I have blogged in the past about some specific no-no behaviors and money mistakes to avoid in life. They all are important to know and understand. But today I want to talk to you about some of the real basics of those mistakes, and how to avoid them.
Kids Do and Kids Learn
When you first were exposed to having some money in your life as a kid, it’s such a big deal that I bet you were just like I was. I held onto it as tight as I could, evaluating every single penny and how I would spend it.
That was expected because getting that money when you’re eight years old isn’t easy. Even as a kid I had to earn it in some way. My allowance was based on chores of some sort and even getting 50 cents was a big deal to me. It meant bubble gum, baseball cards, a soda at the corner store, and if I save enough for a few weeks, I could go to the movies and even buy a popcorn from the “popcorn machine” for a dime too! That was a big deal in 1957.
But even as an eight year old, I could easily fall into “money traps” and make some mistakes with my money. Some were small and some were big. And guess what? I can still experience those feelings even at age 72.
How to Avoid Money Mistakes
Mistake #1 – Investing mistakes we all make
I didn’t take any risks as a child with investing really. Well, there was that time when I bought a bunch of old comic books from the other kids near me for a penny or two (they sold for a dime to 25 cents when they were new back then) and tried to resell them at the playground afterwards for a nickel each. I remember I got burned pretty badly with that one and wound up eating a big loss on them in the end. I can’t recall exactly what happened to the dozens of Superman and other comic books I bought up, but if I had hung onto them they would be worth a fortune today, 60+ years later.
Mistake #1 on steroids right here I guess. I could have avoided that whole big money mistake had I realized I was investing in something I didn’t know much about…running a business and taking a risk with inventory. OK, I didn’t know anything about it.
Always research what you’re investing in and do your due diligence. Sometimes our excitement or a time-sensitive offer makes us want to leap before we look. But you won’t regret taking the time to investigate before you commit.
As with anything in life, especially investing, sometimes the best thing you can do is just to avoid making the big mistakes that can set you back to zero or even worse, the minus money zone. Putting your personal finances in order to start moving to your goals is what you must do, but also avoid the mistakes that can defeat your dreams and then even destroy your motivation to keep going. It did to my comic book empire back then.
Mistake #2 – The poor planning mistake
I once had a high school teacher that was fond of repeating: “The 7 P’s – Prior proper planning prevents piss-poor performance”. Procrastination and poor planning is one of the biggest money mistakes that almost everyone makes from time to time. Procrastination is the reason there are due dates on the bills you get and why people line up at the post office on April 15th every year to mail their income tax returns.
Think about it, even just starting a money conversation with family members can be painful and most people just put it off…forever.
The planning of a budget and saving for your money goals is not really any fun, especially when it means cutting back on the things you want today. That’s true even though it means a better tomorrow and focusing on the things you really want.
It’s so important to have a crystal-clear image or “plan” of your goals. Create a mental picture of what you want from your financial goals. This will help motivate you to get started planning and saving and will support you along the way.
Mistake #3 – Ignorance is not money bliss
Access to great information about your financial planning and investing has never been easier to find. Most people don’t appreciate how much easier it is to get good financial advice these days compared to what our parents went through to plan their finances. Unfortunately, access to the information doesn’t give you more hours in the day to process it all.
We’re all busy. After a full-time job, kids, and that 30 seconds you find for yourself each day, is there really anything left to learn about personal finance? The answer is that you have to make the time.
Learning about personal finance is like budgeting your money for saving. You need to save money. If you don’t make enough for everything you want, you might have to cut back for a while to save enough for your financial goals.
Unless you have enough money to hire a financial advisor that will do everything for you, you need to spend at least an hour or two a week and do it yourself. If you don’t have those couple of hours available, you might have to cut back on a few other things you do to find the time. The upside—like it is and should be—is that spending a few hours now will pay off in having better years afterwards when you reach your financial goals.
Mistake #4 – Taking too much risk with your money
Another big money mistake is that we gamble with our money. There are so many different ways we do that they you may not even realize that you’re doing it.
Take an insurance policy that you may have as an example. It sucks paying for insurance every month. It’s so hard to see the benefit, especially when premiums reach into the hundreds of dollars. But insurance is there to protect you from financial catastrophe and if that word catastrophe scares you, it should.
The average cost of an emergency room visit is $1,500 and each night in the hospital can add up into thousands of dollars in bills. The average cost of a car wreck is $7,500 and that’s even if no one is seriously injured. That’s why you buy insurance.
You need insurance. Just think of how much it would suck to sacrifice and save for years, even decades, only to see all your financial dreams lost to one big giant medical bill!
People take just as much risk by not saving an emergency fund. Insurance can cover the big bills, but losing your job will wipe you out just as quickly. An unexpected layoff can push you into bankruptcy and a debt trap of super-high interest rates.
Oh, and don’t fool yourself by thinking that having investments in stocks and bonds or having a retirement fund at work counts as an emergency fund. Needing money fast may mean selling stocks at exactly the wrong moment, losing thousands when prices are low.
Having an emergency fund in safe investments that you can sell quickly can help you pay expenses without dipping into your nest eggs.
But we don’t just stop there when it comes to taking too many risks with our financial lives. Because we want to get our hands on a quick fix of money, way too often we jump at every tip we get to find the next hot deal or stock. How many times have you done that or do you put almost all of your money in safer investments like bonds and real estate? Yes, it is true that to hit it big you need to take “some risk”. But to be secure you need a secure foundation first. Think of your finances like a construction crew approaches building something.
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Instead of thinking of it as avoiding money mistakes, learn from each of these financial fumbles people make and what you can do differently to reach your goals. Some of the best money decisions are also fairly obvious when you look at the alternatives.
It’s important to write out your financial goals and start planning as soon as you can. Make a budget that includes saving and understand that credit doesn’t mean income. It’s not your money to spend without a pretty good reason and a plan to repay it when you “borrow” it.
When you do start investing, take the time to learn about personal finance and the money habits that will put you on the right track. Do that before you invest your first penny.
Make sure you actually have enough and the right type of insurance as well as an emergency fund to help protect you from all of the “what if” scenarios that can happen in life.
These may be four big money mistakes but they’re not the only ones you can commit. But the good news here is that by taking a little time now to learn about your personal finances, you’ll be able to avoid money mistakes and spot money problems before they become the big money problems that can drain your bank account.
Can you take an honest look at each of these money mistakes? Are you ashamed or afraid to admit having fallen into any of them? Look at each mistake. What led to it in the past and how you can avoid making the same money mistakes in your future?