The money decisions you make today can greatly impact your financial future. Some moves help you build wealth, while others end up costing you significantly down the line.
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In a recent YouTube video, financial author and influencer Ramit Sethi discussed seven money mistakes he thinks could cost you the most. Find out what financial decisions he considers most damaging and how to avoid them.
Also see four steps you can follow to recover from money mistakes.
Relying On Willpower Instead of Automation
According to Sethi, the first costly mistake that many people make is relying on willpower to reach their financial goals instead of automation. You’ll often see tips about cost-saving measures like buying the cheapest toilet paper, cutting your hair or making your coffee at home. “That’s not the life for me,” Sethi said, and you don’t have to rely on those measures either.
Cutting costs through tips like these will help you save some money if you stick to them, but you’re relying on willpower to avoid buying things that make your life easier or more enjoyable. Sethi made the point that abiding by these restrictions strains “your limited willpower … every day, forever,” which isn’t sustainable. “Most people become unmotivated, and they start spending again.”
Instead, Sethi recommended setting up automatic deposits to invest every month, even if you can dedicate only a small amount. That way, willpower is no longer part of the equation — the decision is already made.
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Spending Too Much on Housing
Owning a home is one of the most effective ways to build long-term wealth, but it can come with its pitfalls. You will likely take out a mortgage to buy your home, typically with a 20- or 30-year term. That’s a long time to be locked into a significant financial obligation. You need to be sure you can afford your home payments, not only today but also in the future, even if your financial circumstances change.
Sethi argued that a common money mistake Americans make is overspending on housing. It’s worth noting that housing costs have ballooned in recent years for both homebuyers and renters. Since early 2020, home prices have increased nearly 50%. Because of these price increases, Americans may struggle to find housing within their budgets.
Sethi recommended spending no more than 28% of your gross (pretax) monthly household income on housing. Keep in mind that housing costs don’t include just your rent or mortgage payment. They also include items like closing costs, insurance, maintenance, utilities and additional fees. Sethi said he adds 30% to 50% of the base housing costs to account for these additional costs.
“You’ve got to know your numbers before you go out and make the biggest purchase of your life,” Sethi said.
Waiting To Invest
Most people know that they should save money and invest it for the future. And yet it’s incredibly common to put off investing for some later date. Sethi argued that’s one of the biggest financial mistakes you can make.
The phrase “time is money” is especially true when investing, thanks to the power of compound interest. When you start investing sooner, your money has more time to grow.
Sethi illustrated that point with the example of “Savvy Sally,” who invests $200 a month for 10 years from age 20 to 30, compared with “Naive Noah,” who contributes the same amount from age 45 to 65. Even though Noah invests the same amount for twice as long, when Sally is 65, she’ll have $267,000 more than him. That difference is all down to the fact that her investments had an extra 35 years to grow.
Don’t put off investing until you hit a certain financial milestone or find the perfect investment. Even if you can spare only $50 or less a month to invest, it’s worth it to start as soon as possible and let your money work for you. “The best time to invest was when you were 15, but the second-best time to start investing is today,” Sethi said.
Paying a Percentage-Based Fee to a Financial Advisor
If you’re not sure how to manage your money, you may turn to a financial advisor. Over a third of Americans work with financial advisors, so it’s clearly a popular option.
Sethi pointed out that the mistake isn’t working with an advisor but paying a percentage-based fee for those services. Say your financial advisor charges 1% to manage your money. That doesn’t sound like much, right? Sethi noted that even a 1% fee “can cost hundreds of thousands of dollars in lifetime returns.” Put that way, the fee no longer seems reasonable.
Instead, choose a financial advisor who does not charge a percentage fee. Many excellent financial advisors charge a flat fee or an hourly rate to manage your money.
Agonizing Over Details That Don’t Make a Difference
It’s easy to waste time getting caught up in the details when making a financial decision. Sethi offered the example of choosing a new credit card and overanalyzing the different benefits and point structures. It’s just not worthwhile to worry about these minute details most of the time.
His philosophy? “Fight for simplicity.” Sethi uses few credit cards, makes simple investments and maintains only a few bank accounts. Just get started with the best decision you can. You can always adjust later.
Letting Debt Pile Up
Debt is a fact of life for most Americans. The average American household has over $100,000 in debt, including mortgages. According to Sethi, racking up debt is a major financial mistake.
“The more debt you carry, the bigger portion of your paycheck is going toward paying off that debt, meaning the less you have to save, invest and spend,” he said.
Avoid taking on unnecessary debt and make a plan to pay off any debt balances you already have. Eliminating your debt frees up your money to reach your financial goals.
Buying an Expensive Car
A brand-new, expensive car might look nice in your driveway, but buying one is probably not a sound financial decision for most people. The average monthly payment for a new car is now over $700. When you add other costs, like insurance and gas, you could spend over $1,000 on your car alone.
Sethi pointed to expensive vehicle purchases as one of the primary issues for people who are experiencing financial difficulty, alongside high housing costs. Instead of buying a new car, Sethi recommended downsizing and keeping your old vehicles as long as possible to save money.
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This article originally appeared on GOBankingRates.com: 7 Money Mistakes That Could Cost You Millions, According to Ramit Sethi
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