Top 5 ways you’re sabotaging your finances

Fellow Americans, listen up.

We need to do way better at managing our money

The U.S. savings rate is just 4.1% this year. And that puts the country 17th among 24 industrialized countries in the Organization for Economic Co-operation and Development.

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The median retirement account balance for all U.S. households is $3,000 for all working-age households and $12,000 for near-retirement households, according to one study.

Ouch.

Some of us make matters worse with unforced errors regarding our personal finances.

Here are five common self-inflicted wounds to avoid:

1) Skipping 401(k) plans

Not participating in your company’s 401(k) program is a common mistake.

First off, you can save money on a tax-deferred basis. In other words, your contribution comes out of your paycheck before income taxes are deducted. That means your taxable income is less and your tax bill is lower.

Yes, you pay Uncle Sam when you retire, but the overall tax savings are still big, thanks in large part to triple-compounding interest: on your principal, on the taxes you haven’t yet paid, and on the interest already earned.

Many companies have programs that match a certain percentage of your 401(k) contributions. It’s a great benefit and shouldn’t be overlooked.

Having money automatically deducted from your pay each month is a smart and relatively “painless” way to save a substantial amount of money over the long haul.

2) Life Insurance

If you have dependents and your last name isn’t Buffett or Gates, you likely need to have adequate insurance protection in the event that you make an unexpected exit from life’s big parade.

Getting the right amount of coverage at a reasonable price is crucial. Your odds of accomplishing both are usually better if you do this while you are relatively young and in good health.

Work with an insurance agent to estimate how best to cover your lost income to cover future housing, living and educational expenses for your survivors.

And don’t forget disability insurance in the event that your unable to work due to illness for a long period of time. The bills won’t stop coming in, after all.

3) Emergency savings

Life is full of surprises, sometimes unpleasant ones.

An unexpected divorce, illness or job loss can upend your financial situation overnight if you don’t have an emergency fund set aside.

The experts suggest aiming for six months’ worth of expenses in savings.

And, when you do have to take money from this fund, it’s important to immediately start rebuilding it again. Automating these savings in the form of auto-transfers to a savings account is one way to make sure you continually build up these funds.

4) Home purchase

It’s likely the biggest financial transaction you will ever make. So why not take every precaution necessary to make the right choice.

First off, be realistic about what kind of house you can reasonably afford. Most financial advisors recommend that you spend about a third of your monthly after-tax income on your housing needs.

Balance emotion with reason. Many home-buyers make mistakes in the buying process because of emotional reasons, such as “loving” a prospective house they can’t truly afford, or making crucial purchase mistakes because they find themselves caught up in a bidding war.

Skipping a home inspection is usually a very bad idea. Yes, it’s an added expense, but you need some sense of the maintenance costs you will face as a homeowner.

A bidding war or a strong preference for a house doesn’t negate the need to “look under the hood” of such a large investment. Good inspectors can also catch serious structural issues that may give you a second thought about buying that dream house (or help you negotiate a lower purchase price.)

Best to stay emotionally detached and make the most well-informed decision possible.

5) Raiding the retirement fund

Unless you are one of the lucky few with a well-funded retirement plan or a big private pension, tapping your retirement plans early to pay college tuition bills and other expenses is generally a bad idea.

Many 401(k) plans do have hardship withdrawals for tuition expenses, but the tax hit is considerable.

If you are 59½ or younger, you are going to pay income tax on the withdrawal, plus a 10% early withdrawal penalty.

You are far better off taking out government and private student loans for your child. It might be hard to remember this in such an emotional situation, but be sure to rationally compare how long you have until retirement, vesus how long your children have to pay off student loans before making a decision that could cost you in the “golden years.”

Managing your finances in a rapidly changing economy and labor market is never an easy thing.

Don’t make it harder by sabotaging your finances.

Continue learning: Retirement investing: Is an IRA or 401(k) right for you?