Try as we may to avoid it, regret is a part of life that is impossible to circumvent entirely. But, by planning ahead and being familiar with some of the more common financial regrets, you can limit the downsides and create a healthier financial future for yourself and your family.
We’ve all made a few money mistakes we wish we could take back (those late-night Amazon splurges often don’t seem as exciting the next morning 😅). However, some financial mishaps are costlier than others, and they can have a lasting impact on your financial health. Here are some of the most common financial regrets people have, along with advice on how you can take action to avoid them.
1. Not saving for retirement early enough
One of the most common financial regrets of middle-aged and older folks is that they didn’t start saving and investing for retirement early enough. And it’s an understandable regret! Because approaching those retirement years with little saved means either working much longer than you expected or making drastic lifestyle cuts.
Time is the biggest advantage when it comes to saving and investing. So unless you have access to a DeLorean with a flux capacitor, you better start saving ASAP because there’s no rewinding this financial tape!
The magic of compound interest
Investing early is crucial because of the magical reality known as compound interest. When you invest your money, it’s like planting a small apple seed in the ground. Left untouched over many years, that seed will grow slowly into a tree. Which will eventually produce hundreds or thousands of apples for you.
Compounding returns work in much the same way nature does. For each dollar you invest and leave untouched, it will start to multiply over time. And if you leave it untouched for long enough, those dollars will grow into a money machine. And that money machine will produce a steady stream of passive income.
In the early years of investing, your returns will seem quite small. But as decades pass, those compounding returns start to do the heavy lifting on your behalf.
For example, if you invested $50,000 and kept it invested in highly diversified index funds for 30 years and never contributed to it again, you’d end up with over $503,000! That would mean that you earned about $453,000 in returns over a 30-year timespan. However, if you only left that money invested for 10 years, you’d only have $107,000.
Time is the key to experiencing the inevitable reality of compounding returns.
Playing catch-up is costly
Even if you start investing later in life, you can still reach your retirement goals. But, since you have less time to enjoy compound returns, you’ll need to contribute a higher percentage of your income to reach those lofty money goals.
For example, lets say you want to build a $2M retirement nest egg by the age of 65. If you start investing when you’re 20 years old, you’ll only need to contribute about $417 per month (assuming an average 8% return). You’ll only have to invest $225,180 when all is said and done. But you’ll retire with over $2M, having earned $1,778,824 in returns over the decades!
However, if you wait to start investing until you’re 35, the monthly contribution needed to hit that $2M goal jumps up to around $1,420 per month! With only 30 years for your money to grow, you’ll end up contributing $511,200 to reach the same retirement goal.
As you can see, the longer you wait to begin your investing journey, the more you need to save. Plus, needing to invest such a large chunk of your monthly budget later in life can strain your finances. It’s hard to change from not investing anything to suddenly funneling big bucks into retirement accounts! However, it is entirely worth the sacrifice to ensure you will be financially secure in retirement.
Not sure how much you should start saving? Here’s exactly how much you need to save up to retire…
How to avoid this financial regret:
The best time to invest was yesterday. But the second best time is RIGHT NOW. Every day and every dollar counts when working towards a more secure financial future. Begin taking advantage of your work-sponsored retirement account if you have one. Or, open up a Roth IRA or Traditional IRA and start making contributions each year. Even if you only have a few spare dollars each month, small amounts contributed now can make waves decades down the line.
Consistency is key. Automating those contributions is a game-changer on that front. This will ensure that you don’t forget to save for retirement each month. Whether you’re investing in an individual retirement account or your work-sponsored plan, put those contributions on auto-pilot!
And lastly, make sure you are actually investing the money you’re sticking into those accounts. Getting the money in the account is crucial. But so is investing that money.
And remember, Investing your money doesn’t need to be complicated. More often than not, a simple investment strategy is often the most effective. Just take a few minutes to read up on these investment basics and you’ll be good to go! TLDR: Low-cost index funds are our favorite choice for most folks!
2. Not saving enough to cover emergencies
Another one of the biggest financial regrets is not having enough savings on hand to cover a financial emergency. Unfortunately, being ill-prepared to handle emergencies can have a devastating impact on your finances.
According to a recent Bankrate report, only 44% of Americans would be able to cover a $1,000 emergency with money they have in savings. The rest reported that they would need to borrow money, put purchases on a credit card, or take out a personal loan. This is not a position you want to be in.
Taking on debt to cover emergencies is destructive. While compound returns work for you when it comes to retirement investing, it works against you when it comes to credit card debt. Credit card interest rates are much higher than average annual market returns and can reach as high as 36%. This is what makes credit card debt feel like a briar patch that’s so difficult to get out of.
Not having enough cash on hand to cover emergencies can wreak havoc on your finances. And it can prevent you from reaching your goals promptly. From causing you to take on credit card debt to stretching your monthly budget to an uncomfortable degree, unexpected expenses can send us scrambling if we don’t plan for them in advance.
How to avoid this financial regret:
Economists recommend saving up $2,467 in a basic emergency fund. They’ve found that this exact amount will be enough to help you cover the most common surprise expenses (like car repairs or unforeseen medical bills). This is a great place to start, especially if you do not already have emergency savings.
Once you reach that basic saving goal, it’s time to start working towards fully funding that emergency fund. This means working towards a savings amount that’s somewhere in the neighborhood of 3-6 months’ worth of expenses. This larger cash pile will protect you against bigger emergencies, like an unexpected job loss.
Quick ways to save money
Saving 3-6 months of living money is a hefty goal! Here are a few ways to save some extra cash quickly!
- Negotiate your bills– We have more power over our monthly expenses than we might think! Call up one of your service providers and ask if there are any promotions you can take advantage of.
- Try a pantry challenge– You probably have hundreds of dollars worth of food hanging out in the freezer and at the back of your pantry. Skip the grocery store this week and commit to using up what you have.
- No Spend Month– consider having a no-spend or low-spend month and only buy essentials to see your savings skyrocket!
- Pare down your utility bills- Save some serious cash each month by working to whittle down your water, gas, and electricity bills.
- Switch to a budget phone provider– Stop sleeping on cheap phone providers! Research low cost MVNO’s like Mint Mobile and Google Fi. They run on the same networks as the big phone companies. Making the switch can add up to hundreds of dollars worth of savings over a year.
Want even more ideas for how to save more money? Be sure to check out our post, “27 Ways to Save Money- in ALL Areas of Your Life!”
3. Getting into Credit Card Debt
Burdensome credit card debt can stick to you like glue, and it is often cited as one of the worst financial regrets. Carrying high amounts of debt means that your purchases are costing you more money. That’s particularly true in an era of high interest rates. It can make it more difficult to get approved for a mortgage, and it can negatively impact your credit score.
Plus, credit card debt can also affect your physical and mental health. Debt and money problems can lead to long-term stress, causing a higher likelihood of depression and anxiety. This affects your sleep, leading to a boatload of other health issues. That being said, it’s no wonder that 47% of folks say they regret taking on credit card debt.
How to avoid this financial regret:
One of the best ways to avoid financial regrets around credit cards is to follow the “golden rules of plastic.” Sticking to the best credit card practices can help you to avoid credit card debt, while still benefiting from the perks.
Here’s an overview of the best credit card practices to follow:
- Only buy stuff you can afford. If you put more on your credit card than the amount of cash you have in the bank, you’ll accrue interest. EXPENSIVE interest. So stick to only buying things you can afford to pay for with cash!
- Pay your card in full and on time every single month. This is the number one rule for using credit cards and debt-free living. If you’re more forgetful, you can set up autopay to ensure you never miss a payment.
- Keep an eye on utilizationn. The more of your available credit you use, the higher your card utilization ratio will be. Work to keep this all-important credit metric below 30% to keep your credit score looking healthy.
If you don’t think you can stick to these rules, it’s best to cut credit cards out of your life entirely. Credit card rewards are awesome, but getting into debt or paying interest will completely negate any of these benefits.
Getting help if you are already in debt:
If you’re already in credit card debt, know you are not alone. While getting out of debt takes hard work and dedication, it is entirely possible. We recommend putting together a debt payoff plan and picking either the debt snowball or debt avalanche method to help pay it off quickly.
If you have large amounts of debt and feel overwhelmed, remember you can always reach out for help. Money Management International and the National Foundation for Credit Counseling are two legitimate organizations that offer low-cost or free debt management assistance.
4. Having too much student loan debt
Many folks who take out student loans have financial regrets about how much they paid for their degree. While small amounts of student debt can help you to grow your future earning potential, taking on sky-high amounts of debt can hurt your finances for years or even decades to come. The average student loan debt sits around $38,000! And the average monthly student loan payment is in the range of $200-299.
Even more regrettable is that only 62% of people who enroll in college end up completing their degree after six years. That means those folks are stuck with pesky student loan debt without receiving the higher earning potential that accompanies that degree!
Having too much student loan debt can certainly derail your finances. If your monthly payments bring your debt-to-income ratio up too high, it can make it more difficult to buy a home or rent an apartment. Plus, high monthly payments can make it arduous to save enough for retirement.
How to avoid this financial regret:
Well, if you haven’t already gone to school, it’s important to consider whether or not college will actually be worth it for you. There are also many ways to significantly decrease the cost of a college education. This can meaningfully reduce your student loan burden, or even help graduate with no debt at all!
For example, choosing a state school over a private school can significantly cut down college costs. According to College Board Trends, the average cost of enrollment from 2023-2024 for private colleges was $41,540, compared to just $11,260 for an in-state public school. That’s nearly a quarter of the price!
Prospective students can also apply for financial aid using the FAFSA. They should also spend some time researching and applying for scholarships. By getting even just a few “smaller” scholarships it can reduce the amount of money you’ll need to borrow in a significant way.
If you’re considering going to college in the next few years or have a high school child, let us be the ones to tell you that graduating debt-free is entirely possible. Be sure to check out our interview with Jason Brown, who graduated debt-free with two degrees!
Help with existing student loan debt.
If you already have student loans, you’ll just have to find the best way to manage paying them off. In many cases, an income-driven repayment plan, like the new and generous SAVE plan, can give you a lower monthly payment. It can also lead to forgiveness for some of your loans at the end of your repayment period.
If you have private student loans, you’ll need to work towards paying those off eventually, since forgiveness does not exist for this type of loan. If you’re struggling to make payments, you could consider refinancing. Or try calling up your loan provider to discuss your options to avoid defaulting and give you more breathing room.
Not sure how to start paying off your student loans? Be sure to check out our step-by-step guide!
5. Purchasing a House You Can’t Afford
Being “house poor” is a serious problem for Americans. More than 1 in 4 homeowners in the US spend more than 30% of their monthly income on housing, which places them directly into the “house poor” category.
While it may be tempting to buy a home at the top of your budget, this can lead to financial issues and regrets down the line. You might be able to afford the mortgage payments now, but if your employment situation changes, you could struggle to make those payments. Foreclosures can occur after just four missed mortgage payments! So it’s really important to make sure you can afford your mortgage even if your circumstances change.
But even if you can make your payments, having an uncomfortably high mortgage can put a major strain on your finances. It can impair your ability to invest for retirement or make it harder to pay down debt. High monthly mortgages can also make it difficult to spend money on things that bring you joy, like family vacations or hobbies. That’s why it’s important to make sure you can truly afford your mortgage before purchasing a home.
How to avoid this financial regret:
While shopping for a home, try and stick to the helpful 28% rule. This states that your monthly mortgage payment should not be more than 28% of your gross income. While this may not be possible in all housing markets or financial situations, it’s a safe guideline to lessen the likelihood of issues and regrets in future years.
If you’re unable to meet the 28% rule, consider house hacking by renting out a portion of your home to someone else to reduce your monthly housing costs. Or, work towards earning more money and maximizing your income to increase your monthly housing budget.
Lastly, consider the reality that renting might suit your needs better for the time being. Both renting and owning a home come with unique benefits, and it’s possible that renting could be an even better financial move for your current situation. Be sure to weigh the pros and cons of renting vs. buying a place before deciding to buy a home.
The Bottom Line:
If you’ve made money mistakes in the past, you’re not alone. Nearly three-quarters of adults in the U.S. admit to having financial regrets over past decisions. However, one mistake does not define the future of our finances.
What’s important is that you turn your financial regrets into lessons learned, and use them as an opportunity to expand your money knowledge and make better financial choices going forward.
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