This week I want to talk about money mistakes.
It has been my aim when writing this weekly blog to be positive and provide the best money information available.
What I have learned however over the years is that we tend to respond better to negative information. You only have to look at the nightly news, something I don’t do anymore. The main stories are all negative.
The media does this because they know it is what appeals most to viewers.
So this week, in my attempt to appeal to your media trained senses, I am giving you my top 7 money mistakes. Each of these mistakes on their own may not appear to be a big deal…
…BUT when you start combining more of them together, the impact on your money and wealth becomes profound.
When it comes to success with money you know that it all boils down to spending less than you earn and investing on a consistent basis.
If it was easy, I could stop now and you would be fine to go about building your desired financial future.
The problem however, is modern society has built a range of pitfalls and traps that prevent you from achieving success. These pitfalls and traps lead to common money mistakes.
In no particular order, here are my 7 money mistakes that could be why you aren’t having the success you desire…
The 7 Worst Money Mistakes
As I outline each of the mistakes I have included some tips on how to avoid them. My aim is to ensure we get to the end of the post with some positive vibes J
1. No Emergency Buffer
Your emergency buffer is simply a minimum of three months of your living expenses.
When unexpected issues occur, like illness or accidents, the emergency buffer provides you with the cash you need to continue to meet your living costs.
Not having one is like driving a car without insurance, eventually it is going to bite you.
Without an emergency buffer, life’s unexpected surprises will put extraordinary stress on your financial position, right at the time when you don’t need any additional stress.
Building your emergency buffer is the first step in your financial freedom journey. My tip is that you determine how much surplus money you have each month, and a minimum of one third of this surplus be applied to building your buffer.
2. Not having a will
The data on the number of people who don’t have a will is staggering. A friend of mine recently had an experience with a family member who passed away without a will, the stress this caused was incredible.
Without a will your estate could end up in long protracted legal battles to determine the right way to manage your money.
The tip to avoid this money mistake is to get a lawyer to prepare a will and power of attorney as soon as possible.
The peace of mind this brings is worth every cent. And you will know that your family receive what you have built for them.
3. Inadequate Insurance
I think of insurance as a supplement to your Emergency Buffer.
It covers the things you couldn’t save up to cover in advance, helping to replace or protect the largest assets you have – your career, your home, your investments – if you experience a major accident, death, or injury.
Insurance is an area where you need an advisor. They can ensure that you have the right amount and don’t pay for things you don’t need.
My tip is that you have at least the following insurance policies:
- Home and Contents
- Trauma and Permanent Disability
- Income Protection
4. Not Paying Yourself First
As I suggested at the start. The formula to financial success is to spend less than you earn and invest the rest.
The unfortunate truth is that most people spend first and then worry about themselves last, if there is anything left.
Guess what, there is never anything left. This is where you need a plan for your money.
The tip to avoid this money mistake is simple, pay yourself first, and then spend what is left. This is actually one of the money rituals of the wealthy that I learned from Benjamin Graham.
If you’re not paying yourself first, you’re not making progress financially. And the longer you wait to save and invest, the harder it will be to catch up later.
5. Overspending on your home
This money mistake is one of the more recent financial phenomena’s…
It has become commonplace for people to buy houses that are bigger than they need, more expensive then they can afford and require more ongoing maintenance then they expect.
This is often referred to as ‘Keeping up with the Joneses’…
You may have heard about the book The Millionaire Next Door, well the author has a less well known book that explains this concept and how to overcome it. I highly recommend Stop Acting Rich…And Start Living Like a Real Millionaire by Thomas J Stanley.
This book explains how it isn’t just homes that people overspend on. There are luxury brands, cars, fashion, the list goes on.
If you desire to be financially free, I recommend avoiding this syndrome.
6. Waiting to invest
There are three factors that determine how well your investments perform:
- The amount that’s invested
- The rate of return your investments (income plus growth)
- The length of time they are invested
Most of what we see in the press deals with getting the best return on your money.
But, the factor that most influences the value of your investments, is the amount of time you have it invested.
The longer you wait to invest, the more you are costing your future financial self.
Consider this example of two sisters:
Smart Saver Sister starts saving $4,000 every year, starting at age 20. After 10 years, her $40,000 total contributions are now worth $62,500 (at an annual growth rate of 8%). At age 30, Smart Saver Sister stops saving and makes no further contributions. She just lets the money grow at an 8% annual rate of return for the next 30 years, until age 60. At age 60, the $62,500 will have grown to $629,000.
Her sister, Late Saver, waits until age 30 before she starts saving $4,000 a year. Unlike her Smart Saver sister who stopped saving after 10 years, she doesn’t stop saving. She saves every year for 30 years, from ages 30 until she is 60. At age 60, her account is worth only $530,000.
Wait, what? Wow!
If I add a couple of extra options to this example to show how Smart Saver could really have made it big in investing for retirement:
- If Smart Saver Sister kept saving $4,000 her whole life, she would have ended with more than $1.1 million.
- And if that $4,000 could have been $5,000, she would have ended with $1.4 million.
So the solution for this money mistake is now fairly obvious right, start now and keep at it!
7. Too much debt
As the example above illustrates, the power of compounding your returns is substantial.
When it comes to debt, compounding is working against you and in the favour of the banks.
So carrying large amounts of non-investment debt is crippling your financial goals.
The tip for this money mistake is simple, start using some of your monthly surplus to reduce your debt.
As you will recall from number one money mistake, one third of your surplus goes to building your emergency buffer, the remaining two thirds goes to reducing debt.
The sooner you are debt free the better.
So there are my 7 money mistakes and tips to avoid or overcome them.
Now that you know some of what has been hindering your financial success, let me remind you of the simple formula to success I mentioned at the beginning.
Spend less than you earn and invest the rest = financial success (guaranteed)
Leave me a comment and let me know if you have any experience with these money mistakes.