Money Mistakes You Didn’t Know You’re Making

Here is a list of money mistakes I have made at some point in my life. I’m pretty sure you’re making some of them too.

1. Retirement
   • 401k
     • Not investing in 401k at all.
     • Not investing enough in the 401k to at least get the full extent of the employer match.
     • Not investing enough in 401k up to the IRS max. 401k accounts are funded with pre-tax dollars. i.e., federal income taxes do not apply on the amount of your income that you invest in a 401k. Depending upon what marginal tax bracket you are in, this could give you up to 37% larger initial principal for investing than if you invested after-tax dollars. With the magic of compounding, the growth on this principal could make a significant difference. Don’t max out your 401k contributions if you have credit card debt (pay that off first!). And be aware that 401k is a long-term investment. Early withdrawal penalty is a 10% additional federal tax you must pay on the withdrawal amount, in addition to regular income taxes, if you take distributions before age 59½.
     • Not front-loading your 401k contributions if your employer matches are friendly to front-loading. e.g., at Microsoft, they’ll match your contributions 50%. If you can afford it, you can complete your contributions in the first few months of the year so that you take advantage of the full employer match even if you get laid off later in the year. This also gives more time for your money to grow in the 401k.
     • Front-loading your 401k contributions in a way that prevent maxing out the employer contributions. This is the opposite of the previous point. If your employer only matches your contributions every paycheck, it’s important to spread them out to take full advantage of the employer match.
   • Mega Backdoor Roth
     • Not taking advantage of the mega backdoor Roth feature. If you’re lucky enough to work for an employer whose 401k plan allows for the Mega Backdoor Roth (like Microsoft, Amazon, Google), you can contribute after-tax dollars in a Roth account that (a) grows tax-free, (b) allows withdrawals tax-free.
   • Traditional Roth IRA
     • Not investing in a Roth IRA. If your income is less than the eligibility criteria for a Roth IRA (less than $165K if single, $246K if married), you can invest up to $7,000 per year in a Roth IRA. Roth IRAs are great because investments grow tax free and no taxes are due on the capital gains within the account while it’s growing and even when you withdraw from the account in retirement. What’s more, you can withdraw the principal (the amount you had contributed) at any time without penalties if you need it. When my kid started earning money doing summer jobs as a teenager I set up a Roth IRA for him.
   • Deferred Compensation
     • Not enrolling in your employer’s deferred compensation plan. Some employers (e.g., Microsoft) offer deferred compensation plans. If you don’t need cash now, you can put some of your annual compensation into a tax-deferred account where it can grow tax-free.
2. RSUs (Restricted Stock Units)
   • Not planning for the tax bill on RSUs. When your RSUs vest, your employer will typically sell 22% of them on the same day to pay for the federal income taxes you owe. However, if you’re in a higher tax bracket then you could have a large tax bill when you file your taxes the following year. And if it’s too large, the IRS will even impose a penalty. You can pay estimated taxes throughout the year via eftps.gov to avoid such penalties. This stings even more if the stock price declines and now you owe $15K in taxes on RSUs that were worth $100K when granted but are now only worth $60K. If you are intentionally holding on to the RSUs because you believe the stocks will appreciate, that’s fine. But most people aren’t intentional about this.
3. Cash management
   • Keeping substantial cash in a checking or regular savings account where it doesn’t earn any interest. There are so many great alternatives to this. HYSA (high yield savings accounts) like Marcus is one. But even better is buying treasuries through you regular stock brokerage account. T-bills are liquid (unlike CDs that have an early redemption fee), risk-free and yield better than HYSAs. If you’re more adventurous you can try municipal bonds since they are tax-free.
4. Tax saving measures
   • Not investing in HSA: Health Savings Accounts are the rare unicorn of triple tax advantage: money isn’t taxed (1) going in, (2) while it’s growing in the account, or (3) when it’s taken out. You could fund it, let it grow for years, and then reimburse yourself later for all your years of accumulated medical expenses, plus all the new expenses you will incur when you’re older.
   • Not investing in 529 college savings plans: Funded with after-tax dollars, these plans are a great way to grow your money tax-free and not pay any capital gains taxes when the funds are used for qualified educational expenses. If you start as soon as your child is born, you get 15+ years of compounded tax-free growth.
5. Cash back on credit cards
   • If you aren’t earning at least 2% back on every single credit card purchase you’re leaving money on the table. You can reward-hack different credit cards to save more than that but 2% is the bare minimum. If you have stocks+cash in excess of $1 million at Bank of America / Merrill Lynch you are in their platinum tier and they will give you 75% bonus on their regular cash back rewards. Since their regular rate is 1.5% cash back, you get 2.625%. On every single purchase. Without any special hoops or categories to enroll in. Without any annual fee. 
6. Credit card balances
   • Not paying off your credit cards. I haven’t made this mistake thankfully. But including it here for completeness. Pay off your credit cards in full every month. Interest rates on credit card debt are huge and it makes no sense to maintain a balance. No, you cannot invest the money elsewhere and make more after taxes. Just do yourself a favor and pay off your credit card debt before investing anywhere else.
7. Protecting your wealth
   • Not buying umbrella insurance. Liability coverage in your car and home insurance policy may not be enough if you have substantial wealth. Umbrella insurance adds another layer of protection and is relatively cheap.
   • Not having a trust to avoid probate. If you don’t have a trust, your assets go through the probate process after your death. This can cost 3-7% of the estate value and can take 1-2 years. A revocable living trust can avoid probate and make things infinitely easier for your survivors. A trust can also kick in if you’re alive but incapacitated for some reason. 
   • Once you set up a living trust, not transferring ownership to the trust for all your major assets. This includes your bank accounts, brokerage accounts and title for your real estate.

Discussion about this post on Hacker News.