There are big money mistakes and small money mistakes. There are good mistakes and bad mistakes.
Good mistakes are the ones we learn, get better, and move on from. Bad mistakes are the ones we seem doomed to make over and over again. Money mistakes can be especially painful because our finances play such a big role in our lives.
Below are four big money mistakes commonly made and what to do if you make them.
Hopefully, by reading this you’ll be able to learn from the mistakes of others so you can avoid making them yourself. This is an easy post for me to write because I have a lot of experience to draw from.
Going out to eat when you can’t afford it
Before I get into this, I’m not going to tell you that small things like buying coffee will prevent you from becoming financially successful. I haven’t taken a vow of poverty and I don’t expect you to either.
I fell into the trap of spending too much money eating out by doing what everybody else at my office was doing from roughly age 22 to 28. During this time, a part of my work culture involved going out to eat for breakfast and lunch almost every day. I wasn’t doing a good job of monitoring my cash flow or budget, so I didn’t know I couldn’t afford to eat out this often.
If you find yourself in a similar situation, there are two important questions to ask yourself: Do you enjoy it? Can you afford it?
I didn’t really enjoy it all that much. It was just what everyone did. Therefore, it was a big mistake. My advice for you is to examine your motivations around eating out. Are you doing it because it’s something you really enjoy, or is it more out of convenience? If it’s more out of convenience, I encourage you to start eating breakfast at home and bringing lunch to work whenever possible. The $10 or $20 we spend eating breakfast and lunch out can add up over time.
How do you know if you can afford it? That’s the right question to ask, and the only way to answer it is to know your facts. When it comes to personal finance, your facts are your cash flow, your budget, and your priorities.
Cash flow is simply knowing how much money you have coming in and going out every month. How often are you monitoring your spending by looking at bank and credit card statements? I recommend doing it at least once a month.
Budgeting is a process of giving every one of your dollars a job. Having a budget helps you to know if you’re on track to meet your financial objectives and where you may need to make adjustments. For example, the 50/20/30 budget guide provides parameters to know if your spending habits are aligned to those of financially successful people. By following this budget guide, you’ll know if you can afford to go out to eat.
I’ll cover the importance of financial priorities in depth later in this article, but your priorities are simply knowing what’s of greatest importance to you. If you’ve never sat down, thought about, and then written these down, my guess is that you don’t truly have any.
Sure, we all have passing ideas of what we’d like to have happen in the future, but until we write them down, they’re just pipedreams. You have to write them down.
Here’s a post of financial priorities and goal setting if you’d like to dig into it.
Buying or leasing an expensive car
I overspent on cars in my 20s because of vanity and ego. So, whenever I see others doing it, I totally get it. I hope to talk some of you out of making this mistake and learn from me.
Unless you’re independently wealthy, there’s a finite amount of money to go around. So every dollar you assign to a car payment means that dollar can’t be working on another one of your financial priorities.
So, this goes back to the importance of knowing your facts. Are you within the parameters of 50/20/30? Are you on track to meet your financial priorities?
If yes, then get the fancy car. If not, don’t.
Sounds easy, right? But we all know that intellectually knowing that we’re not supposed to be doing something isn’t enough to stop us from doing it. We need to bring our decision making back to our priorities. Those priorities need to be strong enough to overcome our egos and our desires for vanity. Typically, only then will we are able to make sound financial decisions. It’s similar to “finding your why.”
Losing money investing in individual stocks
I was excellent at making this mistake, as well, and my motivations were clear. I wanted to get rich.
My desire to get rich was matched only by my aversion to do any real research on the stocks I would invest in. I made some successful investments during my 20s, but there were some real stinkers as well.
Same question as earlier: can you afford it?
No, I’m not asking if you can actually come up with the money for a share of the stock or that crypto currency you’re looking at. I’m asking if you’re on track to meet your short, mid and long-term financial priorities.
I know, I know, you’re probably sick of hearing me say it. But here’s the deal, if you’re not, then you can’t.
If you’re not on track to fully fund your short-term emergency fund, your mid-term goals like the down payment on a home or a rental property, and your long-term retirement plan, then you can’t afford to be investing in individual investments like stocks, crypto, or anything else.
If the Golden Rule of personal finance is “pay yourself first,” the Silver Rule is “diversify.” The core of your portfolio should be well-diversified investments such as index ETFs. Once you have that plan in place, then it can be time to invest in individual investments. Not before.
Which brings us to big mistake number four: buying too much house.
This mistake has been blowing up people’s financial lives for a long time and it’s the most devastating because it often involves locking in a bad decision for the life of a mortgage, meaning many people overpay for a house they don’t need for 30 years. And it gets worse because more expensive homes require bigger down payments. So, you’re not only locking yourself into a future of less money for other priorities, you’re having to hand over more of your hard earned money up front, as well.
This is the one mistake I’ve managed to personally avoid. But, it is a common thing to do.
Just as the 50/20/30 budget guide is a helpful guideline to follow, so too is the 28% and 36% rule. Simply put, you shouldn’t spend more than 28% of your gross income on housing expenses. Now, there’s a lot that goes into figuring out total housing expenses and it’s a lot more than the cost of your mortgage. So before you make a decision on how much house to buy, take the time to determine what your total housing costs, such as homeowner’s insurance, HOA fees, and lawn maintenance will be for the home you’re considering and make sure it won’t violate the 28% rule.
The 36% rule tells us that we shouldn’t spend more than 36% of our gross income on debt servicing meaning home mortgage, credit card debt, car loans and student loans.
There are so many emotions associated with our homes and emotions are not the friend of good financial decision making. The more you can be aware of your emotions, think about your feelings, and then apply logical thinking to your decisions, the better off you’ll be.
Those are four big money mistakes and I hope you avoid making them. If you’ve made them or are making them, please work to learn from them so you can move past them and not make them again.
Now I’d like to hear from you. What has this inspired or motivated you to do? Do you have a big decision coming up that’s been on your mind?
As always, I encourage you to talk with someone about what you’re working to get better at. Talk to a friend, coworker, or your favorite cousin.
If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
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