We’ve all made mistakes with our money. While some are knowingly reckless — say, an expensive night at the casino or going into debt to buy a fancy car you can’t quite afford — others are less obvious.
For instance, not getting a credit card because you’re scared of overspending and ending up in debt sounds like a responsible move — until you want to buy a car or a house and have no credit to back you up.
Below, Business Insider breaks down a handful of bad money moves to avoid that may feel smart at the time.
Dipping into your 401(k) early to buy a house or pay off debt.
There may come a time when you consider cashing out part of your 401(k) for a short-term goal that feels more pressing than retirement — like buying your dream house or paying off lingering credit card debt.
Don’t be fooled: A 401(k) may seem like just another vehicle for saving money, but the rules are far different than a traditional savings account. To start, money pulled out before age 59 and a half is subject to an early withdrawal penalty and will be taxed as regular income (you can calculate the specific cost of early withdrawal using a tool like this one from Wells Fargo).
One of the greatest advantages of a 401(k) is its ability to generate tax-free compound interest— the multiplying effect of earning interest on top of the money you’ve already earned interest from — over the long haul. Take your money out early and you’ll lose a bulk of savings.
A better option if you have retirement savings and you’re truly strapped for cash? Take money out of your Roth IRA, which has much more flexibility for tax and penalty-free early withdrawals.
Taking out a ton of student loans to go to school.
The number of Americans taking out student loans to finance college is steadily rising. While a good education can lead to a higher salary, taking on loads of debt to get there isn’t always a smart move.
Many people don’t grasp the full scope of a student loan beyond college, including how interest rates work and how long it realistically takes to repay the loan. The average borrower has a $351 monthly payment, a sizable recurring expense for a new college graduate on an entry-level salary.
In short, student loan payments could inhibit you from reaching other important financial goals. Before you sign on the dotted line, consider the ROI of the degree you want to pursue and what other options are available, like scholarships, grants, or even community college.
Not getting a credit card.
As a 20-year-old, credit cards scared me. They seemed like free money and I thought spending with them would ruin my financial stability, even though I paid my bill in full every month.
In fact, the opposite is true. If I ever wanted to buy a car or a house, I’d need credit.
“A lot of people these days check credit scores as some sort of measure of how responsible a human being you are,” says financial expert Jean Chatzky, host of the “HerMoney” podcast and financial editor at the Today Show, in a video with Business Insider’s Graham Flanagan, who is 34 and doesn’t have a credit card. “It’s possible to have a good credit score without a credit card, but it’s easier if you do have one.”
But having a credit card doesn’t mean you need to use it all the time, Chatzky said: “That’s sort of the secret.” Spend only what you can afford to pay back, and you’ll build solid credit.
Being conservative with your investments in your 20s.
Millennials aren’t investing in the stock market, largely because they’re scared they don’t have enough money, or the knowledge to make the right investments.
“No one can time the market, so know that if there is a decline, it’s going to bounce back. Over time, being in the market pays off more so than staying out of it,” Michael Solari, a certified financial planner with Solari Financial Planning, told Business Insider.
In short: A risky investment when you’re young has time to correct itself. Try a target date retirement fund, sometimes known as “set it and forget it” investments, which adjust their asset allocation and risk exposure based on your age and retirement horizon. Early on, when the need for that money is still a couple decades away, the fund will adopt a more growth-focused strategy. As you ripen toward retirement, it dials back the risk.
You may not get the average annual return of 11% in your target date fund — given you’ll be invested in a blend of stocks, bonds, and alternative assets — but if you get even 6% per year, an original $10,000 investment will be worth more than $32,000 in 20 years without you having to do a single thing. Compare that with $12,200 in your high-yield savings account or $10,020.20 in your traditional savings account.
Paying someone to actively manage your investments.
Though it may seem intimidating, investing is anyone’s game. You don’t have to be a stock-picking genius or a earn a massive paycheck to make great returns over the long term — and you certainly don’t need to pay someone to do it for you.
In fact, according to John C. Bogle, the legendary founder and former CEO of the Vanguard Mutual Fund Group, the best way for the average person to make money in the market is to invest in passive index funds.
The “classic index fund,” which he defines as holding many, many stocks, and operating with minimal expenses and high tax efficiency, works for two main reasons: They’re broadly diversified, which eliminates individual stock risk, and they’re low cost.
“It is a simple concept that guarantees you will win the investment game played by most other investors who — as a group — are guaranteed to lose,” Bogle writes in his book “The Little Book of Common Sense Investing.”
You can start by opening an account online with Bogle’s company, Vanguard, and investing in their index mutual funds, which charge relatively low fees for investing directly (an average of 0.13%).
Buying a house because it seems like a “good investment.”
Justin Sullivan / Getty Images
Homeownership shouldn’t be taken lightly. At the end of the day, buying a home isn’t a means of getting rich. That is, unless you’ve done your due diligence and are buying a property specifically as an investment that will eventually become a source of income.
“When you look at the average price increase of a home across the country over the last 100 years, it’s only about 3%,” Eric Roberge, CFP and founder of Beyond Your Hammock, told Business Insider. “If you take away extra costs plus inflation, you’re not really making any money on average on a single family home.”
It’s smarter to look for an affordable house that meets non-monetary goals: It’s in your dream neighborhood or it’s a good place to start a family.
“A home is a utility, not an investment,” Roberge says.
Keeping all of your money in a traditional savings account.
If you’re part of the 30% of Americans saving money, way to go! Putting that money into a run-of-the-mill savings account may feel like the obvious move, but there’s actually a better option: high-yield savings.
Mary Beth Storjohann, a certified financial planner who founded Workable Wealth, recommends capping your personal savings once you have enough to cover at least six months’ worth of expenses, also known as as an emergency fund. Then move any overflow savings into a high-yield savings account, where you could earn 1% interest on your money, rather than the 0.01% earned in a traditional savings account.
Another great option is to put your savings in a low-cost target date fund. Though the market is impossible to predict, you’re still going to get a better return on the money there than you would in a plain old savings account, with little to no work required.