I've yet to come across someone who's completely avoided making mistakes with their money. But while you can't eliminate them entirely, it's worth taking the time to consider some common missteps we all tend to make, and how to avoid them.
Here are five money mistakes Americans frequently make and some suggestions for how to get back on the right track.
1. Not building emergency savings
About half of Americans have less than $500 in their savings account. Not having enough emergency savings can add to financial stress when unexpected expenses creep up.
A depleted emergency fund typically leads to credit card charges when the inevitable emergency occurs. That's not great for most people's budgets, considering the average American household has $7,951 in credit card debt.
How to avoid it: Open a high-yield savings account -- many pay 5% or higher right now -- and automate your savings. Even arranging to have $25 or $50 per month sent into the account can go a long way toward covering the next emergency.
2. Putting off retirement planning
For many years, I completely avoided thinking about retirement savings. Putting money aside for retirement was what rich people do, or so I thought. But then I started seeing how quickly I could build retirement savings with an employee-sponsored 401(k), and my perspective changed.
I've been in tight financial situations, so I understand that the idea of saving for retirement when bills are due now isn't always an option. But if you have access to a 401(k) plan through your job, putting just a little money into it can add up quickly.
For example, if you invest $100 per month in a 401(k) or individual retirement account (IRA), and earn the stock market's annual historical rate of return of 10%, it will give you $68,730 in 20 years.
How to avoid it: Sign up for your employer's 401(k) plan, especially if they match your contributions. If a 401(k) isn't available, consider opening a brokerage account and buying a low-cost index fund that tracks the S&P 500.
3. Not having a will
I'm guilty of not having a will, so this one's a reminder for me, too. The main reason to have a will is so that your property and assets go to whomever you want when you die. Without one, the laws in your state could dictate what happens.
It's also a good idea to consider how your estate -- no matter how big or small -- will affect your loved ones if you don't have a will. By being specific about your property and assets, you may be able to help family and friends avoid unnecessary conflict.
How to avoid it: Completing a will online is relatively inexpensive these days. LegalZoom charges just $199 for a basic will.
4. Not having the correct tax withholdings
In my first salaried job, I worried about getting my tax withholdings right. Knowing how much to withhold and what might affect your tax liabilities can be challenging, and I didn't know where to start.
In general, it's wise to revisit your tax withholdings whenever you experience a major life event. For example, if you've recently divorced, lost a job, or had a child, you may want to reevaluate how much taxes you're having withheld.
How to avoid it: The IRS has a convenient tax withholding estimator. You can enter your income, deductions, and potential tax credits and receive an estimate of how much tax should be withheld from your paycheck.
5. Ignoring your credit score
Your credit score indicates to lenders how likely you are to repay loans on time. It's not a perfect system, but it's one of the best ways to gauge your creditworthiness.
You don't need to check your credit score constantly, but you should have a general idea of your credit score at any given time. Staying informed is worth the effort -- the higher your score, the more likely you are to get better interest rates when you borrow, which saves you money. Plus you could save on insurance costs and even have an easier time renting an apartment.
How to avoid it: Many banks and credit card companies will show you your credit score for free. If it's lower than you want, there are proven ways to increase your score. Start with paying your bills on time, which accounts for 35% of your score. Then dive into your credit report to look for errors -- if you find mistakes and have the credit bureau remove them, you could see a bump in your credit score.
Remember, we all make financial mistakes. The important thing to remember is to figure out which ones you might be making right now and how you can correct them. Whether it's getting started with creating a will or opening up a savings account, we can all make progress toward our financial goals with a few simple steps.
