3. Not Prioritizing High-Interest Debt
All debt isn’t equal. So while you should always pay the minimum on your various debts — be it student loans, credit cards or a mortgage — a more productive strategy is “racking and stacking.” Essentially, you rank your debt in order of highest to lowest interest rates, and prioritize paying off the debt with the highest interest rate first by devoting any extra cash toward that debt. Once it’s paid off, you move down the list to pay down the next high-interest debt.
“Focusing on paying one debt off at a time (while making minimum payments on all other debts) can not only save you interest, but it can also give you additional cash-flow flexibility over time,” explains Taylor. “As each debt is paid off, you have one less minimum payment to worry about every month. You may still decide to dedicate just as much each month toward debt reduction overall, but you’ve got more flexibility, which always feels good!”
How Much You Can Save: If you’re sitting on a $10,000 credit card balance with 12% interest, you’re paying $100 in interest a month (and that’s a pretty low interest rate). Since most lenders require that you pay at least your interest every month, you’ll need to pay more than $100 a month in order for your balance to start decreasing.
“With payments of $150 per month, it would take more than nine years to pay off the debt, costing about $6,500 in interest,” says Taylor. “With payments of $400 per month, it would take only two and a half years to pay off the card, and cost $1,600 in interest.”
4. Neglecting to Take Advantage of a 401(k) Match
A 401(k) is an employer-sponsored retirement account, and some companies actually give you money just for using it, which is known as a “match.”
“Now that the days of pensions are long gone for most employees, it’s necessary that people save for their own retirement,” says David Blaylock, CFP with LearnVest Planning Services. “Fortunately, many employers offer a matching contribution to a retirement account — once you contribute from your paycheck each pay period, your employer matches it. This contribution can have a huge impact on the amount you can accumulate for retirement.”
There’s no equivalent offered via an individual account, like an IRA or a Roth IRA, so if you aren’t contributing to a matched 401(k), you’re essentially declining free money. Changing this habit is simple: If your employer offers a match, start contributing to your 401(k) — even if it’s just the bare minimum required to get the match.
How Much You Can Save: While every company’s matching policy is different, let’s assume that your employer matches every dollar that you contribute up to 3% of your annual salary. If you make $60,000 per year, not contributing to your 401(k) costs you $1,800 per year in matching contributions. Over 30 years, at a 7% rate of return, that $1,800 per year comes out to a total of $170,000!