As we work our way toward 2018, it’s natural to have money on the brain. After all, for many of us, a new year means a fresh financial start of sorts. But just as it’s crucial to map out your financial goals, it’s also critical to know what not to do next year. Here are five money mistakes that could derail your finances in 2018 — so stay away from them at all costs.
1. Not completing your emergency fund
If you’ve been neglecting your short-term savings, you’re in good company. A good 57% of U.S. adults have less than $1,000 in the bank, while a frightening 39% have no savings at all. But that’s no excuse for not having an emergency fund, and the longer you go without that safety net, the more you put your finances at risk.
At the very least, you should aim to have an emergency fund with three months’ worth of living expenses. Amassing enough to cover six months of expenses would be even more ideal and would give you a dose of added protection. Fail to put some money in the bank, and you’ll have no choice but to resort to credit card debt should you lose your job, fall ill, or encounter a whopper of a bill that your regular paycheck can’t cover. And that could set the stage for a pretty bad year, financially speaking.
2. Not contributing to a tax-advantaged retirement plan
We all know that it’s important to save for retirement, and we all know that it’s best to take steps to lower our taxes. But if you don’t contribute to a retirement plan next year, you’ll fail on both fronts. In 2018, you can put up to $18,500 into your 401(k) if you’re under 50. If you’re 50 or older, you get a $6,000 catch-up that raises this limit to $24,500.
Don’t have an employer-sponsored plan? No problem. You can still open an IRA and save for retirement that way. The annual contribution limits for next year are $5,500 for workers under 50, and $6,500 for those 50 and over.
How much can you shave off your tax bill by contributing to either type of account? Well, it depends on your effective tax rate, but if that rate is 30%, and you set aside $5,000 for the year, you’ll save yourself $1,500, just like that. Plus, the money you put into your account will get to grow on a tax-deferred basis, which means you won’t pay taxes on your investment gains until the time comes to take withdrawals in retirement. Talk about a win-win.
3. Shying away from stocks
If you’re socking away money for retirement, you’re already off to a pretty good start. But if you’re not investing that money wisely, you’re doing it — and yourself — a disservice. A Wells Fargo study released last year found that 60% of Americans are investing too conservatively for retirement and are risking not having enough income to fund their golden years.
If you’ve been avoiding stocks in your portfolio, it’s time to change your strategy. Though it’s true that bonds are a more stable investment than stocks, they’ll also give you a much lower return over time.
Check out the following table, which highlights the difference between a stock-focused retirement portfolio versus two safer approaches:
|Investment Style||Average Annual Return||Total Accumulated Over 30 Years*|
|Moderately aggressive: stocks and bonds||6%||$474,000|
|Moderately conservative: mostly bonds||4%||$336,000|
TABLE BY AUTHOR. *ASSUMES A $500 MONTHLY INVESTMENT.