We have all made mistakes in life. When we were young, we never wanted to listen to our parents. What do those old people know anyway? Hopefully, we have become wiser as we have become a little older. Here are 13 money mistakes, that we all can avoid, I have seen made repeatedly or have made myself.
1) Not having a financial plan: When you do not have a financial plan, you will not move forward to reach your goals. Your financial plan can help you make sure your spending matches your priorities and your values. Your financial plan will help you decide when you should start investing your money, how much to save for retirement, and other financial goals. Take the time to set up your financial plan today.
Part of my path to this profession is how poorly my results were when I made plenty of money but didn’t have a financial plan.
2) Not having enough in emergency savings: I have mentioned the value of having an emergency fund before, but many people still only keep $1,000 or $2,000 aside for “emergency money.” This may help you with a last-minute plane ticket, but it will not tide you over if you get really sick.
If you have what sounds like a lot more–say, $25,000–consider whether that makes sense for your income. After all, if you’re making $100,000 plus a year, that’s not going to last long if you lose your job.
–Accumulate 3-6 months’ worth of income (or more in some cases) in your emergency savings
–Only use it for true emergencies
–When your income changes, hopefully upward, make sure to increase your fund proportionately
3) Making financial choices out of fear: Another common mistake is to make a financial choice when you are afraid, or you feel a lot of pressure to act right away.
When you are afraid, you may not be considering all the options, and you may end up making a costly mistake. It is important to take a step back and consider all your options. You may also want to talk the decision over with someone you trust.
This is also why Money Mistake 2 is so important. Extra money in the bank gives you time to make better decisions. Lost your job? Business had a bad year? It is a lot easier to make good decisions if the danger of not being able to make a mortgage payment or buy groceries is not hanging over your head.
In my previous attempt at business ownership, I made some missteps based on needing to keep my cashflow going and not having adequate resources to make a good decision.
I wrote about our amygdala and how it causes us to make suboptimal decisions before here.
4) Stepping over dollars to pick up pennies: People will obsess over trying to save $10 online shopping or spend hours of family time trying to save $50 or $100 on labor costs while not preparing for a salary negotiation which is orders of magnitude more important.
If it is a $10 decision do not spend $100 of energy to make it. Identify the things in life that can create great value for you and focus on those.
5) Focusing too much on spending and not enough on income: You absolutely have to keep an eye on spending. However, there is a bottom limit to spending, at least if you want a roof over your head and food on the table. You can only cut so much.
Income, on the other hand, has a great deal more upwards potential than we often believe. Start a side hustle, start a business, take a class or certification that makes you more valuable in your profession, or study to negotiate a better salary. There are many ways to increase your income that will likely be beneficial to achieving your long-term financial goals.
6) Too much lifestyle creep: Some lifestyle creep is fine (we are trying to live reasonably not pinching every penny), but the data suggests that spending more than 50% of your raises pushes your financial independence further away. When good things happen, celebrate them. But don’t forget about your future
7) Keeping up with the Joneses: Some people are going to be richer than you. Some will get there by skill and some by luck. Don’t worry about them. Many of those people will only seem richer than you. Many of them are up to their eyeballs in debt trying to seem like they are doing well to others. Focus on how you are doing relative to YOUR financial potential. That’s the only one that really matters anyways.
8) Borrowing too much: They say it takes money to make money, which is why borrowing money and investing it can be such a profitable strategy. Unfortunately, if things go south, you could lose it all. When borrowing money there are no guarantees, except your monthly payment.
Another way to borrowing too much is buying too much house. Bigger is not necessarily better. Unless you have a large family, choosing a 6,000-square-foot home will only mean more expensive taxes, maintenance, and utilities. Do you really want to put such a significant, long-term dent in your monthly budget?
9) Staying at a dead-end job: Another big financial mistake is choosing to stay at a dead-end job. This can hurt you financially because it does not give you room for advancement or to increase your earnings (See Mistake 5). While you may take a job as a steppingstone or because you are desperate for work, you do need to have a plan to move on to a better job.
You need to determine when the time is right to find a new job or start your own business, as well as the skills that you will need to find a career better suited to your interests. Begin the process before you are ready to leave your job. That way you are prepared when the time comes.
10) Not having a plan when you quit: When you quit your job, you do not qualify for unemployment insurance, and you may find yourself in a very tight financial situation. It is also more difficult to find a job when you are not currently employed.
11) Investing in products you don’t understand: If you can’t explain it to a five year old, then you probably don’t understand it. And if you don’t understand it, then you are probably taking risks you can’t even imagine. Keep it simple and buy simple investment products.
12) Not having disability insurance: While an emergency fund is a crucial part of any personal finance plan, you should also have disability insurance. It will help if you endure any long-term illnesses, bringing in, say, 60% of your normal salary—an amount that could allow you to stay in your current home.
Before buying an individual policy, investigate whether your company offers long-term disability insurance as part of your benefits package. You will want to know if you are going to augment what is available there or start from scratch.
Disability insurance policies vary greatly from policy to policy, so it is important you work with a specialist in the area. 2 important features are to make sure the policy covers your “own occupation” and to make sure the policy is Non-Cancellable (which means rates are guaranteed level)
13) Not having life insurance: While life insurance will not benefit you, I mean you’ll be dead if it pays off, it could make a huge difference to those that depend on you; like a spouse, children or business partner.
We don’t plan on dying but it happens to everyone. Are you, or more importantly your loved ones, prepared if pass away unexpectedly?
Term Insurance is the easiest way to get started, although there are some situations where permanent life insurance makes sense. Work with a professional you trust to understand your decisions.
There are many financial pitfalls to avoid in this world and hopefully this article will help you avoid the 13 I mentioned and keep you on the path to financial success.