After spending years on wall street amongst fairly intelligent finance experts, I realized they even smart people consistently make money mistakes. Successful money management and personal finance do not require a high IQ or the ability to outsmart the crowds. Smart people often fall into money traps because they believe they can do better than the masses.
Sometimes individuals are not necessarily trying to make better investment decisions but instead are too busy to learn how to manage their financial affairs best. Unfortunately, these people often incorrectly assume they are making the right moves without doing enough diligence or research.
Good personal finance habits donโt begin with advanced techniques or unreasonable risks. Staying disciplined when it comes to planning, managing, and diversifying your wealth is what grows your nest egg.
Letโs take a look at some common money mistakes to avoid, which smart people seem to repeat continuously.
Buying Financial Products You Donโt Understand
If you cannot sensibly explain what you are investing in, you probably should not own it.
Most market bubbles and subsequent crashes occur when many people buy into something they do not understand. Whether itโs technology stocks of the early 2000s or mortgage-backed securities during the great recession, time after time, intelligent people get caught in the hype and buy financial products they donโt understand.
To avoid this trap, you should be able to explain to a layperson what it is you are investing in and why. Anything you buy should seem reasonable and logical. Investments made with the dream of earning an incredible return are probably based on either misunderstanding or hope over logic.
Truth be told, most people buy individual stocks without an in-depth understanding of the underlying companyโs valuation. Most of these investors would be better served to instead put their money into passive, diversified index funds, which require less specialized knowledge and understanding.
If you do insist on purchasing an individual stock without knowing all the financial details, at a minimum, you should be familiar with the company, its products or services, and a general understanding of how it makes money.
Taking Financial Advice From The Wrong People
People love talking about their successful investments but rarely brag about huge losses.
When your friends are bragging about how much they made from their latest stock pick or crypto trade, this is probably the moment you should tune out. Unfortunately, it is human nature to want to jump on the bandwagon when others seem to be making profitable decisions.
Smart people often fall victim to listening to their successful friends or colleagues, who they believe have insights beyond their own. In reality, financial markets move in cycles from overbought to oversold, and very few professional investors overperform passive investing in the long run.
By following market trends or popular opinions without thoughtful research, investors essentially end up timing the market to their disadvantage. Warrant Buffet is famous for saying: โI will tell you how to become rich. Be fearful when others are greedy, be greedy when others are fearful.โ In hindsight, buying into an over-hyped market or stock often turns out to be an overpriced moment to buy.
If you arenโt knowledgeable about the best investing practices, you should either work towards building your financial literacy or work with a financial planner with your best interests at heart.
Buying When You Should Rent
Many smart people believe that renting is inferior to buying a home because you are throwing money away instead of building equity. Homeownership has become a symbol of stability and financial security, but there are often cases where renting is much more financially prudent.
High-interest mortgage rates, condo association maintenance and taxes, property taxes, and homeownersโ insurance are all significant expenses that often can make home ownership much more expensive upon further consideration. Additionally, the lost investment opportunity of the down payment and upfront costs should be fully accounted for when making a proper comparison.
Many younger people or families buy their first homes with the thought that they will be starter homes that they will upgrade within five to ten years. Buying and selling real estate is further hindered by expensive broker commissions, closing fees, mortgage recording taxes, and other local fees or โflipโ taxes. In these situations, it is often cheaper to rent temporarily until a future, longer-term home can more comfortably be afforded.
Not Saving Enough for Retirement
Smart people often understand the need to save for retirement, but in many cases, they end up falling short of what they need. This ultimately leads to either having to cut back on how they imagined their retirement, working additional years (if even possible), or sadly running out of money at an elderly age and living on a tight budget.
There are two common mistakes that can cause money complications later in life, especially if they are prevented consistently and early.
Living Beyond Your Means
Whether people feel the need to โkeep up with the Jonesโ or have expensive taste, many people fall into the trap of spending beyond their means. There is nothing wrong with spending money or even the occasional splurge; however, you should have a basic budget to ensure you are putting enough money away for the future and not spending too much today.
Any dollar splurged before paying down debt or contributing to a retirement account is probably a poor decision. By working with a financial planner or doing your own basic planning and budgeting, you should have a plan as to how much money you are putting away every year. Furthermore, your plan should estimate how much money you will have at retirement.
Most people avoid this exercise of budgeting and planning and rather not face the truth that they are borrowing from their future selves when they spend too much today. Creating a budget and an investment plan is a simple, essential part of ensuring you save enough to hit your long-term financial goals and live within your means.
Not Starting to Save Early Enough
Time is the most valuable and finite resource any individual has. When it comes to building wealth, you need to utilize as much time as possible to keep your money compounding as long as possible.
Tax-deferred retirement accounts are an essential tool for most individual investors because they provide the opportunity for money to grow more rapidly without tax drag. These benefits cannot be ignored, and investors should put away as much as possible into these accounts as soon as possible.
Smart people often believe their earnings potential will increase in the future, and they can make up for the difference later on. Delaying saving for retirement for ten years can be the difference between hundreds of thousands or even millions of dollars, depending on what age you retire.
Conclusion
Sadly, many poor money mistakes that many individuals make are avoidable, given better money practices and guidance. The following is a review of the four dumb money mistakes smart people make regularly:
- Donโt invest in financial products you donโt understand.
- Donโt take financial advice from others who are not financially literate or donโt consider your best financial interest.
- Donโt feel the need to buy a home. Fully analyze the difference in expenses between buying and potentially renting.
- Make sure you have an investing plan and budget that will enable you to hit your retirement goals and needs.
Avoid these simple pitfalls, and your financial future will indeed be brighter.
