Financial mistakes will hold you back from saving money, creating wealth, and living a better lifestyle for the rest of your life. However, the most important thing is making any of these financial mistakes may cause you to be unable to afford retirement.
Many people say they are not interested in finance or economics, but it is better to learn some basic finance rather than grow old and poor. Finance and economics drive the world and impacts everyone whether you like money or not.
You will not be able to prevent growing old (unless the world is on the edge of some miraculous scientific breakthrough) but you can prevent moving into poverty. Nowadays, most people live in retirement for at least 15 to 30 years after they stop work. That’s a long time to live as an old person in poverty.
Who is going to look after you when you’re old?
Most parents expect their children to care for them in old age.
In the modern world, the reality is somewhat different. Some children move away and live in a different city or country from their parents. Some children become poor and cannot afford to care for elderly parents. Other children don’t want to be burdened for years caring for elderly parents.
You need to plan for your own retirement fully funded by your life choices and the investment decisions you make early in life. Don’t expect everyone else to care for you when you’re old. Even the government may not be able to afford to pay generous age pensions to everyone in the future.
So here are the six financial mistakes to avoid. It is preferable to avoid these mistakes as early as possible in life but the important thing is to start today.
1. Excessive Focus on Saving
Saving money for the future is a good thing. But if all you do is save up money in a bank account (or hide it under the bed) it will be a financial mistake and you will lose out in the long term.
Inflation diminishes the value of the currency and reduces purchasing power. Savings will have less purchasing power in the future meaning you will not be able to do as much with it as you could today. For example, if you are taking a long time to save the deposit to purchase a home and house prices increase your savings will buy less home.
Saving is a good thing in the short term but only saving will hold you back in the long term.
What you need to do is invest your money for the future.
2. Living Beyond Your Earnings
The second of the financial mistakes is too many people in today’s world live beyond their earnings funded by debt.
Yes, there are far more spending opportunities than our parents or grandparents ever had, but too many people who only have average jobs spend too much money.
If you want to purchase small items of domestic nature such as clothes, food, fuel, a haircut, or new phone, use your savings not credit cards.
Borrowing money must be reserved for purchasing appreciating assets such as real estate, investments, or a business that provides your employment.
Use your own equity (your savings) to buy domestic items. If you borrow money for domestic items of expenditure you are paying high interest rates making every purchase more expensive for yourself. Over time, you will have paid thousands of more dollars for life’s essential items. This practice will keep you from saving and investing money. And if you don’t save and invest money you will become poor.
Only buy what you can afford. If you don’t have the money in the bank to pay for the expenditure, don’t buy it. Wealthy (and smart) people never borrow money to pay for items of domestic expenditure.
Note: You can use a credit card to purchase goods and services but make sure you pay back the full balance every month on the card before any interest charge. Never pay credit card interest.
3. Buy Quality at the Right Price
Some people are tempted to purchase cheap products and services. This can work well for some products but you must examine the value proposition.
Generally, the cheaper the goods the less likely they are going to last the distance. The item will break or wear out sooner leaving you to make another purchase.
Usually, it is better to purchase medium quality and price products and services. This usually gives the best overall value proposition.
However, sometimes it is better to buy a cheap replacement item every few years than to pay too much for an expensive item and try to make it last many years. For example, you could pay $150 for an really good fry pan that may last 10 years. But I would prefer to pay $50 every 3 or 4 years for a reasonable quality fry pan. It’s better to have something new every 3 years than try to make an item last a long period of time.
4. Financial Mistakes – Failure to Invest Early
When you are young life can be one big party but don’t let life get away from you. Yes, enjoy your life. However, your whole life is not about being in your 20s and partying every weekend. The 20s pass you by and then life gets more serious. It takes years of working and saving to buy your first home. And many people still don’t own their home when they are 50 years old. Even fewer have adequate retirement savings.
Start saving and investing as early as possible even if it is a small amount.
As soon as you start your first job and start earning money, you must save and invest a portion of your earnings. The sooner you start the wealthier you will become later in life.
Always do your homework before you purchase any investment. An investment must make financial sense. Eventually, the investment must make money and increase in value.
Property investment is appealing to many people but never purchase a negatively geared investment property unless you can afford to make up the cash shortfall from another source of income. And never purchase an investment only to reduce your tax liability.
Negative Gearing for Investment Property
5. Financial Mistakes – Excessive Expenditure
Some people like to spend too much money on luxury items that they cannot really afford. Why do that? Maybe it’s just showing off to family and friends or maybe it makes them happy. The result will be less money to invest for the future and a poor retirement.
For example, purchasing an expensive motor vehicle is a common mistake made by people of all ages. When I worked in the finance industry, customers regularly made motor vehicle loan applications for luxury cars with a minimal deposit. For example, deposit of $5,000 to purchase a $60,000 motor vehicle. Don’t do that. Never borrow money on depreciating assets. You will end up paying thousands of dollars in interest charges on a car that is diminishing in value.
6. Not Understanding the Economic & Investment Cycle
The final of our financial mistakes is to ignore or not understand the economic cycle.
The economy moves in a cycle through various stages from peak to trough and back again. It is very important to recognize where we are in the economic cycle before you make any investment or expenditure decisions.
One common mistake is purchasing real estate at the top of the market. Eventually, there will be another real estate boom but it may be years away. And you must fund the property with a mortgage until the next market peak.
Here is the typical cycle of economic activity:
Peak of the Cycle (Boom)
- Real Estate Values Peak
- Stock Values Peak
- High Volume of Stock & Real Estate Transactions
Economic Slowdown
- Signs of Inflation
- Rising Interest Rates
- Falling Stock Values
- Falling Commodity Values
Credit Squeeze (Less Credit Supply)
- Tighter Lending Requirements
- More Difficult to Borrow Money
- Falling Real Estate Values
- Real Estate Slow to Sell
Bottom of the Cycle (Bust)
- Real Estate Values Bottom
- Stock Prices Low
- Low Volume of Stock & Real Estate Transactions
Economy Improving
- Falling Interest Rates
- Rising Stock Values
- Rising Commodity Values
Easier Credit (More Credit Supply)
- Easier to Borrow Money
- Rising Real Estate Values
- Real Estate Sells Quickly
Peak of the Cycle (Again)
The most common mistake people make is trying to perfectly time the market. Even the experts never quite get it right.
Instead, make your investment decisions based on where we are in the economy and what are your investment goals. For example, the best time to purchase stocks is when the market is depressed. Fewer people are buying stocks and there is a low volume of stock trades in the market. Stock prices will be good value and will increase as soon as the economic cycle picks up again.
Please read The Economic & Investment Cycle
Conclusion
I hope this post helps to explain what changes you need to make to your finances to improve your future lifestyle. The most important thing to change is your attitude toward finance, economics, and investments. You will never achieve financial independence and security with the wrong attitude towards money. So invest some time into learning basic finance skills that will enhance the rest of your life.