There are not many secrets to financial success. Shortcuts to wealth may seem to present themselves at times and can be very tempting, but sometimes have quite the opposite effect than we desire. Being an avid reader of finance books, columns, and blogs it’s not so much that I learn new concepts every single day, but I am fascinated how differently two people can communicate the exact same thing.
Jason Zweig, financial columnist for The Wall Street Journal, was once asked how he defined his job. Here is his response:
“My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself”.
If you Google “financial mistakes to avoid” you’ll get 7.43 million search results (I figured one more wouldn’t hurt), but I would suspect there is quite a bit of overlap in those writings. Personal finance is similar to golf. Avoiding mistakes can lead to victory. Getting a hole in one is great, but it’s more important to avoid hitting two in the water on number 12 (see Jordan Spieth).
Here’s my list of common financial mistakes I think you should look out for (no particular order):
- Paying credit card interest: Of course if you owe it, pay it. The trick is to not owe it. Don’t carry a credit card balance, set up your card for auto pay each month from your bank account. If you can’t afford to pay the bill in full, you are living outside your means……
- Living outside your means: Dave Ramsey likes to say “Why do you want to keep up with the Joneses? They’re broke!”. It’s easy to get caught up and buy a new $800 phone every 2 years (only $33.33 a month!), or buy new vehicles frequently, but once you’re in this cycle it’s hard to get out.
- Not knowing where your money is going: This affects many people. The money comes in, but where does it go? I started using a Personal Financial management application on my phone to track all expenses a while ago. Amazon has made it a little too easy for some of us to spend money from the couch. Going out to eat regularly hurts too. Spending $10-$15 every few days at lunch adds up a lot over a month. With the technology that exists today, it is convenient and easy to track where your money is spent.
- Attempting to time the stock market: It’s tempting, but don’t do it. It probably won’t end well, and you’ll never forgive yourself (See: Why You Shouldn’t Time the Market). Peter Lynch famously said “More money has been lost in preparing for market corrections than at the point of a gun”. It seems as if every market prediction I heard in 2016 ended up being incorrect. I will remind you of Paul Krugman’s prediction from election night 2016 when he was asked when markets will recover….”Never”.
- Not maximizing your employer 401(k) match: For example, if your employer matches 50% of your contributions up to 8% of your pay, you better have a great excuse why you’re not putting in at least 8%. There is nowhere else I know of where you can guarantee yourself an immediate 50% rate of return. If you do not maximize your employer match, you should not be allowed to complain about your compensation.
- Taking advice from wrong sources: Your brother-in-law’s uncle may have a monthly subscription to Money Magazine, but that does not make him a financial planner. Also, avoid the free steak retirement seminars as if they are serving Ebola-laced filet mignon. Further, remember that not everyone on TV is smart. There are superstar athletes that believe the Earth is flat.
- Not having a plan at all: Do the math to see what you’ll need to save to retire, pay for the little one’s college, or buy a vacation home in 5 years. If you need help, find a professional. It is unwise to go on a road trip to a place you’ve never been without a map or navigation system.
- Having too much/little/wrong insurance: Cover all risks that could be a detriment to your family financially. But don’t buy whole life insurance when you really need term or have a $5 million death benefit when you only need $1 million.
- Lending money to friends: If you lend money to a friend, you should plan on kissing it goodbye (both the money and the friendship). It’s a tough situation, if you tell them no then they may be offended. If you give them a loan and they do not pay back, that is also awkward. You may feel bad for saying no if you are in a much better position than them financially, but that does not make someone entitled to use you as a personal bank. If you want to give them a gift to help them that is great (and should only be an amount you can easily afford to give away), but loaning money has many downsides.
- Focusing on the wrong things: Clients AND advisors tend to get caught up in the minutiae. Worrying about if you should have 10% of your portfolio in small caps as opposed to 8% probably will not help you much. The focus for too many of us is on our rate of return, whereas we should focus on our rate of savings and spending.
This list could have 500 things, but I see these 10 come up fairly often. Some of them are easy to mitigate, others are very tough. If none of the above have ever been an issue for you, you should be doing great!
Opinions expressed are those of Mark Meredith and not necessarily those of Raymond James Financial Services, Inc. Information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is a complete summary or statement of all available data necessary for making an investment decision. The information presented does not constitute a recommendation or a solicitation to buy or sell any security. Past performance is not a guarantee of future results. Raymond James Financial Services, Inc. is not affiliated with and does not endorse the opinions or services of other entities named. Links are being provided for information purposes only. Raymond James Financial Services, Inc. is not affiliated with and does not endorse, authorize, or sponsor any of the listed web sites or their respective sponsors. Raymond James Financial Services, Inc. is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.