Megan Branch, Publicity Intern
David Bach is the best-selling author of the eight books in the Finish Rich series as well as Fight for Your Money and The Automatic Millionaire. In the latest book in the Finish Rich series, The Finish Rich Dictionary, Bach defines 1001 essential financial terms and provides 10 helpful essays with topics ranging from understanding a credit score to planning for retirement. Below we have excerpted five of Bach’s ten most interesting money mistakes people make.
Mistake #1: Having a 30-year mortgage.
A typical 30-year mortgage at 8 percent inflates the real cost of a $250,000 home to more that $666,000. If you paid off your mortgage in 15 years, the total cost of your house would come to just under $493,000. That’s nearly $168,000 less than it would have been with a 30-year mortgage.
Make a small extra payment each month or fork over a larger lump sum at the end of the year. By making an extra 10-percent payment each month and then adding an extra month’s payment at the end of the year, for example, you can pay off your 30-year mortgage in about 18 years.
Mistake #2: Waiting to buy a house.
When you own your own home, you are building equity for yourself. When you rent, you are building someone else’s equity.
The number-one reason people put off buying a home is because they think they can’t afford it. But you don’t need tens of thousands of dollars in the bank for a down payment. All lenders will provide 75 percent of the purchase price of your house or condominium, and many banks will lend as much as 95 percent.
You can probably get a substantial home for the equivalent of your current rental payment. Say you pay $2,000 a month in rent. For that kind of money, you could get a $250,000 mortgage. In most of the country, $250,000 can buy you a lot of house.
Mistake #3: Putting Off Saving for Retirement
Almost 95 percent of Americans age 65 or older have an income of less than $25,000 a year. That means only 5 percent of us are in a position of financial security, much less comfort, when we reach our so-called golden years.
The best way to get started saving for retirement is to arrange to have your monthly contribution either deducted directly from your paycheck or automatically transferred from your checking account each month. If you’re not yet using your retirement account at work, go in to the office and sign up for your plan today. Make it a goal to save 10 percent or more of your gross income. If you can’t imagine saving 10 percent, start with 3 percent and make it a goal to increase that amount by a small percentage every month (you’ll barely feel it). By the end of the year, you’ll be contributing the maximum allowable amount to your retirement account at work.
Mistake #4: Paying too much in taxes.
When you are building an investment portfolio, it is absolutely imperative that you take into consideration your potential tax liability. Financial advisers call this “looking for the real rate of return.” The more you seek to minimize your taxes when investing, the more money you’ll keep. Start by making it a goal to fully invest in your 401(k) plan or retirement plan at work. No plan at work? Make sure you use an IRA account. Once you’ve maxed out your retirement accounts, look to investments that grow tax-free (like tax-free bonds).
Mistake #5: Giving Up.
People often make a financial mistake, get bad advice, and then give up on their dream of financial security. Don’t let this happen to you.
Yes, you should be careful, but don’t become overcautious. By learning to avoid the common pitfalls investors make, you can minimize your risk and put yourself on the road to financial security. The biggest mistake you can make is to not become an investor.