You may not realize it, but the actions you take now can greatly impact your sense of financial security down the road. Many Americans inadvertently minimize their future net worth by focusing only on the short-term. It can be great to live in the moment, but in some situations it’s a good idea to take a step back to evaluate the long-term impact of your financial decisions.
Here are five ways many Americans are shooting their future net worth in the foot:
1. Renting a Home Instead of Buying
Purchasing a home is probably the biggest investment you’ll ever make, but if you choose a property wisely, it’s definitely worth it. Sure, you’ll need to come up with an initial down payment and you’re responsible for all upkeep and repairs, but in most cases these costs pay themselves back.
When you own the property, you build equity in an investment that will likely increase in value over time. Rather than making monthly rent payments to someone else, your mortgage payments are essentially an investment in your future. Homeowners enjoy the stability of knowing their monthly housing expenses are for the long term, whereas renters never know when their monthly rent will increase. Additionally, interest and property tax paid by homeowners is tax deductible, often offering the chance for an annual break from Uncle Sam.
Need a mortgage or you’d like to re-finance your current mortgage? First Financial has great, low rate mortgage options! Check them out today.*
2. Not Paying Into a Retirement Plan Early in Your Career
When you’re young, saddled with student loans and barely making enough money to pay the rent, it’s easy to put off saving for retirement because it’s still 40 years away. However, waiting until you’re older to start saving can have a significantly negative impact your financial stability in your golden years.
The earlier you start saving, the more money you’ll earn in interest. For example, if you opened a 401(k) account in your mid-20s, saved a total of $30,000 and realized an 8 percent rate of return, you would have approximately $280,000 by age 65. However, if you save the same amount, realizing the same rate of return, but wait until your mid-40s to start the process, you’ll have only about $60,000 at age 65. Many companies also have a 401(k) match program, where they’ll match your contribution to a certain percentage or dollar amount, so you’re essentially turning away free money by not taking full advantage of this opportunity.
3. Waiting Until Withdrawal to Pay Taxes on Retirement Plan
Traditional 401(k) and IRA plans allow you to make tax-free contributions into your retirement account, with the deductions made in retirement when you withdraw funds. However, it might be smarter to open a Roth 401(k) or IRA, where taxes are deducted upfront, allowing you the benefit of making tax-free withdrawals in retirement. This could be a savvy move, as there’s a very good chance you’ll be in a higher income tax bracket when you retire than you were when you opened your retirement account.
4. Leasing Vehicles Instead of Financing
At first glance, leasing a vehicle can seem like an attractive option — less money down, lower monthly payments and the ability to drive a higher-priced car than you could afford to finance. However, leasing won’t add any gains to your future net worth. The monthly payments you make are essentially rent to the dealership, as you don’t get to keep the vehicle at the end of the lease. Rather than paying off the car and driving it for a few years payment-free, you’re forced to return it and immediately start making payments on another model — and continue the cycle every few years when your lease is up. Additionally, you’re limited to the number of miles you can put on a leased vehicle, you have to pay extra for excess wear-and-tear charges and you’ll pay sky-high early termination fees if you need to break the lease early.
In the market for a vehicle? At First Financial, our auto loan rates are the same whether you buy new or used.** Apply online 24/7!
5. Using Credit Cards to Overspend
Everyone wants things they can’t afford, but offers for zero or low-interest credit cards can make it very difficult to avoid temptation. It might seem harmless to book a vacation or purchase a new furniture set using a credit card with little-to-no introductory financing, but what if you can’t pay the balance off before the promotional period ends? It’s not uncommon for these promotional interest rates to rise from zero to 18 or 20 percent, which can seriously increase the initial price of your expenditures and leave you with a mountain of debt that can take years to pay off.
Making savvy financial choices now can help ensure you’re able to enjoy stability later in life. Sometimes it’s worth making initial sacrifices now to allow yourself to ultimately come out ahead. Always consider what the impact of the choices you make now will have on your long-term happiness before jumping head first into a decision you’ll grow to regret.
*Subject to credit approval. Credit worthiness determines your APR. Your actual APR may vary based on your state of residence, approved loan amount, applicable discounts and your credit history. A First Financial membership is required to obtain a mortgage and is open to anyone who lives, works, worships, or attends school in Monmouth or Ocean Counties. See Credit Union for details.
**A First Financial membership is required to obtain a First Financial auto loan and is available to anyone who lives, works, worships or attends school in Monmouth or Ocean Counties. Subject to credit approval.
Article Source: Laura Woods of gobankingrates.com, http://www.reviewjournal.com/business/money/5-ways-you-re-sabotaging-your-future-net-worth