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5 common money mistakes to avoid

Key takeaways

  • Don't spend every cent you earn, blow off budgeting, and go crazy with credit.
  • Don't splurge on housing.
  • Don't limit yourself to conservative investments when saving for longer-term goals.

Learning to balance all of your financial obligations with your short- and long-term goals is an important skill. Making these money mistakes may make it harder than it needs to be. Avoid some of these missteps to help set yourself up for financial success in the future.

Mistake #1: Spending every penny

Here's the secret to achieving most financial goals: saving money. But you can't save if you spend everything you earn.

Use your dreams as motivation for some of the scrimping that lies ahead. For instance, if saving for a home is high on your list, that goal should get priority when it comes to your disposable income.

You probably have more opportunities to cut back than you realize. For example, instead of splurging on lunch at work because you have a few extra bucks, bring a sandwich from home and save the difference.

In order to make this work, you have to know how much you earn and how much you spend. Don't get nervous: Meticulous budgeting may not be necessary. Fidelity developed a 50/15/5 rule that can be used as a starting point. Consider the following guidelines for saving and budgeting:

  • Think about allocating 50% of take-home pay to necessities (housing, medical care, debt payments, transportation, and food).
  • Strive to contribute 15% of your pretax income to retirement savings—that includes your contributions and any contribution you may get from your employer.
  • Consider allocating 5% of take-home pay to your emergency savings to cover unexpected and one-off expenses like replacing your dishwasher.
  • Anything that's left over can be saved for other goals.

Even though this guideline helps, it's always a good idea to develop a detailed understanding of where your money is going.

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Mistake #2: Spending too much on housing

It's easy to spend too much on housing—especially if you live in a big city. According to one longstanding rule, you shouldn’t spend more than 30% of your pretax income on housing. That’s not a bad start, but the 30% figure may or may not work for you.

The amount you decide to spend on housing depends on your personal financial situation and the things you want to do with your money. For instance, many young people have high debt burdens from student loans that eat up much of their take-home pay with an average balance of $38,792 in 2020.1

Over 50% of young people between the ages of 18 and 24 lived with their parents in 2021, according to the US Census Bureau. That number does include college students who lived in dormitories.2

Choosing to live with parents or roommates can be a great strategy that can help your finances in the long run. Once you're ready to live on your own, be sure that your housing costs don't jeopardize your long-term goals.

Read Viewpoints on How much house can I afford? and Should you buy a home or keep renting?

Mistake #3: Carrying a balance or running up credit cards

It is all too easy to build up a big pile of credit card debt. A dinner here, a shopping trip there, and before you know it, the minimum payment on credit card balances takes a significant chunk of your paycheck. Then the interest charges add up, further sapping your ability to save toward your goals.

Bypass that sad scenario by never charging more than can be paid off at the end of the month. "The best way to use credit cards is to make timely payments, and don't carry a balance from month to month," says Ann Dowd, CFP®, a vice president with Fidelity.

"If you do have a balance, try to negotiate a lower interest rate," says Dowd. Card issuers are often willing to lower your interest rate if you have a history of on-time payments, and some issuers even offer to waive late payment fees once or twice a year. But they won't do it if you don't ask.

If you find yourself relying on credit cards for essentials or to cover unexpected expenses on a regular basis, it's time to review your spending and beef up your emergency savings. If you don't have an emergency savings, that just became one of your highest financial priorities. Seriously, it's really important.

Read Viewpoints on How to save for an emergency

Mistake #4: Not saving for retirement

Putting off saving for your future is a common problem. It is so very far away, and there is so much to spend money on now. We tend to place a higher value on short-term than long-term benefits, even when we know the long term is more important.

Another obstacle is lack of money. Many young adults feel like they can’t save enough to make a difference. But saving even a little bit matters, especially early in your career. That’s because time is on your side. You have plenty of years for the power of compounding to work for you.

Here's what that means: Money you invest can earn more money, and over time those earnings can generate earnings of their own. The result is that the earlier you start saving, the less you have to save.

Starting early pays off

Think about saving at least 15% of your income each year for retirement in a tax-advantaged account such as an IRA or 401(k)—including any match or contribution you get from your employer. If you can't get there right away, that's OK. You have the option to increase your amount annually if you can afford to do that until you reach 15%. Most people can find some extra money to save if they just pay attention to their spending.

If you're lucky enough to have a 401(k) and get a matching contribution from your employer, contribute enough to at least capture the entire match—otherwise you're basically foregoing a part of your compensation. You wouldn't turn down part of your paycheck, so don't leave matching retirement account contributions on the table.

Mistake #5: Investing too conservatively for long-term goals

Many young investors are overly cautious—maybe because they first became aware of stocks when the market tanked in 2008, or because they don’t have a lot of money and are afraid of losing it.

If you have a long-term goal, like retirement, an overly conservative approach to investing could mean skimping on the level of stocks in your investment mix, which tend to be more volatile than bonds. But stocks also tend to outperform bonds over the long run—by a lot.

Without an appropriate level of exposure to stocks, you will likely need to save far more money to reach your long-term goals, leaving less room in your budget for anything else you want to accomplish.

While stocks have historically offered the opportunity to get the highest return of the 3 main investment types—stocks, bonds, and short-term investments—that doesn't necessarily mean you should invest only in stocks.

Holding a diversified mix of stocks, bonds, and short-term investments could reduce the level of risk in your portfolio and potentially boost returns for that level of risk. An appropriate investment mix is one that balances the considerations of risk tolerance, investment horizon, and financial situation.

Just remember: If you’re saving for retirement, you probably won’t touch your money for 40 or 50 years, so what happens in the market this month or this year is much less important than what’s likely to happen over the coming decades.

Missing out on best days can be costly

Hypothetical growth of $10,000 invested in the S&P 500 Index

January 1, 1980–June 30, 2022

Not missing any days would have resulted in $1.06 million. Missing just the 5 best days in the market would drop the total 38% to $656,000. Missing the 50 best days would result in a total of just $76,000. Results have been rounded the nearest thousandth.
Past performance is no guarantee of future returns. Source: FMRCo, Asset Allocation Research Team, as of June 30, 2022. See footnote 3 for details.

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This information is intended to be educational and is not tailored to the investment needs of any specific investor. Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation. Investing involves risk, including the risk of loss. Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. 1. Board of Governors of the Federal Reserve System. "Student Loans and Other Education Debt." 2. Historical Living Arrangements of Adults 3. The hypothetical example assumes an investment that tracks the returns of the S&P 500® Index and includes dividend reinvestment but does not reflect the impact of taxes, which would lower these figures. There is volatility in the market, and a sale at any point in time could result in a gain or loss. Your own investing experience will differ, including the possibility of loss. You cannot invest directly in an index.

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