To err is human. To err financially is not only human, it happens to even the most astute. Here is a list of the ten biggest money mistakes.
1) Buying Stupid Shit and Accumulating Mega Debt
We live in a consumerist world. Social media projects an image that happiness can be found at the bottom of a new pair of shoes or a Louis Vuitton handbag. Combine this with the easy availability of credit cards and you have a toxic cocktail that will lead many mortals into temptation. This has led to the narrative from financial advisers that credit cards are evil. Credit cards, themselves, can be powerful sources of cheap funding if used correctly. The problem is that most people use their credit cards irresponsibly and get in over their heads. They then spend the next 5-10 years trying desperately to dig themselves out of their debt holes at a time when they should be saving, investing, and building a foundation for financial freedom.
2) Chasing Sexy Investments
Paul Samuelson said investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 to Las Vegas. The biggest mistake people make when it comes to investing is looking for sexy investments. Sexy is great if you are looking for lingerie, a mail-order Russian bride, or an Italian sports car – but it has no place in investing. Investing should be boring – and there is nothing more boring (and powerful) than an ETF.
An ETF is one of the most amazing financial inventions. It is an exchange-traded fund. It trades like a single share but it delivers the performance of a large basket of shares. Take the URTH ETF. This ETF buys more than 1,500 global shares - you are buying the world! Its biggest holdings are Apple, Microsoft, Amazon, Tesla, Google, and Meta. These 6 companies make up 15% of the ETF. You are diversified in terms of sectors and regions. 68% of the companies are based in the US, 6% in Japan, 4.5% in the UK, and approx. 3% in Canada, France, Germany, and Australia. You have technology companies, banks, health care, industrials, media - the whole bang shoot. The fee on this ETF is a low .24%. There is nothing sexy about 1,500 stocks, but this ETF will make you rich – if you invest a decent amount every month – for 30 years!
3) Taking Bad Advice
There is no shortage of financial “gurus” on YouTube, Instagram, Twitter, and other social media. Kids think they can read a couple of books, watch a couple of videos and suddenly they are qualified to offer financial advice. It is true that it is not difficult to understand the basics of finance, but financial education and proficiency is a lifelong journey. In a world that focuses on instant success and gratification, it is easy to be sucked into the belief that financial mastery is easy. On social media, semi-illiterate financial gurus and influencers are giving advice to completely illiterate disciples and this is creating a vicious downward spiral that will end in money being lost and financial dreams being shattered.
4) Failed Relationships that Damage your Credit Rating – and Personal Guarantees
Love is blind, dumb, and stupid. When you enter a new relationship, common sense flies out the window, and sound financial discipline is not far behind. Joint bank accounts and personal guarantees are a two-headed monster that can come back and bite you on the rear. Sharing a bank account may breed conflict. Whether it’s the roommate, spouse, or business partner, disagreements can arise, and having a shared account may create future issues. As all account holders can equally access the account, they can withdraw, deposit, change details, or transfer funds at any time without the consent or knowledge of the partner. In addition, if an account holder has a poor credit history, it can negatively impact the partner as well.
5) Not Having Enough Insurance
Insurance is awesome and you should have lots of it. Let's say that you buy a $50,000 car and insurance costs $1,000 per annum. You can do one of two things – decide to insure the car or your car decide not to insure the car. Let’s now look at the risk-return relationship. Assume a scumbag takes a shine to your new automobile and steals it. That event would result in the realization of a $50,000 loss. You can eliminate this risk by spending $1,000 on insurance. By spending $1,000, you can avoid a $50,000 loss. This is a no-brainer. You need to have car, medical, life, and as many other insurances as possible.
6) Investing in Retirement Annuities
The only person that makes money from an annuity is the salesman. According to billionaire investor Ken Fischer, if you invest $1 million in an annuity you will put a kid through private college. The problem is that it is not your kid. It is the kid of the annuity’s salesman. Do not be fooled by the sales rhetoric. Annuity salespeople will regale you with the tax benefits, the power of compounded growth, the discipline of saving (a lie that we have debunked), supporting your dependents, and long-term stability. If you are financially educated and disciplined, you can do better with direct investments. Annuities are black-box investments – there is no transparency and accountability of results. The fees are borderline criminal. Moreover, when you retire with that annuity, you will get a stream of income akin to a quaint Scottish brook. You deserve the whitewater rapids on the Zambezi River.
7) Being Afraid of Risk
Risk is good. You should embrace it and manage it. You should not avoid it. Jeff Bezos of Amazon became one of the world's wealthiest people in 2018 by taking risks. He put all his eggs in one basket. He went all-in on a little company that sold books over the internet. He grew it into a multi-trillion-dollar company. Risk is good as long as it is managed. Bezos made a calculated bet. He knew he could convert Amazon into the world's leading e-commerce site and the world's leader in cloud computing. Now he is working on making Amazon the world's leading online grocery store (through the purchase of Whole Foods) and the world's leading streaming service (competing with Netflix). If you start a business, and you believe in the business with all your heart, mind, and soul, go all in. Commit to it and believe you will succeed. This belief, commitment, and drive will act as a risk management tool.
8) Avoiding the Stock Market
The stock market is one of the greatest generators of wealth on the face of the earth. Many, however, avoid the stock market for two reasons. Firstly, they think it is too dangerous. Most people are terrified of the stock market because it exhibits wild and volatile swings and this is true – in the short term. The stock market, over the longer term, tends to be more predictable and benign. Your first step is to recalibrate your opinion of the stock market and take a long-term view. Secondly, they are under the misconception that you need to be super smart and dedicated to investing. In reality, you do not need to be an expert in stocks to get rich. All you need to do is invest a decent amount of cash in a well-diversified ETF over the long term.
9) Making Your House Your Most Important Asset
Most people believe their home is an asset. Robert Kiyosaki, in his book "Rich Dad, Poor Dad", says the asset/liability test is simple. Assets put money in your pocket. Liabilities take money out of your pocket. If you are living in a house, and it is mortgaged, you are paying rates, taxes, and interest on the loan. It is a liability. If it is "free and clear" it is still a liability. You are paying rates and taxes, not to mention lights, water, and general maintenance. But property prices always go up. That is a fallacy. Americans who bought houses before the financial crisis of 2008 will paint you a different picture. Real estate is like any asset – its price can rise or fall. If you are banking on your house price appreciating in value, then welcome to the world of speculation. Real estate is a very powerful income-generating asset, but it is only an asset when it puts money in your pocket i.e. if you rent it out to someone else.
10) Lack of Patience
We are impatient. We want to get rich quickly. Getting rich, however, requires compounding and patience. Investing $100 per month at a return of 10 percent per year will deliver $226,048 after 30 years. How much would I have after 30 years if, instead of 10%, I generate returns of 20% year? The human brain, in all its feebleness, would reason like this – if I am earning double the return (20 percent instead of 10 percent), it should have double the money - $450,000.
What would you say if I said that by doubling the annualized return you would earn TEN times more? Your $100 investment at 20 percent per annum will yield $2,297,783 in 30 years!! How is this possible? Through compounding and patience. Albert Einstein said that the power of compound interest is "the most powerful force in the universe" and went on to say..." he who understands it earns it; he who doesn't, pays it."
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