5 Most Common Money Traps to Avoid

September 13, 2022
Here are five common money missteps and the measures you can take to get back on track.

For many of us, managing our personal finances can be about as fun as doing our taxes. But just like software can make the tax process easier, there are specific things you can do to make money management as painless as possible. Below are five common money missteps and what you can do to get on track. 

1. Delaying saving for retirement

It's easy to put off saving for retirement when you're in your 20s—it seems far-off and making a day-to-day budget work may be challenging when you're starting a career. Soon enough you reach your 30s, and your priorities may shift to saving for a house or paying for childcare—still not an easy time to save for retirement. The fact is, it may never be easy. But it will always be necessary. And yet, a quarter of American families don't have any retirement accounts at all.1

The fix: As soon as you start a new job, sign up for your employer's 401(k) plan. If your employer doesn't offer a 401(k), set up an individual retirement account (IRA) and automate your monthly deposits. If you don't get used to having extra money in your paycheck, you won't miss it when it automatically goes into your retirement savings. Plus, if you start early, your earnings will have a chance to generate more earnings, potentially growing your savings at an accelerated rate over time—that's the power of compounding.

2. Skimping on an emergency fund

According to a recent Bankrate.com survey, 23% percent of all Americans have no emergency savings set aside to cover things like home repairs, medical bills, temporary unemployment, or any number of unforeseen (and pricey) expenses. About 73% of Americans don't have enough set aside to cover six months' worth of expenses.

The fix: Stash away three to six months' worth of cash in a separate account to cover essential living expenses. The number may be daunting, but you don't have to get there overnight. Funnel part of your paycheck automatically to a separate account and you'll make steady progress over time. And remember to increase your savings rate as your earnings—and cost of living—go up.

3. Taking the short view on investing

Given the performance of the market this year or, looking back farther, from 2007 to 2009, it's easy to understand why so many investors react rashly when the market takes a dive. During the Great Recession, the Dow Jones Industrial Average lost about 20% of its value between February to March in 2009, and more than 50% from its peak in October 2007 to its lowest point in March 2009. But it's the investors that have the fortitude to take the long view who tend to prevail. Even with the market's performance this year, from that rock-bottom point in 2009, the Dow Jones Industrial Average has risen more than 25,000 points.2 Investors who cashed out back in 2009 or for many years delayed getting back into the market may have locked in losses and consequently missed some or all the upswing.

The fix: Stay invested. If you have a history of making investment transactions right after a major event, consider reducing the number of times you log in to view your account—say monthly or quarterly. Remember: Day-to-day market fluctuations have little impact on your long-term goals. Bear markets typically come to an end and research shows that staying invested over the long haul—and not trying to time swings—can be the best way to participate in the market.

4. Avoiding the market

Market volatility may be scary, but while past performance is not a guarantee of future results, there has never been a 20-year period when stock returns were negative. Keep your time horizon in mind when you're investing in stocks. Having most of your money in the stock market can be quite reasonable for a young person when investing for retirement. You should consider some exposure to stocks, even during retirement.

The fix: You don't have to jump in cold. Get in the habit of investing by moving a portion of your cash savings into a diversified portfolio each month. This approach, known as "dollar cost averaging," potentially allows you to buy more shares of an investment when the price is low and fewer shares when the price is high. If you have a significant amount of money to invest, dollar cost averaging will reduce the impact of market volatility on large purchases.

5. Concentrating your investments

Some of us might have too much of one type of investment in our portfolio. Maybe it's stock in the company we work at or municipal bonds inherited from a relative. But there's a benefit to owning many different types of investments. Having that variety in your portfolio—called diversification—tends to reduce its volatility and risk. Each investment responds differently to changes in the market or economy. If geopolitical events shake up your international stocks, for example, U.S. bonds might rise and help smooth out your portfolio's return overall.

The fix: Make sure that you have investments across numerous sectors, industries, and geographical areas. Once you have a diversified portfolio in place, revisit your portfolio's allocation mix on a yearly basis to make sure it still aligns with your investment goals.

Source: Board of Governors of the Federal Reserve System, Division of Research and Statistics, "Report on the Economic Well-Being of U.S. Households in 2021 – May 2022."

2 As of 8/26/2022.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Diversification, Periodic investment plans (dollar-cost-averaging), and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

Investing involves risks including possible loss of principal.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Charles Schwab & Co., Inc. ("Schwab") recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.