A financial planner shares 5 money mistakes that take years to fix — and how to avoid them

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  • In my 16 years as a financial planner, I've seen many common money mistakes that can take years to fix.
  • Taking on too much student loan debt is a big one — your debt load shouldn't be more than your annual earning potential.
  • Not saving early for retirement and drawing too early on your 401(k) are other key concerns, as well as taking on too much debt and buying too much house.
  • SmartAsset's free tool can find a financial planner to help you take control of your money »

We all make mistakes, but many financial mistakes have long-term consequences. Not only can they be hard to correct, but they can take years to fix. The road to financial freedom is much smoother when you make smart money decisions early on. 

Here are five common money mistakes — and tips for how to avoid them:

Taking on too much student loan debt

According to the Institute for College Access & Success, 62% of students from the class of 2019 graduated with student debt. The average student loan debt owed was $28,950. If you continue to law school, medical school, or business school, you may graduate with an additional $100,000 or more in student loans. 

Before you commit to student loans, think about your earning potential and how it compares to the debt you're taking on. A good rule of thumb is that your expected annual salary after you graduate should be greater than or equal to your total student loan balance. 

For example, if you take out $100,000 in student loans and you expect to make $120,000 after finishing school, you have a reasonable chance of paying off your student loans in 10 years or less. An annual salary that is less than your total student loan balance can lead to major financial stress and keep you from reaching financial goals. 

In addition to researching your expected salary, there are other ways to avoid taking out too much student loan debt. For example, do not take out student loans to cover living expenses. Working during college, even part-time, can help cover living expenses and possibly a portion of your school expenses. Finally, exhaust all grant and scholarship opportunities before you turn to student loans. 

Making withdrawals from your 401(k)

You're young and you just landed a new job. You think cashing out your small 401(k) is harmless. Maybe you're in a financial slump, and you think a withdrawal from your 401(k) will help you recover. Think again! 

When you cash out your 401(k), you lose the power of compound interest. In addition to missing out on future growth, you could also face taxes and fees. Even if you're young and believe that you have time on your side, chances are you won't prioritize saving down the road to make up for the loss. 

To avoid 401(k) withdrawals, make sure you have an adequate emergency fund. If you're not there yet, look into side jobs to increase your income or review your budget to see how you can reduce expenses. Withdrawing from your 401(k) should always be a last resort. 

Carrying too much debt overall

Along with a mortgage or student loan debt, credit cards and car loans can be a drain on your monthly budget. The more debt you have, the higher your fixed expenses. If those fixed expenses are a significant portion of your budget, you may find yourself living paycheck to paycheck. This is often a result of trying to "keep up with the Joneses." You may have to resort to taking on additional debt just to get by. Even worse, you may not have the wiggle room to save for retirement or other financial goals. 

To avoid excessive debt, start by tracking your expenses and living below your means. Don't use a credit card if you can't pay off the balance in full each month. These habits will help you for the rest of your life, and your future self will thank you for it. 

Not saving for retirement early

The sooner you start investing, the more time your money will have to grow. A survey by Bankrate found that just over half of Americans say their biggest regret is not saving enough. Saving for retirement was the most commonly cited regret. You may believe that retirement is far away and you can save later. Before you know it, you're in your 40s or 50s and retirement is just around the corner. If you haven't developed the habit of saving early in your career, it's hard to adjust your lifestyle down the road. 

Avoid the regret of waiting too long to save by saving as soon as you start working. If you're already employed but are behind, start saving now. Saving 20% of your income is a great place to start, but you should aim to save even more if you want to retire early. 

Buying too much house

The home you live in should be recognized as a "lifestyle asset," not an investment. Unlike investment assets, which provide income or grow in value over time, lifestyle assets require ongoing cash flow to maintain. Cars also fall into this category. 

If you stretch your budget to buy too much house, you lock yourself into a payment that doesn't go away until you pay off your mortgage or sell the house. In addition to your mortgage, you're responsible for all the other costs of homeownership, such as insurance, taxes, maintenance, utilities, and association fees. 

When you spend a significant portion of your income on housing expenses and cannot afford much else, you're "house poor." A tight budget combined with very little savings can put you in a challenging situation for years to come.

While a conservative rule of thumb is to spend no more than 25% of your take-home pay on your mortgage payment, you should consider how a home purchase fits in with your other expenses. Avoid being house poor by clarifying what you can really afford based on your personal situation and financial goals. Don't blindly listen to what a mortgage broker says you can afford. It's also good to have a solid emergency fund after you make a down payment, so you're not getting into debt to cover unexpected expenses. 

If you've made some of these money mistakes, you're not alone. While it's essential to avoid them, you can overcome them. It just might take a little time, so be patient, learn from your mistakes, and get back on the path to financial freedom.

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