The Worst Financial Mistakes You Can Make

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A few years ago, a young first-time author was desperately trying to sell her book. She didn't have much in the way of publishing connections. She also didn't have a track record.

Publishers were suitably unimpressed. The first one passed. Then a few more. Then still more.

By the time this unknown author sold her novel, a dozen publishers had turned her down.

The "Harry Potter" book series went on to shatter sales records across the globe. Those 12 publishers passed on an opportunity that would have created enormous wealth and power for their companies.

Cleary, it's not easy to always make the right decision, even if you're working with near-perfect information. Yet too many of us sabotage our own financial prospects by making mistakes that could easily be avoided. We compromise our ability to build wealth by failing to take the long view. Or we act impulsively and irrationally.

Not all of us will have to confront a Harry Potter moment. Yet it's critical to avoid the common traps that plague investors and savers.

So let's discuss some of the worst financial mistakes you can make -- and how to avoid them.

Borrowing from a 401K

When should you consider borrowing from your 401k account? Almost never. In fact, unless your life or health hangs in the balance, taking money from your retirement account should be the last thing on your mind.

According to the Wall Street Journal, 20-percent of 401k holders are paying back a loan. That's an extremely troubling statistic. Pulling money from a retirement account exposes you to taxes and penalties. Even more importantly, it hamstrings your efforts to build wealth. Are you borrowing from a 401k for anything other than last resort emergencies? Then you need to talk a hard look at your financial self-discipline.

Borrowing from a 401k is something of a financial "crime of opportunity." The vast majority of plans allow these loans. By making the threshold so easy to clear, borrowers are tempted to override their own economic self-interest for short term gain.

And that's one serious mistake.

Failing to save early

Saving early in life is the one thing that can vastly improve your odds of building serious wealth. Unfortunately, it's also the time when we're least motivated to do so. When we're young, retirement is almost an abstract concept. We have a hard time even picturing ourselves in old age, let alone planning for it.

Yet the power of early saving almost cannot be overstated. If you start saving in your 20s, compounded interest alone will make you wealthy. We're not talking about huge amounts, either. Saving just $200 each month at five-percent interest will return nearly $300,000 after 40 years.

That's $300,000 created by saving less than $7 per day. It's the easiest --and most reliable -- wealth building formula around. By failing to save early, you're bypassing a huge opportunity to amass your personal fortune.

Not saving enough for retirement

Here's a troubling statistic. According to the New York Times, the typical household aged 55-64 has a mere $104,000 saved for retirement.

That's enough -- as long as you plan on departing this planet five years after retirement.

If you'd like to stick around and actually enjoy your post-working life, $100,000 won't come close. The Center for Retirement Research estimates more than half of Americans won't be able to maintain their standard of living after retirement.

The days of defined benefit pensions are largely gone. Today we need to take responsibility for our future. That means a realistic accounting of how much we'll need post work. It also means we need to trim expenses. Opt for low cost index funds instead of more expensive investment options. Consume less and save more.

It might hurt a bit now -- but the alternative is far more pain in the future.

Getting "wants" and "needs" confused

It's hard to keep things in perspective in a consumer society. We're bombarded daily with messages telling us that we need a larger house, a nicer car, another luxury item. We buy these items and we feel good -- at least temporarily.

In reality, we don't need any of those things. What we need is enough wealth to keep us healthy, stable and happy in retirement. Enough wealth to help friends and family members.

Enough wealth to leave a legacy to pass on to the next generation.

The takeaway

Making the right financial decision isn't always easy. We aren't infallible. We all fall prey to personal biases or errors in judgment.

Yet there's no excuse for sabotaging your future for short-term gain.

Save your money. Invest it wisely. Avoid making poor decisions.

Do that, and you'll be on the road to greater wealth and happiness.

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