I have been paying very close attention to the people around me lately, picking up on subtle financial cues that have caused them pain. Occasionally I pry, and ask what happened. Most of the time I can make a few observations and connect the dots. Read on if you want to see some money mistakes that have knocked people off the Financial Independence path.
Each one of the below money mistakes have happened to a personal friend or family member (and I have done a few myself).
Money Mistakes: Unnecessary Debt
Tied closely to unnecessary debt, is debt with an unnecessary high interest rate. If you are going to take out debt, do your homework and compare interest rates.
Here are some common themes I have noticed
Weddings – I realize this may be the most important day of your life, but throwing 10-15K on a credit card to fund your dream wedding is not a great way to start out the marriage. Some of the best weddings we have been to cost under 5K, get creative!
Engagement Rings – Find “the ring” then start negotiating and try to pay cash. If you need to take out a loan (I did) try to get a no interest term loan or credit card from the jeweler. It is a pretty common practice and I was able to negotiate 12 months interest free from the standard 6.
Cars – Cars are a financial death trap, I have friends driving around 50K+ trucks that haven’t hauled anything in their life. Car sales are cyclical, wait for the dealerships to get desperate. We have a .9% interest rate on our vehicle and I have heard of even lower rates. Patience wins here.
Vacations – Please resist the urge to pay for a vacation you can’t afford, it might seem like you are relaxing but your debt is not going away when you get back
Money Mistakes: Panic Selling
Many young or inexperienced investors sell the first time they experience a market correction. It is a natural but dangerous reaction.
If you can’t stomach a paper loss, you are either investing above your risk tolerance or need a stronger stomach.
Sell Low Buy High – You know, basically the best way to lose a lot of money fast.
Dollar Cost Averaging – Panic selling kills dollar cost averaging, you are selling when you should be benefiting from more shares for the same amount or money.
Kill your will to invest – Don’t let other people talk you out of investing because they have lost money. I have been given stern warnings about losing all of my money in the stock market, apparently its an evil place for some. Historically, you will not lose!
Money Mistakes: Not Paying Yourself
This is on every financial blog and/or book, but for good reason. It is a must to get ahead and actually make progress in the right direction.
This ties very closely with automation for me – if you automate all of your savings paying yourself is easy and just becomes part of life. If you aren’t paying yourself first you are actively making other people rich.
“Rich Dad Poor Dad” highlights paying yourself first very clearly
Finding a way to automate and use a percentage is the best solution for paying yourself first. As your income increases more money is automatically saved.
Money Mistakes: Buying a House you can’t Afford
The biggest problem here is people fail to think long term when they purchase a house. As new expenses introduce themselves the house becomes a burden.
A few things to think about:
- Job Loss
- Other Debt (see #1)
- Property Taxes/Insurance
- Mortgage Insurance
- I feel like I could go on forever here, houses can be a trap
We have had multiple family member purchase 4000+ sq ft houses in the last year. Pure insanity from my perspective, I can’t imagine cleaning 5 bathrooms. We actually downsized from our first house that was about 2000 sq ft and still have a ton of room that is not used.
I can hear the minimalist bloggers chuckling as they read this section
One Bonus tip for students
Don’t use your loans to buy beer (I did). That $15 case costs a lot more money when you pay 6.5% interest on it.
Some products that can help you:
Acorns: Acorns is an automation app that collects and invests your spare change when you make a purchase. I connected Acorns to my checking account and my credit card. If you are interested in trying it, you can use my referral code here (both of us will get $5 in our account)
Personal Capital: Personal Capital has a ton of great Free features, you can track your spending, net worth and even analyze your portfolio. It has top notch security and I am able to connect all of my accounts. Saves a ton of time! (I may be compensated if you use this link)