We all know that money mistakes can have a big impact on life later on. Not everyone is good with money all the time, so to help you stay on top of your finances, here is a list of some of the top money mistakes to avoid at any age.
In your 20s
1. Racking up debt without a plan to pay it off
When you are younger, the lure of easy credit can lead to racking up debt on high interest with little to show for it. You may be paying off the overseas holiday, fancy car, shopping spree or 4K TV for years after the memories and the novelty of having the latest has faded.
Then, when it comes time to saving for a deposit for one of the biggest investments of your life - like buying a home or investing – your surplus income may be consumed by paying off smaller commitments.
Saving may feel impossible, delaying entry into the property market. If you can’t save up for things without using credit, always try to have a plan to pay it off as quickly as possible and limit yourself to one credit product at a time.
2. Not taking payments seriously
Not paying bills on time or missing repayments can seem pretty trivial with so many other priorities vying for your time and money. But if a bill is unpaid for a certain time period after the due date, it could be listed on your credit file, which may see you being declined for a loan years later.
Set reminders or direct debits, or better still pay your bills when they arrive to ensure they are not forgotten. Your credit rating is something of value that should be guarded carefully. If you’re interested in learning about what’s in your credit file and what having bad credit actually means, read our blog here.
3. Not having an emergency fund
It’s easy to fall into the trap of living pay-to-pay, week-to-week – so try to learn good savings habits early. Research from superannuation and insurance provider, MLC, found that 46 per cent of young Australians live pay cheque to pay cheque.
Not only does this mean that there may be no money for emergencies, if one does arise you risk alienating friends or family when you ask for help, or have to resort to shorter term loans just to get by. Plan for the unexpected - have an emergency fund put aside that you don’t touch, and hope that it is never needed.
4. Saving the minimum required to get into the property market
As much as saving the minimum deposit for a home loan seems like the fastest way to get on the property ladder, it can come with a cost.
With a minimal deposit you may not qualify for the most competitive home loans, and lenders mortgage insurance (LMI) may be levied at the maximum rate. Even with interest rates at record lows, this extra cost could run into thousands and take years to pay off.
Do your research thoroughly and understand the pros and cons. If the additional cost can be overshadowed by strong capital gains you may decide to proceed anyway. Whatever the case, seek advice to fully understand your options.
In your 30s
1. Not treating your first home purchase like an investment
Once you’ve recovered from the mistakes of your 20s and finally have enough money to buy a house, you might have your heart set on a flashy unit in the city or a comfortable home in the suburbs.
For many, the choice is often based on emotion rather than on its investment potential. If you think of it as an asset that will grow over time, your research should be centred on the elements that make it a good investment. Then the emotional aspects, like what you love about the place should come second.
Is it close to shops, schools and amenities that will see demand increase over time? Is there anything about the property that can be done to improve its value and return more than it costs to do?
For most of us our home is the biggest investment outside of superannuation, and with favourable tax treatment, something that can help set you up for retirement.
2. Not shopping around for your first home loan
When it comes to applying for a home loan, many first-time buyers turn to the bank they’ve been with since day zero and think that they will be given favourable treatment. But there are dozens of lenders out there with thousands of loans to choose from. Choose carefully because if you have a minimal deposit and pay LMI, you could be stuck for years with an uncompetitive home loan without the interest savings features or flexibility you need.
There is a plethora of information available online but if it doesn’t make sense or if you don’t know where to start it is wise to seek the advice of a broker. They can help you uncover what is important to you and guide you through your options. You can find a Liberty broker here.
3. Not making extra repayments
Once that mortgage is locked in, too many new mortgage holders heave a huge sigh of relief and then treat it as set and forget. Making minimum repayments can mean you may be paying your loan off for the whole term, which can be up to 30 years. But it doesn’t have to be that way.
Making extra repayments can cut down your loan term and save thousands in interest. For example, for a $300,000, 30 year mortgage at 3.99%, making minimum repayments you’ll have to pay back around $515,000 by the end of the term. However, by making extra repayments of just $50 a week, you could save around $53,000 in interest and shave over six years off your mortgage.
If you want to look at how making extra repayments could save you cash, check out our calculators. The secret is to start making extra repayments early and keep it up.
In your 40s
1. Not refinancing to get a better deal
Liberty data shows that nearly half (46 per cent) of Australian mortgage holders have never refinanced. Of those, 20 per cent said it was because they didn’t know where to start and 12 per cent said they were too busy. You could fall into this category after you have had your home loan for a few years.
Your financial situation changes over time, so your mortgage should too.
Keep up to date on the types of home loans, interest rates and features that are available. Then regularly review your mortgage to ensure it is competitive. If you don’t know where to start consult a broker. They can help you work out if you have a good deal and help navigate through the process.
2. Overstretching on your second home
With a growing family and built up equity providing a decent bit of capital – many people think this is the time to buy that dream four bedroom house in the suburbs. However, taking on extra debt in your 40s, especially when it’s on a 30 year loan term, means you may carry the debt into retirement.
Changeover costs can add up with thousands going on stamp duty and other miscellaneous costs. Crunch the numbers on whether renovating your current home is an option and if not, set a budget on what you can afford. Always have the end game in mind. This way you can enjoy the extra space without the stress of overcommitting.
3. Leveraging too much
Many people feel pressured to draw big chunks of equity to invest - whether it’s buying investment properties or shares. In fact, as you head towards retirement it may be better to be more conservative with your investments.
What if something goes wrong or circumstances change? So that you continue to grow your wealth without risking it all, make sure there’s a back-up plan.
Seek financial advice to ensure your investments are suited to your stage in life and don’t keep you awake at night worrying about the what-if’s.
In your 50s
1. Not using these years to get ahead on the mortgage
Instead of spending their 50s getting ahead on the mortgage, some indulge in the luxuries they have missed out on over the years, ignoring the opportunity to get ahead on mortgage payments.
Frugality when things were tight makes way for expensive cars, travel, household items and jewellery.
It’s important to have an end plan in mind for how you will be debt free by retirement. Without careful planning during this time, this goal may not be achieved.
2. Continuing to be the Bank of Mum and Dad
Once the kids are older, some parents continue to support them well into their 20’s and even 30’s.
While it’s nice to have the kids around and to be able to help them out, whether it’s to buy a house or put them through university, this can be a drain on your own finances.
Know when enough is enough and draw the line when it is reasonable to do so. Giving away large chunks of money for a deposit on a home or covering living expenses once your kids are earning money, may not be a wise choice financially.
3. Not protecting your ability to keep up with your repayments
Throughout your working life you should have the right insurances in place to ensure loan repayments and basic living costs can continue to be made if things don’t go to plan.
At key milestones like when you take out a home, car or personal loan, you may be offered insurance cover that will ensure that payments are made if the unexpected happens.
Take the time to think carefully about what your backup plan would be and review your current insurances. If it makes sense to take out insurance offered with the loan take advantage of it.
Take professional advice on the question of whether insurance cover is advisable.