There are strategies we need to put in place that will help lead us where we want to be in life, but just as important is avoiding financial mistakes.
When making our plans, we can project working in a certain career, earning a certain income, investing and having X amount of money by age Y, living in a certain size home, and even planning out a career for our children. But few of us ever give serious practical consideration to the things we don’t want to do!
Two or three major mistakes can derail the most well intended plans so it’s best to play devils advocate from time to time and seriously consider the question “what can go wrong here?” It should be done with the same level of intensity that we give to the plans that we hope will move us forward.
Below is a list of ten financial mistakes I’ve culled over the years from my experience in public accounting, from working in the mortgage business and from a few dives into an empty pool I’ve taken on my own road of life.
1 ) Investing in things you know nothing about
When it comes to investing, we often make the assumption that if it’s working for others, it’ll work for me.
But even common investment vehicles, like stocks, bonds and real estate can be more complicated than they seem at face value. For example, people often pay market price for real estate they plan to hold for investment; the few people I know who are successful real estate investors never pay full price. No discount, no deal! Some people think they’re investing in the stock market, when in reality they’re speculating. Know what you’re getting into before you invest; once you’re in, it’s already too late. “Buy and hope” is NOT an investment strategy!
2 ) Putting most of your money in the stock market
Most people it seems are herd investors; but herds lead to manias and manias lead to crashes. Herd investors tend to be “fully invested” at market tops and reluctant to commit funds at the bottom. In my accounting and mortgage careers, where I’ve had a chance to look at the investment habits of probably thousands of people, I’d say the majority have 80 to 100% of their money in the stock market near market tops.
If you’re really committed to long term investing, balance is a big key since no investment is ever guaranteed. It’ll take several years of above average investment returns to overcome a single 50% hit to your portfolio. Here’s where that question–what can go wrong here?–is especially relevant!
3) Debt consolidation
Any attempt to eliminate debt without actually paying it down is a shell game we play with ourselves to make debt more tolerable. While I’m sure there are debt consolidation success stories out there, anyone in the mortgage business can tell you that most people who did consolidation mortgages or equity lines came back a year or two later with more debt to consolidate.
4 ) Buying a new car every 5 years (or less)
By being routine new car buyers, we lock ourselves into paying the new car premium anytime we make a purchase. But by buying a car that’s two to five years old we pay closer to true book value and the new car premium is virtually non-existent. Or by buying a new car and keeping it for ten years, we cut the number of new car premiums in half as well as increase the amount of time we drive a car with no payment on it. Will that help your bank balance?
5 ) Not using coupons or taking advantage of discounts
Advertising, attractive stores, credit cards and a heavy cultural bias in favor of convenience have reduced many of us to impulse buyers. We want what we want with the fewest hassles and we want it now. By shopping that way, we’re always paying full price for everything. But by adding some research, coupon clipping and a healthy dose of patience, and we can often buy what we need at 10 to 50% less than the shelf price.
It may not be a huge windfall on any single purchase, but practiced over time, it can add up to thousands of dollars in savings. Any time you’re going to make an important purchase, go to the merchant’s website (or their competitors) and see what kind of specials they’re running, or any coupon offers they have. Think auto repairs, restaurant meals, hotel rooms – just about every vendor runs specials.
6 ) Turning all of your money over to a single investment manager
It would really be easier to turn our money over to a single money manager or mutual fund, and let them take care of our investments while we go off and do what we do best. However few people can beat the market consistently, even if we’re paying them a fee for doing so. No one cares more about your money than you do, so it pays to diversify among investment managers in much the same way as you would if you were building a portfolio. It’s your best protection against a manager who loses his touch, makes desperate investments or worse.
7 ) Trading up on your house every few years
Each time you trade up three things happen: 1) you pay thousands of dollars in closing costs, 2) your mortgage resets to Year 1, and 3) the overall cost of your lifestyle expands. This is often the single biggest reason people feel as though they aren’t any better off financially, even though they’re making more money.
8 ) Not having a savings cushion
People often forego pure savings because of the low rates of return, but having a savings account may be the most underrated financial move of our time. Having ready savings available is probably the single best way to avoid using credit cards for emergencies. In addition, idle cash has a way of eliminating stress; we worry less about unexpected expenses and sleep better at night—both of which enable us to be more productive in our careers. Can we put a price on that?
9 ) Living in perpetual debt
One of the major downsides to the low interest rates of the past 20 years is that it’s lowered our inhibitions to debt. When we come to view debt in almost benign terms, we’ve entered dangerous territory. People go into debt, consolidate (see #3 above), then take on more debt. If we’re debt free, we’re free to go where we want, do what we want, make moves and take career chances that aren’t possible when we’re up to our necks in debt. Debt is something to be avoided, or paid off—then avoided.
10 ) Taking on student loan debt that’s out of proportion to expected earnings in your new career
We often think that if a little bit of something is good, more of it is even better. Student loans are an area where that thinking is prevalent. A college education may be a positive attainment, but like everything else in life, it does have limits. Taking on $80,000 in student loans to enter a career field with a starting salary of $40,000 can put you behind the eight ball, and make you debt dependent early in life. Student loans must be paid back, so make sure that the amount of debt you incur is commensurate with the typical compensation in the career field you plan on entering.
Have you made mistakes on any of these? Or are there any other financial moves you can think of that should be added to the list?