Americans are terrible savers. Study after study have shown that we can barely scrape together a few hundred dollars, let alone $1,000 or more.
If you are in this camp, don’t give up hope: It is never too late to turn things around. In fact, simply avoiding a few common errors is a great way to boost your savings rate.
Following are some boneheaded mistakes that can seriously dent your ability to build a financial cushion or nest egg — plus, some fixes that can get you on the road to substantial wealth.
1. Buying new when used would do
Bad move: Yes, a shiny new car will impress the Joneses — for a little while. But shelling out $20,000 to $30,000 for a new car is potentially disastrous to your long-term financial picture.
Better move: Let’s say you buy a used car for $15,000 instead of a new one for $30,000. Then, you take the $15,000 you saved, earmark it for a retirement account and invest it in a mutual fund that earns an average 8% a year over the next 30 years.
At the end of that time, you’ll have around $150,000 — and that “compromise” car will be long forgotten.
So, invest in your future and avoid a monster depreciation hit by buying used instead of new. Cars are made better today than ever before, which makes buying used ones less risky.
The choices is yours: A few “oohs” and “ahs” from your neighbor today, or an extra $150,000 in retirement.
2. Paying retail for stuff you rarely use
Bad move: Perhaps you live in a place where you get just a handful of snowstorms every year. If so, does it make sense to go out and spend thousands of dollars on a snowblower you will use three or four times a year?
Don’t spend big bucks on expensive hardware you’re going to use infrequently.
Better move: Borrow rarely used stuff from friends or family. Other options are to rent what you need, or to form a neighborhood co-op to share the expense, storage and use among the people on your block. After all, sharing a few things with a neighbor can reduce both cost and clutter by 50%.
3. Paying extra for a low deductible
Bad move: Everybody hates paying a high deductible. It feels outrageous to first pay an annual or semi-annual insurance premium, then have to fork over $500 or $1,000 per claim before your coverage even kicks in.
But claims are — or should be — rare. Odds strongly favor a higher deductible leading to increased savings over time.
Better move: Self-insure by raising your deductibles to as high a level as you can comfortably afford. Raising home insurance from $500 to $1,000 can cut your premium by 25%, according to the Insurance Information Institute.
4. Buying books
Bad move: Don’t pay $29 for a best-selling hardcover that probably isn’t as good as your friend said. Even if the book is great, how many times are you going to read it?
Better move: Find the same book sitting on the shelves of your local library. Remember, your tax dollars already paid for that book, so you might as well check it out.
Even better, get your book as a free e-book download so you don’t even have to leave your desk.
5. Paying for water
Bad move: Want to feel foolish? Spend $1.50 for a plastic cylinder containing an abundant and freely available natural resource: water.
Better move: Buy an insulated water bottle and fill it yourself. If you don’t trust local water quality, purchase a home water filter.
6. Buying into brands
Bad move: Paying big bucks for name-brand tablets of acetaminophen just doesn’t make financial sense.
Better move: Stop by Amazon, and you can easily get just as many tablets with the same exact ingredients as the name brand, all at a much lower price.
7. Passing up retirement plans
Bad move: Not participating in your employer’s 401(k) or other retirement plan can be like throwing away free cash, since many employers match a certain percentage of employee contributions. By not participating, you also miss out on potential tax deductions.
Better move: Sock all the money you can spare into a tax-advantaged retirement plan like a company 401(k). If that’s not available, fund your own IRA.