It's great to find ways to maximize savings, identify winning stocks and improve career prospects. But sometimes it is also important to consider the other side — how to avoid major mistakes that can cripple your financial future. In fact, some of the biggest mistakes that people can make are entirely in their control and completely avoidable. Here are five easily avoidable financial mistakes you may be making right now.
Insurance — too little, too late
Having inadequate insurance is an easy way to ruin your financial life. Every year there are reports of significant catastrophic flooding in some part of the United States, and every year that means some homeowners are facing an economic wipeout. Standard homeowners insurance excludes flood damage, and many homeowners neglect to buy a flood policy.
If a guest injures themselves on your property and you are not adequately insured, you may be forced to pay out of pocket for their expenses. The same can be true for people you hire to work on your house and even trespassers.
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If you run your own business, make sure that you are adequately covered for any damage that may be done to your customers' property, any injuries to your workers, and so on. Just a single on-site injury could end costing a quarter-million dollars, and that would be enough to wipe out most small businesses.
A criminal record can disqualify you from admission to schools, the receipt of financial aid, qualification for loans, employment and security clearance. Even a "youthful indiscretion" that results in no jail time can haunt a person for years and prevent them from gaining employment in certain industries.
The advice here is pretty straight-forward — stay out of trouble. Failing that, a criminal record does not have to ruin your life if you are committed to turning it around. Accept that there will be long-term consequences to your wrongdoing and approach it honestly; do not try to hide your record, understand that you will get many rejections and do everything you can to prove that you are a conscientious and trustworthy employee when you are given a chance.
An unplanned family
It can be entirely true that there are rewards to having children that far exceed the financial ramifications of parenthood, but the reality remains that an unplanned family can drastically alter a person's financial future.
When a child is born, there is a legal financial obligation for both parents to support that child until he or she reaches adulthood, and that obligation is usually assessed as a percentage of income. Child support averages nearly $300 a month, a significant number that is close to 10 percent of the national average for take-home pay. What's more, courts typically make this a very high priority obligation and will pursue nonpayment through various legal channels including incarceration and garnishment.
Raising a child can cost from $6,000 to over $10,000 a year, and that can be quite a burden for an unprepared couple that is still paying off school loans, still in school, or in the early lower-earning years of a career. On top of the explicit financial costs, there are all manner of opportunity costs — time that parents cannot spend at work furthering their career, lost educational opportunities, and an inability to save as much for retirement.
Excessive spending and debt
Most often people turn to credit cards to fill the gaps between what they have and what they want, and that kind of debt carries the closest thing to legal knee-breaker rates. What's worse, is that many of those who rely on credit cards cannot (or will not) pay them off promptly and so the debt continues to cascade and accumulate.
Some people who use debt to buy a car only look at the car payment and ignore the cost of insurance, maintenance, gasoline, parking and so on — costs that can easily match the monthly car payment. By not thinking through the full cost of ownership, these people end up with much more debt than they can actually support. The same is true of homes — people often over-buy and get a house that is too large or too upscale for their actual needs and financial wherewithal.
Even if you can afford these payments, you're spending money on an unproductive asset that you could be saving and investing. Make a habit of buying more car or more house than you really need and you may be well along the path to ruining your financial future.
Being a bad employee
For the vast majority of people, work will be the overwhelming source of their wealth. One way to torpedo that earnings potential is by establishing a reputation as a bad employee.
There are innumerable ways to be a bad employee — laziness, dishonesty, unpleasantness, immaturity, and so on. The bottom line is that if people do not like work that you do, and the process of working with you, they will not promote you, they will not give you raises, they will not give you more rewarding work, and they will not help you advance your career.
There are limits on what employers can legally do to impair a bad employee's future prospects (giving a negative reference, for instance), but sometimes a lack of support and positive assistance is all that it takes to put a ceiling on a once-promising career. Employers often look askance at an employment history that shows frequent changes and/or a lack of upward progress and those are often the outward signs of a bad employee who has to move around from job to job or cannot get promoted at their current position.
The bottom line
A successful financial life is about maximizing the positives and minimizing the negatives. The good news is that all of these negatives can be controlled and avoided. A little research and a fair bit of self-discipline is all that it takes to avoid some very costly mistakes.
Copyright 2015 by The Associated Press. All Rights Reserved.