Common Financial Mistakes: Avoid these at all Costs!
When it comes to financial mistakes, everyone has a story. In fact, many people end up paying for those mistakes for years. The aftermath of these mistakes causes financial stagnation, stress, and stunted achievements. I could write on and on about the mistakes and lessons that my wife and I have learned. Let’s see: We financed two cars, purchased a home and used our entire savings as a down payment, fully furnished our home on a capital one card, financed my wife’s wedding ring, and invested heavily in mutual funds while we were in debt. Thankfully, we woke up a few years ago and corrected all of those mistakes. Because our household income is above average, my wife and I had a very large shovel to dig out of those mistakes. Those mistakes we personally made, could have someone else “in-the-hole” for several years, living paycheck to paycheck because of failure to foresee the impact of the choices that were made.
The problem with money management is that everyone is forced to manage it, even though no formal training has taken place to prepare one to do so. Generally speaking, most people tend to manage money the way their parents taught them. This creates a word of mouth knowledge that can come from sources that haven’t had any successful experience in the topic.
1. Living beyond your means. This is the #1 reason that our culture has more individuals who look wealthy rather than being wealthy. It doesn’t take long for the illusion to fade, if you spend more than you make (using credit to purchase things because you don’t have the money.) you will ultimately destroy your future. Here are two great ratios.
A.) Your mortgage should be less than 30% of your take home pay.
B.) Your car’s value should never be more than 50% of your annual salary. (Cars depreciate, it makes no sense to invest large sums of money into something that virtually makes your investment disappear. Would you invest $30,000 into an a stock market investment that turned $30,000 into 8,000 in 6 years? I hope not.
2. Not combining incomes when you are married. When you get married, you and your spouse become one. You can not adequately plan a future together when you are living apart.
3. Loaning others money. I believe loans are an awful idea. If a person is in a financial hole, how does adding more dirt to the hole help them out? Loans bring unnecessary stress and relationship issues. Now when your friend fails to answer the phone on the day he was to pay you back, you have hard feelings towards them; because you figure they are dodging you.
4. Financing anything besides your home. To finance something is to admit you cannot afford it. Why pay interest on something when you have the cash? It’s because you don’t have the cash, or the cost of the purchase makes you fear that it is going to deplete the cash you do have. The major reason not to finance things could be an entire blog post! The #1 reason is that it reduces your cash flow.
5. Not having an emergency fund. Not having a stash of acorns is easily the key contributor to paycheck to paycheck living. If your job is stable your emergency fund should be 3 months of expenses. If your income is extremely low… get a second job! You emergency fund will save you from drawing lines through your budget every time an event happens (events will always happen!).
6. Retirement loans. Borrowing from yourself sounds like a great idea. Until you get hit with taxes and penalties, your $20,000 401k loan could easily turn into $14,000. It is just bad mathematically, you should only do this to avoid foreclosure or for life emergencies. Borrowing from your 401k can be reworded as “Would you like to borrow $20,000 @ 30% interest + a $300 pay cut for 5 years” That sounds awful when you word it from the other side of the equation.
7. Not doing a Budget and not having a financial plan. Not budgeting seems to correlate with being broke. I budget every month and review it weekly. A budget is a requirement for profit. When you fail to plan to put $200 into your savings account, it fails to be there.
8. Not having insurance. If you have stability in your financial situation insurance is the 1st stop. Not having insurance can ruin your financial future and those who depend on your income. Term life insurance is so cheap that you have to be insane, not to get a 20 year term right now.
9. Not contributing to retirement. With the long strides retirement planning has taken, there is no excuse not to invest towards retirement (unless you’re in a temporary financial hole). Investing should start with company matches (only up to the match and not a penny more), Roth IRA’s are second, and last would be traditional IRA’s invested in mutual funds.
10. Being broke and working one job. It shocks me that a person can complain about not having funds, but they aren’t using all of their time to prevent the problem. If you are broke, single, and have no children… get to work! Sorry for the blunt passive aggressive advice but seriously get a second job and stop the torture.
11. Cosigning on anything. It should go without saying, but I’m going to say it… never sign on anything to help another person. At the end of the day the bank doesn’t see your transaction that way. They see the broke person who can’t afford it and the person who will pay the bill because they can afford it. By cosigning, you are agreeing to pay the full balance when the bill doesn’t get paid. Guess what, it won’t get paid at some point. If the person you are helping was making wise financial decisions and had a good track record of paying on time, they wouldn’t need another person to back them up financially. “If he doesn’t pay, bill me”. That is exactly what you are saying to the creditor.
12. Not saving. In the Richest Man in Babylon, the first principle is “Pay thyself, first”. A sound principle in wealth building and virtually an urban legend to many in our culture. This principle states that you claim a percentage of every dollar you earn as “yours” and place it safely away never to be spent. The stashed savings provides security, insurance, and the ability to allow money to work for you… instead of you working for it. Basic savings or money market accounts are where you should store it.
13. Buying a home when your aren’t financially strong. This is a mistake that I personally made. There are hundreds of hidden costs that come along with home ownership. As Dave Ramsey says “You want your house to be a blessing. Buying a home when you are broke will be a curse.” The flip side of this would be renting like you’re a home owner. I would suggest being modest in your selection process. This is a temporary residence, it should not be your dream apartment. The goal should be saving towards your home and the more you spend on a nice apartment, the less you can save.
14. Investing in single company stocks. Everyone has heard about diversification, you know… “Don’t put all your eggs in one basket.” I don’t care what the track record is, how much of a discount you got it for… holding on to single stocks is dangerous. 50% of your investment could be gone when a CEO runs over a poodle on his way to the office, when they get accused of making a racial slur, or the company fails. Mutual Funds hardly ever have more than 5% invested in a single company, this helps mitigate risk and partake in the positive side of owning stocks.
15. Needing your “own”. Sometime in the recent past, it has become normal to be on your own at 18-25 with no assessment of your financial position. You shouldn’t get a place, car, etc. just because you see others do it. You do these things when you have saved and are in a great position to make the leap. Wait until the boat is safely parked at the dock before you leap in!
Feel free to comment with any other financial mistakes I missed. I’m sure there are dozens! Don’t forget to subscribe and share!