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Most people have money problems, but even a small financial misstep can affect your short- and long-term goals.
In a recent podcast episode, financial expert Suze Orman talked about the most common mistakes related to money management, particularly when it comes to retirement accounts. According to Orman, “the biggest mistakes you’ll make with your money are the mistakes you don’t even know you’re making.” Specifically, knowing the difference between a transfer and a rollover.
For example, when you withdraw money from an IRA or Roth IRA and put it back in within 60 days, that’s called a rollover, Orman said. You can only do this once every 365 days, he said. If you don’t wait the full 365 days, IRS rules say there are tax consequences.
A rollover occurs when you have money in an IRA account and you want to change the brokerage firm or credit union where it is held. The transfer goes directly to the new brokerage firm or credit union and does not go through your hands. You can do this as many times as you like.
This is not the only common financial mistake people make. Listed below are other financial mistakes that experts often make.
Not prioritizing maximizing your company’s 401(k) plan
“Ironically, one of the biggest financial mistakes people make is not participating fully in their company’s 401k plan, specifically, at the level where they receive the full employer contribution,” said Robert R. Johnson, professor of finance at the Heider College of Business at Creighton University.
Instead, Johnson said many people prioritize putting their money toward paying down student loan debt. “If you don’t participate at the level necessary to earn the full employer match, you’re basically turning down free money,” she added. Plus, your 401(k) contributions can help reduce your taxable income and your current tax bill.
Not investing in the right type of retirement account
“A common mistake I’ve seen is not maximizing the benefits of retirement accounts, as many people are unaware of the different types of retirement accounts available and end up investing in one that doesn’t align with their financial goals,” said Michael Collins, CFA, founder and CEO of WinCap Financial. Collins explained that this can result in lower returns, missed opportunities for growth, and potential tax consequences.
Take very little risk with retirement plans
Another common financial mistake is taking too little risk with retirement plans. “By their very nature, retirement plans have a long time horizon,” Johnson said. “The surest way to build real, long-term wealth for retirement is to invest in the stock market.”
Citing data compiled by Duff & Phelps, Johnson explained that since 1926, the average annual return for a large-cap stock index is 10.1%. Based on these historical averages, Johnson said an investor could double his or her money in just over seven years and have 10 times as much in 23 years.
“There’s an old Wall Street saying that goes, ‘You can either sleep well or eat well,’” Johnson said. “You’ll sleep well if you commit your funds to low-risk investments, such as money market funds or Treasury bills, but your investments won’t grow substantially and may even have trouble keeping up with inflation. You’ll eat well if you invest consistently in stocks.”
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