It can be difficult to start a new project or work toward a goal at the best of times.
When you’re dealing with something as complicated and stressful as money, it’s easy to be tempted to procrastinate.
Financial procrastination is incredibly common, and it can cost you a huge amount unless you figure out how to overcome it.
Here are some of the most common forms of financial procrastination and what you can do about them.
1. Debt Consolidation and Refinancing
If you have debt, especially credit card debt, consolidating your loans into one monthly payment or refinancing to reduce your interest rates are both great ways to save money by reducing your monthly bills.
The huge number of debt consolidation services and refinancing options makes it easy to get into a cycle of constant refinancing and consolidation, with no intent to ever pay your balance down.
If you refinance your loans and make just the minimum payment it can take decades before you pay off the full balance.
To avoid this:
Come up with a payment plan before you consolidate or refinance.
Then.. stick to it!
Coming up with a plan before you start the refinancing process makes it easier to execute than refinancing and deciding that you’ll come up with a payment plan eventually.
2. Lack of an Emergency Fund
Saving money is hard.
Even if you have enough to cover all of your monthly bills, it’s much more appealing to spend the extra money on fun things than it is to sock it away for the future.
It's also an important step to take to help avoid financial hardship.
Ideal Size of an Emergency Fund
|To start...||Ideal goal...||Super safe...|
|$1,000||3-6 months of essential expenses||12 months of expenses|
If you’re hit by an unexpected expense and don’t have an emergency fund, you’ll have to take out a loan to pay for it.
That means paying interest and fees, driving up the total amount that you pay.
Start building your emergency as soon as you can.
You don’t even have to think about the process very much. Sign up for a savings account and set up automatic transfers.
Each month, some money will be pulled from your checking account to your savings account. If you ever need some extra money, you can withdraw it from the savings account to cover the expense.
A one-time effort can result in long-term financial security.
3. Not Using an Online Savings Account
If you already have a savings account, you might think that you’re financially set.
However, if you’re keeping the money in a savings account offered by a traditional brick and mortar bank, you could be missing out.
Online banks tend to offer much better interest rates on their savings accounts. Because they don’t have to pay the costs associated with operating a network of branches and ATMs, online banks cost far less to run than brick and mortar banks.
They pass those savings on to their customers in multiple ways, including the interest rates.
Often, the rates offered by online banks can be ten or one hundred times the rates offered by a traditional bank. That means you could earn $100 in interest at an online bank for every $1 you earn from a brick and mortar bank.
Changing to an online bank isn’t hard.
Simply sign up for an account, enter your current bank’s routing number and savings account number, and make an electronic transfer.
The time you spend will be repaid with significantly increased interest payments.
4. Not Saving for Retirement
When you’re young, it might seem like putting off retirement savings isn’t the worst thing to do.
You might have 30 or 40 years before you’re even thinking about retiring, which is plenty of time, right?
The problem with that line of thinking is that retirement savings use special tax-advantaged accounts, such as the 401(k) and Individual Retirement Account (IRA).
These accounts limit the amount that you can contribute each year.
In 2019, the limits are $19,000 for 401(k)s and $6,000 for IRAs.
If you don’t fill up your contribution space each year, the remainder of that space disappears.
You can’t back up contribution space for the future, so every year that you don’t make a contribution is potential tax savings lost.
This also doesn’t account for the fact that time is the most powerful force when it comes to building a retirement fund.
Consider this example:
You start saving $5,000 each year at the age of 25 and plan to retire at 65. Your investments earn a return of 9% each year.
Over the course of 40 years, you’ll contribute $200,000 to your retirement account. After the 40th year, your account balance will be $1,841,459.
A friend of yours decides to delay saving for retirement, saving $10,000 each year starting from the age of 35, with plans to retire at 65.
Over the course of 30 years, your friend will contribute $300,000 to their retirement account. Despite contributing 50% more than you did, your friend’s ending balance will be just $1,485,752, almost $300,000 less than yours.
That $300,000 difference comes from procrastination and avoiding saving for retirement.
5. Incorrect Tax Withholding
The American tax code is notoriously complicated and difficult.
There are entire companies that were built around helping Americans file their taxes each year.
Still, there are some basic things that you can do that can improve your financial situation.
When you start a job with a new employer, you have to fill out a variety of tax forms, including Form W-4.
This form asks how many allowances you want to claim, which affects the amount of money that your employer withholds from your paycheck to pay for taxes.
There are a lot of things that you can claim allowances for, but the important thing is that when your personal situation changes, you should update your W-4 to make sure that it is accurate.
If you don’t, you might wind up letting your company withhold too much.
Of course, you’ll get this money back at the end of the year when you file your tax return.
Still, getting a tax refund, no matter how nice it can feel, is a bad thing.
Every dollar you get back with your tax refund is a dollar that you loaned to the government for free.
If you had instead had the money in your possession and put it in a savings account or investments, you could have reaped the benefits of having that money working for you.
6. Not Managing Your Credit Score
It’s easy to forget about your credit score if you’re not applying for a loan.
It’s one of those things that is incredibly important but only at specific times -- specifically, when you’re applying for a loan.
If you’re thinking about applying for a loan, you’ll probably want to do everything you can to give your credit score a boost.
While there are some techniques that you can use to get a short-term boost to your credit, they’re not the most effective.
Building good credit is a marathon, not a sprint.
Two essential factors in your credit score are:
- your payment history
- the age of your accounts
The payment history aspect is obvious. Make your monthly payments before the due date, every single month. The more on-time payments that you make, the better your score will be.
The age of your accounts is less obvious. In short, the more old accounts you have and the fewer new account you have, the better your credit score will be.
If you have aspirations of buying a car or a house, you’ll want to start building your credit early. Even if you don’t think you need one, sign up for a credit card as early as possible.
Use it carefully and make sure that you don’t wind up in debt. Also, be sure to not apply for loans or credit cards that you don’t need.
If you have a few old accounts, no young accounts, and solid payment history, you’ll have a great credit score. This can help you save on interest rates when you do apply for the big ticket loans like an auto loan or a mortgage.
Over the course of 30 years, a rate that is 0.25% lower can be a huge deal.
7. Automate Your Bills
There is a much simpler will to pay your bills.
Many people are still resorting to snail mail to receive and pay bills. You're wasting time, effort, and resources to address a task that could be done automatically.
The best way to fight this form of financial procrastination is to set up automatic payments.
You can do it for:
- Credit cards and loans
Basically, the biller will collect the correct payment without you having to do any work.
If you must, you can still take a little bit of time to review the bill for accuracy. Otherwise, you don't have to worry about paper mail, writing checks, or potential late fees when the bill doesn't arrive as expected.
Financial procrastination is a common thing, but getting over it is essential to getting your financial life in order.
Build up some motivation and do everything you can to fight the urge to procrastinate.
The benefits will be more than worth it.