Here is a short list of the most common financial mistakes that I see people make. If you can avoid most of these, most of the time, you will be on a great path to building wealth and financial well-being.
This one is obvious. If you spend more than you earn, you will eventually start building up debt, and that will make your life stressful. Don’t spend more than you make.
Not Saving Enough at a Young Age
This is one of the most common financial regrets. Sure it’s harder to save when you are young because your salary is usually lower, but it’s worth doing so anyway. The reason is the magical power of compound interest working in your favor.
It’s never too late as long as you start now, and the important thing is just to get started. Invest early and often.
Credit Card Debt
Many people love getting miles and points from their credit cards with the goal of traveling for free or receiving large cash back bonuses. This makes sense though, only if you pay off your credit card balances in full every month.
If you ever carry a balance, it all goes out the window because the interest charges are so ludicrously high it will cancel out any bonuses. Too many cards in your wallet can also create confusion and might cause you to miss a payment deadline, again creating a huge interest charge.
Poor Asset Allocation
The two investing extremes are either taking on too much risk or taking on too little. Both extremes are less than ideal. Saving only in a bank savings account yielding 1% or less is hardly going to keep up with inflation. On the other hand, going 100% into tech stocks might score enormous returns some years but crash in other years.
The goal is to get to an asset allocation, a balance between stocks and bonds, which lets you sleep at night.
Even professional investors fall victim to market timing. It’s natural to think that we know more than everyone else and can sell before the next crash and time the market. Real estate investors are just as susceptible to this as stock investors are.
Crashes and downturns seem to happen when no one is expecting them, and even Ph.D. economists are notoriously bad at making accurate predictions. Once you have settled on an investment strategy, resist the urge to tinker with your portfolio.
Letting Your Emotions Make Financial Decisions
The best way to approach investing is to remove emotions from the financial decisions. These emotions are fear and greed.
Never fall in love with a house you can’t afford or invest too much in a single company or industry. Whenever you are tempted to make a radical change to your investments, consider this; don’t do something, just sit there! This is an area where a good financial adviser can provide valuable guidance and keep you on track during times of stress.
Buying Too Much House
Buying more house than you can afford can be a big mistake. It’s not just about the monthly payment, but also about the carrying costs like property taxes, utilities, and maintenance. Property taxes rise year after year, and unexpected house maintenance can be a real shock to the wallet.
Another downside with owning too much house is that you are less financially flexible when so much of your wealth is tied up in an illiquid asset like your residence.
Marrying the Wrong Person
If you and your spouse have very different financial goals and values, there’s a greater chance for conflicts over money. There are natural spenders and savers, and if you and your spouse fall toward opposite ends of that spectrum, it can make it hard to agree on long term goals.
The worst thing that can happen that can really ruin a couple’s finances is a costly divorce. Discuss your finances before you decide to get married to make sure that you both share similar financial goals and values.
Paying High Fees
Paying high asset management fees to your financial advisor is going to eat away at your return over the long term. Remember that these high fees are taken out year after year even when your portfolio has a down year.
Stick to low fee index funds, ETFs, and lower cost active funds whenever possible. Costs matter, so find an advisor with low flat fees.
I have your back when it comes to cutting high investment fees. Contact me HERE.