Identifying These Money Mistakes Can Help You Achieve Financial Independence
Let’s face it. Nobody is perfect, and when it comes to money, we all make mistakes. Our personal finance lessons are often learned through experience, and learning from those mistakes is sometimes the best way to learn. But, learning from your mistakes only works if you can recognize that you made a mistake. If you’re oblivious to the fact that you’re doing something wrong, you’ll never be able to take action to correct it.
This list is designed to help you identify 12 of the most common money mistakes people make. You may have already made many of these mistakes, but with others, you’ll want to be aware of them so that you can make sure they don’t happen in the first place. This will put you ahead of the game so you don’t have to go back and fix what has already been done.
1. Not Living Within Your Means
This is the cornerstone of personal finance regardless of your income or net worth. It doesn’t matter if you make $20,000 or $200,000 a year, if you can’t live within the constraints of the money coming in, you’ll end up in debt. It is simple math: income < expenses = debt, income > expenses = surplus. Sometimes living within your means can be difficult, but if you ever want to make progress in your financial situation, you have to recognize this or nothing you do will matter. You’ll never become a millionaire if you continue to spend more than you earn.
2. Failure to Budget
If you can’t identify where your money goes, it will be incredibly difficult to live within your means. The only way to get a handle on your money is to create a budget. It doesn’t have to be a painful or complex process, but at the very least, you need to see where your money goes so that you can determine where money can be saved. A failure to budget is how most people end up living paycheck to paycheck or get into debt.
3. Lack of Goals
Just like creating a budget will help you live within your means, goals will help you make progress with your finances. If you don’t know where you’re going, how will you ever get to where you want to go? Saving, investing, and increasing your income is great, but why are these things important? What are you saving for? What purpose do your investments serve? Without goals, you have nothing to benchmark your progress against.
4. Having Too Much Debt
To put it simply, having debt sucks. If you owe money, that means you’re just reducing your cash flow to make the payments. Some argue that there is good debt and bad debt. For the most part, I agree. When it comes to owning a home, it is virtually impossible for most people to buy one without taking on some debt. But even a so-called good debt can be bad when you borrow more than you realistically should. The key is to keep debt to a minimum and recognize when you have too much. Just because people say a mortgage is good debt, don’t go and buy a $300,000 house when you can really only afford a $200,000 house. The more you can do to maintain and improve your credit, the better.
5. Not Saving Enough
Unfortunately, if you have too much debt, that probably means you aren’t saving enough. The savings rate in this country is extremely low, and the biggest problem is that most people’s paychecks go to pay off various debts such as a home, vehicles, credit cards, student loans, etc. Even if you have debt to repay, you have to save money. This is where it pays off to pay yourself first. Set a savings goal, and treat your monthly savings amount as a bill. If you can find a way to pay your $100 cable bill every month, you should be able to find a way to pay yourself $100 a month in savings. If you treat savings like any other bill that has to be paid, you’ll slowly begin to build up some savings.
6. Inappropriate Amount of Savings
When you aren’t saving enough, chances are you’re cash reserves are too small. Most people recommend that you keep between 3 and 6 months of expenses on hand in your savings so that you can weather an interruption of income or emergency without turning to taking on more debt. How much you should set aside is dependent on a number of things, but you should have an emergency fund available to help. On the other hand, you can have too much in your cash reserves. I’ve seen people with well over $100,000 in savings while not even putting any money into IRAs or retirement accounts. So, while it is more common to not have enough savings, you can have too much cash on hand that could be better used elsewhere.
7. Lack of Estate Planning
The word ‘estate’ conjures up images of wealthy families giving away millions of dollars worth of assets to heirs upon someone’s death, but that couldn’t be further from the truth. Even your typical family has estate planning issues to be concerned with. It all starts with a will. Even if you don’t have a ton of assets, you should have a basic will. This ensures that what assets you do have go to the people you want. Aside from a will, you want to make sure your beneficiaries are updated on all of your accounts. An untimely death with outdated beneficiaries could really put your survivors in a bind. And don’t forget life insurance if you’re married or have children. Think about the financial consequences to them if you were no longer around.
8. Ignoring Disability Insurance
Nobody likes paying insurance premiums, but in the event you need to make a claim, they are life savers. Disability insurance is often overlooked, but it can be one of the most important policies you can own if you or your family rely on your income. The number one cause of bankruptcy and foreclosure is disability. Sometimes just a seemingly minor injury can put you out of work for months, years, or even the rest of your life. And don’t expect Social Security disability to pick up where you left off. If you insure your life, you should insure your income as well.
9. Lack of Diversification
You’ve heard the phrase, “don’t put all of your eggs into one basket” before, and this applies to investing more than anything. The investment landscape is incredibly diverse. You have real estate, domestic stocks, foreign stocks, government bonds, corporate bonds, various capitalization of different stocks, money markets, and so on. From month to month, and year to year, each of these asset classes has their day in the sun and perform the best. The problem is, it is virtually impossible for most people to correctly pick the best asset class for any given time frame. So, instead of trying to guess, you should be diversified. As you spread your money out across asset classes, you minimize your risk and maximize your return.
10. Losing Focus
The current bear market in the first part of 2008 is a classic example of this. If you’re someone who has 20 or more years until needing to tap into your investments, you can’t let a few bad quarters derail your investment plan. Sure, losing money isn’t any fun, but making drastic decisions based on a few bad months will only do more harm than good if you’re trying to plan for the long term. Don’t lose focus, and keep your eye on the prize, and only make minor adjustments as needed.
11. Being Naive
You, and only you are responsible for your financial well-being. It isn’t up to the government to protect you from your mistakes, and you shouldn’t expect the public education system to adequately prepare you for your financial challenges. The only way to make sure your money is working for you and that you’re getting ahead is to educate yourself and actively keep track of your finances. If you ignore your finances, or put your head in the sand hoping your debt will just go away, you’re sure to have a long and hard financial road to travel on. If you’re reading this blog, that is a great start, and there are many more out there that can help you become financially educated.
12. Not Asking for Help When You Need It
Even if you read a bunch of finance books and keep up with the financial blogs, there are times when you could use professional help. If you honestly need help with something, either taxes, estate planning, or even choosing a portfolio, don’t try to be macho and go about it alone. It is okay to seek professional help if you really need it, and even if it costs a little bit of money, it could save you from losing even more. Think of it like this: sure, you can go to WebMD and learn about and diagnose your symptoms, and possibly even alleviate the symptoms, but it doesn’t make you a doctor. If you aren’t comfortable with handling your health completely on your own, your major financial decisions shouldn’t be any different.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Very true Jermey, nobody likes to pay for insurance but in an untold situation insurance is the only life saver.
I really like the not living with in your means. I think that we try to justify this in our society that it is ok for us to buy things that we can’t afford because we are doing it to better our families. This really is “simple math”, hard to do, but very important! Thanks so much!
Excellent list! Thanks. I pay special attention to number 5: Not Saving Enough. I encourage your readers to put some money in a high yield savings account. The bank that I work for has a great High Yield Savings Account at 3.5%. Our account is really fair, and designed for the customer: there’s a $1 minimum, no monthly fees, 24-hour online access, and of course it’s FDIC insured. Also - ShoreBank invests in socially and environmentally responsible causes. Check this out for more information about the bank: http://shorebankdirect.sbk.com/
@Unspender - Yeah, your universal health care coverage is really awesome. I can't believe how efficient it is. Especially the part of it that gets shipped to the US after the patients wait for years... I look forward to our own government rationed health care very soon. Say hi to all the other socialist idiots up there for me, eh?
Not living within your means is something that so many of my friends struggle with. A major cause of that is trying to impress other with stuff they really can't afford. But the funny thing is that stuff they buy rarely impresses me.
I've been guilty of most of these at one point or another, but I've been cleaning up my act lately and it's already starting to help. Just cutting back on credit card interest has freed up a lot of real cash.
Thanks for your tips Jeremy.
N-girl: I'm very sorry to hear about your friend. I don't know what it's like in the US (or wherever you are), but in Canada, I'm pretty sure our universal health care coverage would take care of the brain tumour costs. That said, I may consider disability insurance, depending on its cost.
Very concise and insightful post. Interesting enough, I wrote a post regarding point #12 asking for help early this morning:
One thing that I would add, and some people might not understand, is worrying about what others are doing. Especially in large media markets (NYC, LA, MIA), there seems to be a big push toward image-consciousness, and many people fall into the trap of worrying about and trying to keep up with others are doing, whether it be celebrities, neighbors, friends, etc.
Healthy 20-something woman...I had a friend of mine's husband die at 27 from a brain tumor. He felt healthy too! They had health insurance and life insurance in their 20's. Can you imagine what the debt would have been without it??
Medical insurance is always important. People say they can't afford it, but walk around with the latest gadgets.
This article is great. Many good points.
Too many people keep up with the Joneses.
Being debt free is the place to be.
You also can get a good night's sleep from being debt free!!
There is nothing wrong with having a will at any age with a health care proxy, and power of attorney. Think about Ms. Schivo on life support and that whole fiasco!!
There is another point not being made. Periodically, check and update your infomation on many aspects of your life. More times, our lives get bogged down with unneccessary "red tape" because of it!!
Even I have a couple of these... aye carumba, ayudame, ayudame, Dios mio! (Sorry, I revert to Spanish when I'm scared.)
Great list. I agree that not living within your means is the first and probably most common problem that we need to deal with.
Unspender, in terms of insurance for a single person with no dependents, life insurance probably isn't needed, but some disability coverage might be. I'd check with your employer to see if they offer any basic disability coverage. If not, it might not be worth getting an individual policy since it could be a bit costly.
But it is certainly a question you need to ask yourself, and picture yourself in a situation where you couldn't do your current job for a few years. What would you do? Could you work doing something else? How would you pay the bills? Etc. If you're uncertain, or realize that you'd have no way to pay for basic necessities, then some sort of coverage might make sense.
Thanks for this list, I agree completely.
I'm wondering if #8 applies to me. I'm trying to get out of debt as fast as I can so "extras" like insurance seemed unnecessary to me since no one relies on my income, except me. Is insurance necessary for a healthy single 20-something woman?