute enough to receive the full match. Consider automating your contributions to ensure you're consistently saving.

Neglecting to Assess Retirement Readiness

Many people in their 50s and 60s fail to evaluate whether their current retirement savings align with their expected lifestyle in retirement. This oversight can lead to a significant gap between savings and retirement needs.

How to Avoid: Use retirement calculators or work with a financial advisor to estimate if your savings trajectory will meet your needs. If there's a shortfall, consider adjusting your retirement age, increasing your savings rate, or reassessing your expected retirement lifestyle. It's better to make these adjustments now than to face financial strain in retirement.

Overlooking Healthcare Planning

Healthcare costs are one of the most significant expenses in retirement, yet many people fail to plan adequately for them. This variable is especially critical if you plan to retire before you're eligible for Medicare at age 65.

How to Avoid: Research health insurance options, such as COBRA, marketplace plans, or spousal policies, to bridge the gap until Medicare eligibility. If you're eligible, consider contributing to a Health Savings Account (HSA), which offers tax advantages and can be used for healthcare expenses in retirement. Additionally, factor potential long-term care costs into your retirement planning.

Not Prioritizing Debt Reduction

Carrying significant debt into retirement can strain your finances and limit your flexibility. However, many people in their 50s and 60s fail to prioritize debt reduction.

How to Avoid: First, focus on paying down high-interest debts, such as credit card balances. If you have a mortgage, consider making extra payments to reduce the principal balance faster. Explore options like refinancing to a lower interest rate if it makes financial sense for your situation. Adjust your budget to allocate more funds towards debt repayment.

Neglecting to Review Investment Strategy

Your investment strategy should align with your risk tolerance and time horizon as you approach retirement. However, many people fail to review their investment portfolios regularly.

How to Avoid: Schedule regular investment portfolio reviews with a financial advisor. Ensure your portfolio is appropriately diversified, and consider gradually shifting towards more conservative investments as you near retirement. However, remember that retirement can last decades, so don't become overly conservative too quickly.

Mishandling Social Security Decisions

Deciding when to start receiving Social Security benefits is a complex decision that can have significant long-term implications. Many people start benefits as soon as they're eligible, at 62, without considering the advantages of delaying.

How to Avoid: Use the Social Security Administration's calculators to estimate your benefits at different starting ages. Consider factors such as your health, financial needs, and employment status when deciding when to claim benefits. If you can afford to delay benefits until your full retirement age or later, you can significantly increase your monthly benefit.

Failing to Update Estate Plans

Many people in their 50s and 60s have outdated or incomplete estate plans. This situation can lead to confusion, family disputes, and unintended consequences after your passing.

How to Avoid: Review your estate plan regularly and after any major life changes. Ensure your will, trusts, healthcare directives, and power of attorney documents are up to date and reflect your current wishes. Work with an estate planning attorney to ensure your documents are legally sound and comprehensive.

The Takeaway

As you navigate your 50s and 60s, remember that it's always possible to course-correct and make positive changes to your financial strategies. By avoiding these common mistakes and implementing proactive fixes, you can confidently approach retirement, knowing you've laid the groundwork for a secure and fulfilling future. Regular check-ins with a financial advisor can help you stay on track and adjust your plans as needed. With careful planning and a commitment to your financial well-being, you can look forward to a retirement that allows you to enjoy the fruits of your labor.

You've saved for years – and more likely, decades – and now retirement is here. While you've worked hard to build a nest egg and retire without worrying about money, a few common mistakes could derail your golden years. To help you navigate this new financial landscape, we've identified the most common retiree money errors and provided strategies to avoid them, ensuring your retirement is as comfortable and stress-free as possible.

Overlooking Tax Implications

One of the most common mistakes retirees make is ignoring tax penalties when withdrawing money from their retirement accounts. Failing to consider the tax implications of your withdrawals can lead to a higher tax burden and less money in your pocket.

How to Avoid: Rather than targeting the biggest or most convenient account, review all of your options to make sure you are drawing money in a tax-efficient way. Consider factors such as required minimum distributions (RMDs), the order in which you should withdraw from taxable and tax-advantaged accounts, and the potential impact of your withdrawals on your tax bracket. Consult with a financial advisor or tax professional to develop a withdrawal strategy that minimizes your tax liability.

Neglecting to Review Your Budget Regularly

It's tempting to stick to your usual spending habits in retirement, especially if you have a set income. However, not revisiting your budget can lead to overspending and financial strain, as prices and lifestyle needs change over time.

How to Avoid: Review your budget at least once a year. Track your expenses and identify areas where you may be overspending or where you can cut back. Consider how your lifestyle and priorities may have changed since you first created your budget and adjust accordingly. Don't forget to factor in potential increases in healthcare costs and other expenses that may arise as you age.

Financially Supporting Adult Children

While it's natural to want to help your children, constantly bailing out adult children can significantly strain your retirement savings. Remember, you've worked hard to build your nest egg, and you must prioritize your financial security.

How to Avoid: Set clear boundaries with your adult children about your financial support. If you choose to help them, consider setting limits and discussing repayment plans. Encourage your children to become financially independent and develop their savings and budgeting habits. If necessary, guide them towards resources that can help them manage their finances more effectively.

Underestimating Retirement Costs

Many retirees underestimate their retirement expenses, particularly healthcare costs. According to a study by the Employee Benefit Research Institute, the average couple aged 65 may need to save up to $300,000 to cover medical expenses in retirement.

How to Avoid: When planning for retirement, be sure to factor in a realistic estimate of your healthcare costs, including premiums, deductibles, and potential long-term care expenses. Consider purchasing long-term care insurance to help cover these costs and to protect your savings. Additionally, research healthcare options, such as Medicare and supplemental insurance plans, to ensure you have adequate coverage.

Overspending Early in Retirement

With more free time and fewer commitments, it's easy to fall into the trap of overspending in early retirement. However, spending too much too quickly can jeopardize your long-term financial security and lead to a less comfortable retirement.

How to Avoid: Stick to a well-defined budget and avoid splurging on unnecessary expenses. Consider gradually easing into retirement by working part-time or consulting, which can provide additional income and help you adjust to your new lifestyle. If you are overspending, take a step back and reevaluate your priorities and spending habits.

Failing to Adjust Your Investment Strategy

As you enter retirement, your investment priorities shift from growth to income and preservation. Failing to adjust your investment strategy accordingly can expose you to unnecessary risk and potential losses.

How to Avoid: Work with a financial advisor to reassess your investment portfolio and ensure it aligns with your retirement goals and risk tolerance. Consider shifting some of your assets into more conservative investments, such as bonds and dividend-paying stocks, to generate a steady income stream. However, don't become overly conservative; you'll likely need some growth investments to keep pace with inflation over your retirement years.

Not Having a Comprehensive Retirement Plan

Retirement is a significant life transition, and failing to have a comprehensive plan can lead to financial and emotional stress. A retirement plan should encompass not just your finances but also your lifestyle goals, health considerations, and estate planning.

How to Avoid: Start by defining your retirement goals and priorities. Consider factors such as where you want to live, how you want to spend your time, and what legacy you want to leave behind. Work with a financial advisor to develop a comprehensive plan that addresses your income needs, healthcare costs, tax strategies, and estate planning. Regularly review and update your plan as your circumstances and goals change.

The Takeaway

Retirement should be a time of relaxation, fulfillment, and joy – not financial stress. By being aware of these common financial pitfalls and taking proactive steps to avoid them, you can ensure that your golden years are as comfortable and worry-free as possible. Remember, it's never too late to make positive changes to your financial strategies, even in retirement. With careful planning, a commitment to your financial well-being, and the guidance of trusted professionals, you can look forward to a retirement that allows you to truly enjoy the fruits of your labor.