5 Common Financial Planning Mistakes to Avoid

5 Min Read | Published: July 5, 2023

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Planning your financial life starts with following smart advice. This includes knowing how to dodge some of the most common financial mistakes.

At-A-Glance

Knowing the best strategies for building financial security is important, but it doesn’t guarantee success.
Financial independence requires understanding which financial mistakes to avoid.
The earlier you recognize the costliest financial mistakes, the sooner you can hatch a strategy that leads toward lifelong financial success.

Avoiding big potholes is a sure way to arrive at your destination in great shape. It’s just as true about your financial life. Steering clear of financial pitfalls is an important factor to consider if you’re eager to live a life with minimal financial stress.

For those launching into “adulting,” taking the time now to get up to speed on common financial missteps can be one of your smartest financial planning moves. Here are five of the biggest financial mistakes to put on your planning radar ASAP.

Financial Mistake 1: Not Having a Big Enough Emergency Fund

Having unplanned expenses pop up is more a question of when, not if. Life happens. The deductible or co-pay when you need medical care. A car repair. A layoff. Yet a federal survey reports that 32% of adults in 2021 didn’t have the cash or its equivalent (like a credit card paid off at the next statement) to cover a $400 emergency expense.¹ (And FYI, the same survey reported that, in 2021, 20% of adults had unexpected medical expenses, the median cost of which was between $1,000 and $2,000. That’s a lot more than $400.)

How to avoid this mistake: The best way to increase the likelihood of being able to pay for emergency expenses is to commit to setting aside money in an emergency fund. Open a separate savings account (online high-yield savings accounts often pay the highest interest rates) and set up automatic transfers – say, weekly or monthly – from your checking account.

High Yield Savings Account. Whatever you save for, save more. Terms Apply. American Express National Bank, Member FDIC. Click to open an account.

Financial Mistake 2: Spending Beyond Your Means

Right-sizing your spending so you have money each month to put toward important financial goals (e.g., emergency fund, retirement savings) is the secret sauce to building financial independence. Being a conscientious spender today can also instill the discipline required to avoid lifestyle creep as earnings increase. A 2022 survey reported that half of people making $100,000–$150,000 a year say they’re living paycheck to paycheck, and more than four in 10 people making $150,000–$200,000 a year say they aren’t getting ahead on savings and other financial goals.²

How to avoid this mistake: Consider firing up a budget to help you stop overspending and start saving. There are different approaches to budgeting. Some folks swear by the zero-based budgeting approach, others are fans of the 50/30/20 approach, for example.

Financial Mistake 3: Borrowing More than You Need for Big Ticket Items

When you’re shopping for a mortgage or a car loan, don’t listen to the number that the lender is willing to let you borrow. Instead, the goal should be to borrow only what you need. Lenders don’t know whether your retirement savings is on track, whether you plan to have kids, or whether you think you might need to step in and help your aging parents with their living costs. The smaller your borrowing costs, the more cash you have to put toward other financial goals.

How to avoid this mistake: The payment on a used car will be less than one for a new car. Same goes for the less expensive house that still ticks plenty of must-have boxes. Push yourself to see how little, not how much, you need to borrow to get what you need.

Financial Mistake 4: Paying High Interest Credit Card Debt for a Long Time

The most cost-efficient way to use a credit card is to be able to pay off the balance in full each month. That said, even if you limit your credit card spending to essentials, there may be times when you can’t pay the bill in full. If that happens, do your best to get it paid off ASAP, or look into the possibility of using a credit card that won’t charge high interest rates.

How to avoid this mistake: Work on building that emergency fund; that savings stash could be used to pay off a high credit card bill. Or look into whether you can qualify for a 0% intro APR credit card where you won’t be charged any interest for the first 12 to 15 months or so, depending on the card. Already have an unpaid balance on a high-rate credit card? See if you can qualify for a balance transfer to a new card with a 0% intro APR – better yet, look for a card that also won’t charge a balance transfer fee.

Financial Mistake 5: Shortchanging Retirement Savings

A 2022 survey conducted by the Employee Benefits Research Institute asked American retirees what planning advice they would give their younger selves. Seventy percent mentioned they wished they had started saving or investing more or earlier.³ Even if retirement is decades away, right now is the perfect time to start saving for the future. The dollars you save when you are young have many more years to benefit from compound growth. For example, investing $500 a month starting at age 25 will net you more than $720,000 at age 65, assuming a 5% annualized rate of return; $240,000 of that is your contributions, the rest is compound growth. If you delay that investment until age 40, you’ll land at 65 with less than $300,000 saved up (assuming the same $500 per month investment and 5% return). If you don’t have access to a workplace retirement plan, consider opening an Individual Retirement Arrangement (IRA) to start investing for your future.

If you have a workplace retirement plan, such as a 401(k), you also want to avoid two costly financial mistakes: not contributing enough to earn the maximum matching contribution from your employer, and cashing in your account after changing jobs. While it may seem like no big deal to cash in a $5,000 or $10,000 account, consider the opportunity cost. A $5,000 retirement account today left to grow for another 40 years will be worth around $35,000, assuming a 5% annualized rate of return.

How to avoid this mistake: If you don’t have access to a 401(k), open an IRA. If you do have a 401(k) and were auto-enrolled in a workplace plan, check that your contribution rate is at least enough to earn the maximum employer match. And vow not to touch your retirement accounts when you move on to another job. If a former employer won’t allow you to leave your money in the plan, you can transfer those funds to an IRA. This is called an IRA rollover, a free service that brokerages can help you navigate.

The Takeaway

There are plenty of strategies essential to becoming financially independent. Many are focused on the best moves to make. But just as important is being aware of costly-yet-common financial mistakes and how to avoid them.

¹ “Economic Well-Being of U.S. Households in 2021,” Federal Reserve

² “The Number of Consumers Living Paycheck to Paycheck Has Increased Year-Over-Year Across All Income Levels,” PR Newswire

³ “Retiree Reflections,” Employee Benefit Research Institute

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Carla Fried is a freelance journalist who has spent her entire career specializing in personal finance. Her work has appeared in The New York Times, Money, CNBC.com, and Consumer Reports, among many other media outlets.

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.

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