We all do dumb stuff with our money, especially when we’re young. Most of the time, we make mistakes that won’t cripple us in the long run. But there are a handful of bad financial moves that almost always come out negative.
Nobody’s perfect, but if you avoid these mistakes, you’ll probably be in good shape, money-wise.
1. Failing to Invest When You’re Young
If you’ve read Wise Bread long enough, you should know about the power of compounding investment returns. This is the notion that the earlier you invest, the better off you’ll be financially because your investments will have time to grow. A $500 per month investment from age 45 to 60 will grow to about $161,000, assuming a 7% annual return. But if you start at age 30, it would represent $606,000. And if you started at age 20? $1.28 million.
2. Buying a House You Can’t Afford
There are many reasons why the economy and stock market took a dive in 2007 and 2008, but one of the main culprits was the subprime mortgage crisis, which stemmed from a flurry of people who purchased expensive homes with unfavorable loan terms. People bought homes with little or no money down, with mortgage payments that began high and only got higher. This led to a massive number of foreclosures, as homeowners were left unable to make payments.
Banks these days try to avoid lending to anyone who would have to pay more than 28% of their net income each month toward the mortgage. Lenders are also reluctant to provide home loans to those who would have an overall debt-to-income ratio of 43% or more. If you find that you may be exceeding these limits, it’s likely that you are stretching yourself too thin and are putting yourself at risk of foreclosure, and possibly bankruptcy.