5 Money Habits That Look Responsible But Are Actually Costing You Thousands
Some money habits feel smart and financially disciplined.
But some of these well-intentioned moves can come with a hidden price tag. Over time, missing out on investment growth, employer matches or higher interest earnings can cost thousands of dollars.
Here are five money habits that may be doing more harm than good.
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Paying Down the Mortgage
Few financial milestones feel as satisfying as paying off a mortgage ahead of schedule. The tradeoff is that those extra payments may be money that could have been growing elsewhere.
Christopher Stroup, certified financial planner (CFP) and founder of Silicon Beach Financial, said someone who directs an extra $1,000 per month toward a 3.5% mortgage rather than investing it could give up roughly $53,000 in potential growth over 10 years.
“Debt-free living provides a sense of security and certainty that investing cannot guarantee,” Stroup said. “What they often overlook is the difference between the mortgage interest rate they're avoiding and the potentially higher long-term returns available through a disciplined investment strategy.”
Prioritizing Paying Off Debt
Stopping retirement contributions to focus on debt can feel responsible, but it may come at a steep cost if it means giving up an employer match.
“Even if someone is carrying credit card debt at 25% interest, turning down a dollar-for-dollar employer match often does not make financial sense because they are giving up free money,” said Ashley Morgan, debt and bankruptcy lawyer.
Morgan said a worker earning $75,000 whose employer matches the first 5% contributed to a 401(k) could miss out on more than $70,000 to $90,000 over 10 years if those contributions were invested and earned an average annual return of 7%.
“People focus on eliminating debt while overlooking the power of time and compound growth,” she said.
Saving at Your Bank
Many savers focus on building the habit of setting money aside and never think about the account where it lands. That oversight can be surprisingly costly.
Alex Quintana, founder of Arca Savings, compared saving $200 per month for 10 years in a traditional savings account versus a high-yield account.
He said that at a typical big-bank rate of 0.01% APY, the balance would grow to about $24,012. In a high-yield account earning 3.40% APY, it would reach roughly $28,500. That’s a difference of about $4,500.
“The diligence of saving every month feels good and masks the fact that the account is barely working,” Quintana said. “There's no monthly bill associated with your savings account, the only cost is invisible money you never earned.”
Cutting Up Credit Cards
Nick Avila, founder of United Debt Relief, said many people shut down old credit cards to avoid temptation without realizing the move can hurt their credit scores.
“The problem is your credit score doesn't read it as discipline,” Avila said. “It reads it as less available credit and a shorter history -- and both of those push your score down.”
According to Avila, closing a couple of cards could lower a credit score enough to push a borrower into a more expensive mortgage pricing tier. On a $300,000 loan, a rate that's just half a percentage point higher could add more than $11,000 in costs over 10 years.
“Almost nobody connects that choice to the mortgage rate they'll be quoted two years later, because the cost shows up far away from the decision,” he said.
Believing 'Cash Is King'
Robert Johnson, finance professor at Creighton University, called “cash is king” one of the biggest money myths.
Using historical returns, he estimated that $10,000 invested in Treasury bills would grow to about $13,836 over 10 years. The same amount invested in a diversified portfolio of large-cap stocks would grow to roughly $26,896.
“When it comes to building wealth, one can either sleep well or eat well,” Johnson said. “Investing conservatively allows one to sleep well, as there isn’t much volatility. But, it doesn’t allow you to eat well in the long run because your account won’t grow much.”
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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