To be human is to make mistakes with our money, right? Who among us hasn’t forgotten to cancel a subscription or failed to take advantage of our benefits package? As a money coach, CERTIFIED FINANCIAL PLANNER™, and Certified Public Accountant (CPA), I have 20+ years of experience seeing every money mishap under the sun (and I’ve made puh-lenty of them myself!). Let’s talk about some of the most common money mishaps and how to avoid them. Want to know more about this? Listen to episode four of my podcast!
3 Common Money Mistakes and How to Overcome Them
1. Only putting enough into your HSA to cover your expected expenses for that year
Many of us start our first Health Savings Accounts after having had a Flexible Spending Account, or an FSA for many years. And with FSA, because the S stands for SPENDING, you had to make a pretty good estimate of what you might be spending that year in medical expenses. If you got it wrong and didn’t spend all the money, you’d lose it.
By now, most people know that HSA money rolls over year to year, but there’s still a common misconception that you should only be putting in what you think you’ll spend. I also see a lot of people spending down HSA money after they switch plans or jobs. But here’s something most people forget: the S in HSA stands for SAVINGS. That’s how you should think of this account, as a savings account for future large medical expenses. Or even better, as a bonus retirement savings account where you can INVEST THE MONEY, then make tax-free withdrawals in the future to pay for current or past medical expenses.
If you can afford it, put the maximum amount you can afford into your HSA. You can do that through payroll deductions or even with a lump sum deposit at tax time as a way to lower your taxes even further and hopefully qualify for a bigger refund. If you have an HSA through work, most likely you can change your contributions, just like you can with your 401k or your 403b. So you can go fix this right now if you’re not maximizing your contributions!
2. Not understanding what it means to “max out your 401k”
When I use the phrase “max out your 401k,” do you know what I mean by that? It’s a phrase that a lot of financial planners throw around, but then when I’m talking to clients, a lot of them think it means contributing the maximum amount to capture any employer match.
While that is an absolute best practice, when I say “max out your 401k” what I actually mean is put the maximum amount the IRS will allow, regardless of your company match. For 2023, that’s $22,500 unless you're 50 or older. If you’re older than 50, the maximum is actually $30,000!
Now if you’re over here making $100,000 per year and putting in 6%, or $6,000, to get the max amount your employer will match, switching to the actual max is probably going to be too much of a shock to the system. But rather than write that off as an impossibility, try adding just 1% at a time until you get up to that max amount. Your 401k plan might even have a tool called an auto-escalator where you can automatically increase what you’re putting in by a percentage point or two on an annual basis. You probably won’t even notice the difference.
Here's why. If I were to tell you that it’s a best practice to put $1,000 more into your 401k this year and increase that by $1,000 each year until you get to $22,500, you’d probably balk – a thousand bucks is a lot of money!
But let’s break that down by paycheck. Again, let’s say you’re making $100k per year, which comes down to about $3,800 before taxes and benefits each payday, if you’re paid every other week. Increasing your 401k contributions by 1% would decrease your check by basically 38 bucks. Think about what you spend $38 without batting an eye – a spin class or two? Two glasses of Oregon pinot at a nice bar after tax and tip?
By reframing the amount, it’s easier to stomach and pretty much a no-brainer to start saving more.
How to prioritize your retirement savings for maximum optimization:
Start with the match amount that your company gives you as your “zero” that you contribute to your 401k. Then, if you have an HSA, increase your deposits there until you get to the max. Once you’ve put the maximum amount allowed into your HSA for the year, then think about funding a Roth IRA. Once you’re at the max there, increase what you’re putting into your 401k, little by little, until you’re at the maximum allowed per year.
And voila – you’re on track for retirement way before you thought possible, or at least the ability to pull back from having to maximize your earnings and savings!
3. Making big financial decisions based on how much room you have in your budget
Now, I’ve made this mistake more than once, so zero judgment! This mistake usually occurs when you a) have a big jump in income b) finally pay something off I did the latter when I moved to a bigger apartment at the same time my car was getting paid off, knowing that the increase in rent would be covered by the fact that I would no longer have a car payment. DUMB!
Why is this a mishap? When I increased my monthly rent by the $300 that had been going towards my car payment, I missed a huge chance to get more financially comfortable earlier in life.
If I could do it again, I would have taken that extra $300 per month and used it to treat all three versions of myself - past, present, and future. I’d treat Past Me by putting $100 more towards my student loan payment. I’d treat Current Me by finding something fun and rewarding like a monthly massage or a house cleaner that was a hundred bucks a month. I’d treat Future Me by putting a hundred bucks more into my savings or 401k.
Here’s the thing: The quicker you can minimize your monthly financial obligations like housing, transportation, subscriptions, and memberships, etc., the less prone you are to a financial disaster due to a loss of income.
Of course, you need to live your life according to your values, but when you’re deciding how much car or house you can afford, make sure you’re using the right metrics rather than what room you have in your current cash flow. As Suze Orman says, just because you have the money, doesn’t mean you can afford it!