On this blog we’ve talked about what you should do with your money to maximize your wealth across your lifetime, however it might be even more important to talk about what you shouldn’t do. Sometimes making the wrong decisions or putting off certain responsibilities can have a dramatic impact on our wealth, which is why in this post, we’re going to talk about the 7 deadly sins of personal finance. Avoid them and you’re already on your way to a better and more stable future.
1. Waiting to Save for Retirement
This one is one of the biggest mistakes you can make when it comes to personal finance, it’s particularly dangerous because it involves passivity, unlike some sins on this list you’re not necessarily taking a negative action but rather you’re choosing inaction which may fool your brain into thinking that you’re not doing anything wrong. But don’t fool yourself, you’re in fact choosing you’re deciding to put it off, you’re deciding to disregard your future.
When it comes down to retirement you can see your wealth at retirement as a function of two basic inputs: time and money. The more time you give your money to grow, the more you are going to have at retirement, the same logic applies to how much money you put in. The problem is the following every dollar you put in in your 20s is going to be worth $10.67 when you retire while what you put at your 40s will just be worth $1.9 (35 vs 10 years of compounding with a Rate=7%).
Investing $100 per month at your 20s might sound like a lot but keep in mind that in order to make up for not investing that meager amount you’ll have to save around $1000 per month if you start to save too close to retirement, make your money work for you not the opposite!
2. Not Caring About Your Credit
Taking care of your credit score is really important for your future, you might not care about it right now but if in a few years you decide that you want to get a mortgage so that you can buy your own house, you’ll certainly regret some decision. Your credit history is very important because lenders base the decision of lending to you based on your credit score, if your score is low enough you might not even be eligible for a loan.
It might even have a negative impact in your career, a 2012 study found that around 47% of employers consult the credit history of the candidate as part of their hiring process. These measures were implemented to counteract theft and embezzlement, so having a low credit score can create a very bad image of you when trying to find a job.
It might also lead to spending more in interest payments across your lifetime as most insurance companies will charge a higher interest rate to riskier individuals. According to Consumer Report even having a decent score might have you paying hundreds of dollars more than those with an excellent credit score. So save yourself some money and troubles and take care of your credit.
3. Not Investing or Investing in the Wrong Place
Investing is one of the easiest ways to build wealth, the problem is that sometimes it can seem too complex. Afterall there are so many stocks, bonds, yields, ETFs, derivatives, etc. that make investing sound too complicated and time-consuming but the reality is that unless you’re managing a portfolio with millions of dollars at an investment firm chances are that you don’t really need to understand every single detail about financial markets.
Take the advice of Warren Buffet and just invest in an instrument that tracks the overall market like the Vanguard funds. Unless you have a deep knowledge of financial markets (and even those who do fail most of the time) don’t try to beat the market by picking specific stocks that you believe are going to grow in the next few years, this will expose your wealth to unnecessary risk.
Investing funds that track an index, for example, the S&P500 is a cheap and easy way to invest with diversification and eliminating most of the risk. If you invest for the long run you’ll also eliminate the intrinsic risks of the market/economy because in the long run the market has always recovered from financial crises and then made some, trying to time the market is a one-way ticket to financial ruin.
4. Failing to prepare for emergencies
Rainy days always come and it’s better to prepare because once they’ve arrived it’s already too late. Failing to save for emergencies can derail your financial plans, emergencies, often sooner rather than late, happen all the time and there’s no way to avoid them. Medical bills, car accidents, house repairs, losing a job are some of the most common ones but it really could be anything.
By definition emergencies are uncertain but you can take three specific measures that will your wallet 99% of the time, first get medical insurance, even if you’re young and you exercise regularly and follow a perfect diet, medical insurance is non-negotiable I don’t care who you are. Second: pay for car insurance, you don’t to be involved in an accident and end up paying thousands of dollar to the other party just for a random mistake. Last but not least save some money for a rainy day, you can use this money if you happen to lose your job or if something in house breaks down, etc.
5. Financial Illiteracy
There’s absolutely no excuse for financial illiteracy, through the internet you have plenty of resources from where to learn, most of them absolutely free, you have blogs (check out our other articles btw), podcasts, youtube videos, and hundreds of free ebooks. Money will play a key role in your life quality so it’s better to really understand it, where does it come from? how does it work? how does it grow? when does it depreciate? etc.
You don’t need to become an economist or anything but reading a couple of books on topics like personal finance and economics will surely be useful down the line. The key to making the correct financial decisions is to invest time and effort on your financial education, I guarantee you it’s one of the best investment you can make.
If you don’t where to start you can check these lists of books:
You don’t necessarily have to read books if that’s not your cup of tea, you might want to listen to a couple of podcasts in your daily commute, you can check out Listen Money Matters or Smart Passive Income among many other great podcasts if you’re interested.
6. Not Setting Goals or Plans
In order to make progress, you need to have clear and measurable objectives after that you need to create a plan about how you’re going to achieve those goals. The plans and goals are going to change, maybe the goal was not realistic or maybe you realize that it was the wrong goal and you were measuring progress the wrong way, this doesn’t really matter, the real purpose of your plan is to give you some direction.
If your goals is to invest $1500 dollars then you already have a measurable objective you’re either taking action and getting closer to your goal or you’re fooling around. If you don’t have a clear plan and you just have the goal of “achieving financial freedom” it’s way easier to do nothing and fool yourself. You might not be saving money but you say to yourself “it doesn’t matter because thanks to my career I’m going to make a lot of money in a few years so it doesn’t really matter” or you might just save a couple of bucks every now and then and think that’s enough.
If you have a clear financial goal that has a deadline you’re going to put more effort into it and even if you fail your challenge it doesn’t matter you can adjust it and continue to make real progress. After doing this process multiple times you will get better at setting realistic goals and plans which will allow you to reach more significant financial milestones.
7. Not Getting Help
Sometimes certain problems are beyond our knowledge of the field, even if you have read a couple of personal finance books and you’re well versed on economics, financial markets, stocks, etc. sometimes you will not have the knowledge or even the experience to deal with certain aspect of finance, in these cases, it’s a good idea to seek Profesional help.
Financial advisors, accountants and lawyers can be useful on certain occasions, especially when your wealth is at risk. It’s wise to recognize our shortcomings and allow the experts to take care of complex problems. If you’re worried about a certain investment, a potential lawsuit or how taxes may impact certain business decisions consult an expert on the field, sometimes paying the professional can be cheaper than making the wrong decision.