In my office, I have an entire shelf devoted to books I’ve borrowed from the public library. One that I’ve been browsing recently is Ilyce R. Glink’s 100 Questions You Should Ask About Your Personal Finances. This book is structured as a series of questions and answers addressing personal finance concerns. It’s not bad.
In the appendix, Glink lists ten common personal finance mistakes. She writes:
There’s nothing wrong with making a mistake. It happens all the time. Even the “experts” make mistakes. But you’ll really have problems if you don’t learn from your mistakes, keep making the same ones over and over again.
Here is Glink’s list of money mistakes, including my comments on each:
- Procrastinating. The best time to make any sort of financial improvement is now. The best time to start paying off your debt is now. The best time to start saving for retirement is now. The best time to start a budget is now. Mathematically, psychologically, and financially, the best time to start is now. Put compound returns to work for you.
- Spending more than you earn. Yes, the government deficit spends. You are not the government. Yes, there are lots of things that are tempting to buy. Yes, you could use credit to purchase them. Don’t. Don’t spend more than you earn. It’s only by mastering this fundamental principle that you’ll ever begin to accumulate wealth.
- Not saving enough. Glink writes: “Building wealth isn’t about how much money you earn each year; it’s about how much money you don’t spend.” When you’re just starting out, it’s difficult to find money to save. But even a little is better than nothing. Work to build an emergency fund. If you have the surplus, by all means max out your retirement plans!
- Failing to pay off debt. Carrying debt is like sitting beneath your own sword of Damocles — it hangs by a hair, ready to fall at any moment. When you’re burdened by debt, a single disaster can be enough to bury you. Don’t tempt fate. Eliminate debt as soon as possible.
- Looking for quick fixes. Get rich quick schemes are just that — schemes. Playing the lottery is not an investment strategy. That hot stock tip is not going to make you a millionaire. Multilevel marketing is just a good way to make your friends and family uncomfortable. Take the slow, sure path to wealth.
- Letting emotion interfere with your decisions. Humans are complex psychological creatures. It’s impossible for us to make decisions — financial or otherwise — completely without emotion. But when you let your emotions get the best of you, you end up in debt. You make poor investment decisions. You buy a house you cannot afford. You buy a shiny new Jetta when your three-year-old Focus still runs fine. As much as possible, separate emotion from your financial decisions.
- Trying to time the market. I’m guilty of this one from time-to-time. If 80-90% of professional mutual fund managers are unable to beat the market, what makes me think that I’m going to be any better? Glink is correct when she says that “the best way to invest in the market is to be steady and consistent”. She recommends dollar-cost averaging (a subject I haven’t covered yet). I think any sort of regular investing in index funds is a smart choice.
- Failing to diversify your investments. I consider this an “advanced mistake” — it’s a mistake that I won’t be able to make until I’ve accumulated significant investments. I not there yet. I’m still paying off debt. But Glink is correct: the best defense against a decline in any single stock is invest in many stocks. The best defense a decline in any single market is invest in several markets.
- Following fad investments. First it was real estate. Now it’s gold. What will it be next year? Don’t chase the hot investments. If they’re hot, they’ve already made significant gains, which means the prime buying opportunity has already passed. Buy low, sell high — remember? The same is true with stocks and mutual funds.
- Not taking enough risk. We all want our money to be safe. We worked hard to earn it, and we don’t want to lose any through investment mistakes. But the truth is the less risk you’re willing to take, the lower your potential returns. You could stick all of your money into a nice, safe savings account, but you’ll only make 1% on your money at best. Especially if you’re young, be willing to accept a little risk, especially if, as in the stock market, the long-term rewards are worth it.
I used to commit seven of these mistakes on a regular basis. I’ve mastered most of the problems now, though, so that I’m left mainly with two bugaboos: procrastination and market timing. And wouldn’t you know it? My financial life has turned around. In the past two-and-a-half years, I’ve trimmed nearly $15,000 in debt, have begun to save for retirement, and have established emergency savings.
Which of these mistakes is most troublesome for you? Procrastination? Looking for quick fixes? Failing to save?
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