Here Are The Top 16 Financial Mistakes Everyone’s Making: Are You Throwing Your Money Away on Any of Them?
Insufficient Savings Rate
This one’s just math. If you’re saving 10% of your paycheck starting from when you get your first job at age 22, assuming a 5% annual ROI, you’ll be able to retire in 51 working years (age 73). If you save 15%, you’ll be able to retire at age 65. If you save 50%, you’ll be able to retire at age 39. Don’t overthink it, this is straight up math.
Related: Did you know, you can retire early?
This has a direct correlation on your savings rate. We all have fat to trim. Doesn’t matter if you’re making $300K a year or $30K a year. There’s always something you can do. Think about it this way, anything above and beyond basic shelter, basic food, and basic clothing is not a necessity.
So anytime you eat out, it’s a luxury. Anytime you have more than 2-3 pairs of shoes, it’s a luxury. Anytime you have a car that’s newer than a vehicle with 100K miles, it’s a luxury.
You get the point. You might not like hearing it, but doesn’t make it any less of a fact. And trust me, we (my wife and I) spend quite a bit of money on luxuries ourselves, but we don’t kid ourselves thinking that they’re needs, and not wants. They’re wants.
Trying to Beat the Market
No one can beat the market, and no one can market time. If you think you can, you’re kidding yourself. Here’s a quote from John C Bogle, Founder of the Vanguard Group: “Sometimes the market is valued way higher than the growth line, and sometimes it’s valued way lower.
If you could forecast that, you’d sell at the high and buy the low. But here’s the thing, I don’t know how to do it. I don’t know anybody who knows how to do that. And I don’t know anybody who knows anybody who knows how to do it. It’s a fool’s game.”
Paying Too Much in Fees
What’s your ER on your 401K funds? If you don’t know the answer to this question, like most people, then chances are you’re paying too much. We’re living in the days of index funds and ETF’s.
So if you’re paying anything more than 0.5% fees on a fund, it’s considered high. Anything more than 1% is extremely high, and anything more than 1.5% is high-way robbery.
Believing that a Financial Advisor has your Best Interests in Mind
If your financial advisor is not willing to put down, on paper, that they will act as your fiduciary, his/her incentives are not aligned with you. They can make up whatever story they wish, but these are the facts. Especially if your advisor is tied to your brokerage. Their interests are not only misaligned with you, it’s actually the direct opposite.
This is because the vast majority of them will get paid depending on what kind of bundle or package they sell you, so the more money the package can make for their company, the higher the commission they will make.
In other words, the more you “lose” financially, the more they “win” financially. So again, these are competing interests. If you need an advisor, go with a fee-only advisor that will put on paper that he/she will act in a fiduciary capacity.
Not Being on the Same Page Financially Before and After Marriage
Often times, I think couples don’t talk about money until they’re well into their marriage. This is a mistake. I say this because research shows that the majority of fights and arguments in marriage are tied to money. It’s also the biggest cause for fraction and stress in marriage.
Even if you are on the same page for now, inevitably there will be some conflict surrounding money. If you’re already married, and you didn’t have these sorts of conversations pre-marriage, I’m sure you can attest to this.
But what you can do is have the tough talk. Set boundaries. There needs to be some give-and-take from both sides. If one spouse is a spender and the other a saver, there needs to be some strategy around how they’re going to handle money together. The saver shouldn’t lord over their spending spouse, making them always feel guilty every time they spend any money. The spending spouse should keep in mind that the saving spouse means well for their family. So there needs to be compromise.
My suggestion is for there to be a specific allocation for both spouses to use, and it should be for guilt-free use. No judgement attached. And there should be an allocation that goes towards varying buckets of savings that both can mutually agree upon and the savings should be tied to a specific goal (i.e. our 2017 summer vacation, our future home downpayment, our retirement, etc).
But having said all of this, most importantly, both spouses need to sit down together and make sure the math works out. You can allocate all you want; but if the math doesn’t work out, it’s all just wishes and may end up with a lot of undesired credit card usage. In other words, don’t just wing it. Create a budget and stick to the budget.
Maintaining a lot of Credit Card Debt
You may have heard about the “magic of compound interest” and how harnessing it can make you fairly wealthy. Now imagine the magic of compound interest working AGAINST you. That’s exactly what credit card debt is. When you’re having to rely on credit cards, you’re really just digging a hole you may never be able to climb out of.
At some point, with a big enough credit card debt burden, all you’re doing is paying interest on it forever. So that $800 smart phone you bought 5 years ago that you put on your card? You may end up paying $20,000 on it over a life time of just paying the interest.
That may be a slight exaggeration but I’m trying to get this point across: why pay more money on anything above and beyond the sticker price? But that’s essentially what you’re doing when you’re paying interest on your credit card.
Buying Too Much Car
If you’re making $50K a year, you have no business financing or leasing a car that’s $50K. If you’re making $100K a year, you still have no business buying a $50K vehicle. You’re pushing it even with a $25K vehicle (which is what a lot of entry level cars cost these days, if you buy brand new).
My rule for car-buying is, spend no more than 10-20% of your annual salary. So if you’re making $50K, your car should ideally cost $5K, or as much as $10K, if you want to stretch. What this means then, is that for the vast majority of people, they shouldn’t buy new cars. They should buy reliable used cars; at least until they have a big enough money snowball that can pay for the car for them.
Related: The Money Snowball Effect
Underestimating your Risk Tolerance
It’s easy to think that you can ride out a stock market down-turn with relative ease. “As long as I don’t sell I’m good right?” Well that’s easier said than done. If you didn’t have any significant savings in the stock market back in 2008-2009, you don’t know what your risk tolerance is. You may think you do, but it’s all conjecture.
We like to think that we’re cool-headed with our investment decisions, but research proves that most of it is emotional. When your life’s savings drops by 50%, it’s not easy to think rationally. Which can lead to selling at the wrong time, and locking in your losses.
I have to be honest here. Even as I’m writing this, I myself hugely underestimate my own risk tolerance. The biggest downturn I’ve experienced was in 2008-2009, but I barely had any money in the market. The second biggest blip was back in 2011 when the market briefly went down roughly 19%. I had a decent amount of money in the market at this point and I barely broke a sweat.
This tells me I can stomach a pretty decent-sized crash. But 50%+ would be a whole different story.
Not Making Health a High Priority
I struggle with this myself. Realistically-speaking, a lot of us are irrational when it comes to health. Here’s why I say this: for example let’s say the doctor tells you you have 6 months to live because you have lung cancer. I know of no one that would not spend their entire life’s savings to try to save themselves. If it means the choice between life or death, we’re all willing to spend every penny we have to get healthy again.
But we don’t think about how much we can do, proactively, to drastically decrease the chance of lung cancer. Not smoking for example. I don’t smoke, but a lot of people do. Do you think that smokers don’t know that smoking is bad for them? They all know that smoking drastically increases the chance of lung cancer and yet they still smoke. The same can be said for not exercising and not eating healthily.
Related: The #1 Most Costly Financial Mistake
Spending Way Too Much on Additional Schooling
I feel like I need to point this one out because it’s becoming an epidemic, especially among the millennial cohort. Kids automatically assume the next obvious step after high school is college, and yet they have no idea what major they want to pursue so they rack up debt in a 4 year university with no plan and no real drive to learn.
And after college, after changing majors multiple times and spending money out the nose for it, they can’t find a job they like so they go to grad school. And then post grad school. And then a doctorate. Please don’t get me wrong, I think getting more education is a fine idea and can be a tremendous boost to one’s income potential. But it needs to make sense! There needs to be some measurable ROI after you graduate!
If you’re a parent who has kids, or are planning to have kids, you should think about how you’re going to guide them through this time period. If you’re in high school right now, or are in college making some of these mistakes, I highly implore you to take a moment to do the math and actually lay out a post-college action plan or post-whatever additional schooling you’re doing and map out a break-even timeline for post-graduation.
Buying the Biggest House you Can Afford
I’m a believer in home ownership. But up to a point. My rule is, you should spend no more than 3x your gross annual income on a house. This is supremely difficult to do in HCOL (high cost of living) areas like Los Angeles / Orange County, where I live. But the rule still stands.
The vast majority of households have no business buying a $900K home (which is the median price on new single family residences around here). Unless you’re pulling in $300K a year.
My wife and I bought our condo 4 years ago that was roughly 2x our annual gross salary at the time. So we went even more conservative than our 3x rule, and we haven’t regretted it! We sleep well knowing that we have a high monthly cash flow that’s not being swallowed up by mortgage payments and property taxes.
Mixing Investments with Insurance
If you ever get pitched whole life insurance / universal life insurance, run in the opposite direction. These are the highest-commission sales for insurance brokers. Just do a little research online if you think I’m wrong. Buying whole life insurance never makes sense. So keep your investments separate from your insurance.
Put the majority of your investments in low fee passively-managed index funds. And keep your insurance to these: fixed term life insurance (20 or 30 year, lock these in when you’re young), umbrella insurance (very cheap for the coverage you get), property, and disability income insurance (with disability insurance, the most important factor is how they define “disabled” – I recommend Guardian).
Being Penny Wise and Pound Foolish
Some of you may be supremely frugal. Obsessing over saving a nickel on a gallon of gas, always fighting tooth and nail and countless of hours for the best deals. But you won’t sweat spending an additional $2K to upgrade to granite counter tops or tile flooring for your kitchen. Or you won’t make a big fuss about a $2K difference between a $22K car vs. a $24K car. That $2K difference sure is a lot of nickels!
Thinking you Need to Make Big Money, in Order to Save Big Money
I see this quite often and it’s simply not true. The iron-clad law of compounding does not play favorites. Whether you’re compounding $1 or $1 million. Compounding works the same.
There are janitors (no offense to janitors – it’s a noble profession), that pass away leaving millions of dollars behind in savings. This should be proof enough that it’s not how much you make, but how much you keep of what you make, and how diligently you save and invest, that makes all the difference.
Not Maximizing your Human Capital
You can increase what you save by improving your bottom line (decrease expenditure), but often times people tend to forget that it actually might be easier to increase your savings by growing your top-line (increasing income).
Here’s an example: spending just 30 minutes a day driving for Lyft or Uber, should add roughly $200-300 to your monthly income. Just 30 minutes a day! How easy would it be to decrease your spending by this same amount? I’d venture to guess that it would be harder to squeeze out an additional $200-300 per month in savings.
Think about how much more you can make if you increased that 30 minutes of doing a side hustle, to an hour, to two? It would hugely improve your ability to generate greater savings. Now, if you improve both the bottom line and top line, there’s a synergistic affect. So I’d challenge everyone, by all means, try to do both: increase your income and decrease your expenses.
Are you making any of these financial mistakes? Are there any of these that you’re hitting it out of the park on? Share in the comments below!