This original article was written by Jeff Rose for Yahoo Finance.
If your goal is getting ahead financially, the formula for success is simple: Maximize tax-advantaged retirement accounts early, boost your savings with a Roth or traditional individual retirement account, choose investments you feel comfortable with and avoid debt like the plague. If you do those four things, you’re bound to enjoy less stress and more wealth over time.
But is it always that easy? Absolutely not. As you move through the various stages of life, you’ll encounter myriad pitfalls and temptations that can knock you off track – some of which can seem like a smart idea at the time.
Speeding toward financial independence is easier when you know which financial choices can slow you down. I spoke to a handful of top financial advisers to get their takes on the most common financial choices their clients live to regret. Here’s what they said.
1. ‘Investing’ in a New Car
“At first blush, buying the latest and greatest version of the ultimate driving machine may seem like a value worthy of your hard-earned money,” says California financial advisor Anthony M. Montenegro of Blackmont Advisors.
Unfortunately, new cars depreciate the moment they leave the lot, and continue dropping in value until they’re worth almost nothing. If you finance the average new car priced at more than $30,000 for five years, you’ll pay out the nose for a hunk of metal worth a small percentage of what you paid. (Remember, a good credit score can qualify you for lower interest rates on your auto loan. You can see two of your scores for free on Credit.com)
Pro tip: Buy a used car and let someone else take the upfront depreciation, then drive it until the wheels fall off. Once five years has passed, you won’t regret all the money you never spent.
2. Not Watching Your Everyday Purchases
While big purchases like a new car can eat away at your wealth, the little purchases we make every day can also do damage, says Maryland fee-only financial adviser Martin A. Smith. If you’re spending $10 per day on anything — your favorite coffee or lunch out with friends — your seemingly small purchases can add up in a big way. (If you must feed a coffee habit, the right credit card can help make it more worthwhile.)
Keep in mind that $10 per day is $300 per month, $3,600 in a year and $18,000 after five years. While you may not regret your daily indulgences, you may regret the savings you could have had.
3. Not Refinancing Your Mortgage While Rates Are Low
While refinancing your mortgage is anything but fun, now may be the perfect time to dive in. That’s because interest rates are still teetering near lows, says Colorado financial adviser Matthew Jackson of Solid Wealth Advisors LLC.
Even one percentage point can cost you – or save you – tens of thousands of dollars in interest over the years. Since rates will eventually go up, you “don’t want to miss the opportunity now,” says Jackson.
4. Buying Too Much House
Buying the ideal home may seem like a smart idea, but does your dream home jive with your financial goals?
Unfortunately, buying more house than you need can lead to regret and financial stress, says Vancouver, Washington financial planner Alex Whitehouse.
“Too much income going to housing payments makes it difficult to fully furnish rooms, keep up with rising taxes, and often leads to struggles with maintenance and utility costs,” notes Whitehouse.
Banks may be willing to lend you more than you can reasonably afford. If you want to avoid becoming house-poor, ignore the bank’s numbers and come up with your own.
5. Borrowing Against Your Retirement Account
While you can borrow against your 401K plan with reasonable terms, that doesn’t mean you should. If you do, you may regret it for decades.
“Millennials often ask if it’s okay to access their 401K or IRA early (before age 59 ½) to buy a home, travel or pay off debt,” says Minnesota financial adviser Jamie Pomeroy of FinancialGusto.com.
However, there are numerous reasons to avoid doing so.
Not only do you normally have to pay a penalty to access retirement funds early, but you’ll pay taxes too. Most important, however, is the fact you’re robbing your future self. You will regret the lost savings (and lost compound interest) when you check your retirement account in five years.
6. Not Using a Budget
While many people buy the notion that budgets are restrictive, the reality is different. If used properly, budgets are financial tools you can use to afford what you really want in life.
“I would suggest that you create a budget that you stick to,” says financial planner David G. Niggel of Key Wealth Partners in Lancaster, Pennsylvania. “At the end of the year, you have the chance to evaluate your spending habits and make some serious changes if necessary.”
If you don’t, your finances could suffer from death by a thousand cuts.
7. Not Saving as Much as You Can
While it’s easy to think of your disposable income as “fun money,” this is a decision you could live to regret in five years.
The more money you have saved later in life, the more flexibility you’ll have, notes fee-only San Diego financial adviser Taylor Schulte. And if you don’t get serious about saving now, you could easily regret it in the future.
According to Schulte, you should strive to “play it safe” when it comes to your savings.
“I’ve never heard anyone regret having too much money,” says Schulte. “But, I’d be willing to bet we have all heard far too many people complain about not saving enough or not starting earlier.”
8. Not Buying Life Insurance When You’re Young
If you are married, own a home, or have children, you need life insurance coverage. Unfortunately, this is one purchase that becomes more difficult – and more expensive – as you age.
If you don’t buy life insurance when you’re 25, you can expect to pay a lot more for coverage when you’re 30, 35, 40 and so on. And if you wait long enough, you may not even be able to buy it at all, says New York financial planner Joseph Carbone of Focus Planning Group.
As Carbone notes, if you develop a chronic health condition before you apply for life insurance coverage, you could easily become uninsurable. To avoid regretting inaction in five or 10 years, most people would benefit from applying for an inexpensive, term life insurance policy as soon as they can.