5 Most Common Financial Mistakes to Avoid
Key Takeaways
- Self-discipline is a key factor to avoiding financial mistakes
- It’s good to reward yourself and enjoy your life – but in moderation
- To succeed in the long run, avoid day trading and timing the market
The other night, my husband and I were going through our monthly financial goals checklist of to-dos and not-to-dos.
We smiled seeing how we have progressed and what we have accomplished together financially.
My husband and I are finance nerds and enjoy learning about all things related to money – and that’s where we decided to list out the 5 most common financial mistakes.
We’ve seen not only our friends commit these mistakes but also other distant relatives and work colleagues – including some working in the finance industry!
"If you want to avoid financial mistakes, it comes down to self-discipline and your mindset."
You have to be able to trust yourself to learn from your past financial mistakes and then never to make those again.
Even better – let’s say you are a 15-year-old reading this blog post and haven’t yet made financial mistakes because you are too young – here’s your chance to learn from others’ mistakes and never make them.
The world is your oyster – and below I have shared some very common financial mistakes that you can learn from and ultimately avoid.
1. FOMO & YOLO
For those of us who are unfamiliar with the terms FOMO and YOLO, let’s decode these acronyms.
Similar to FOMO, the other acronym, YOLO, means:
In other words, FOMO and YOLO mean you should do the things you want to do NOW instead of only focusing on the FUTURE.
FOMO and YOLO lifestyles typically don’t agree with the following:
- Aggressively saving
- Working hard
- Hustling
FOMO and YOLO traits worry about saving and investing so much for a future that may not be granted to you.
I get it.
"In the end, it comes down to maintaining a balance."
On one hand, I don’t think that you should splurge every cent you received from a bonus check.
I consider bonuses as ways to fill in any missing gaps that you may have in your financial picture:
- Paying off credit card debt
- Boosting your emergency savings fund
- Increasing your employee retirement account contributions
I do not spend my bonus checks on material things that would cause lifestyle creep.
For example, with bonus money, I recommend against purchasing:
- New cars
- Fancy clothing
- Epic nights out
"If your goal is to become a millionaire, be smart about spending unexpected financial windfalls (like bonuses)."
Yes, you can certainly reward yourself for the hard work you’ve done – but I will stress that your “reward” should be moderation.
If I were to see an unexpected bonus?
I’d save my bonus money and try to outperform my quota so I would earn double my bonus money for the next round of bonuses!
"Motivation costs $0."
Listen up Millennials and Gen Zer’s: FOMO and YOLO would be one crucial and common financial mistake to avoid.
If you are looking for ways to stop spending and start investing money, check out M1 Finance.
This is my go-to investing app when I’m looking to:
- Automate my investment strategy
- Manage my money using a hands-off approach
- Find the best investment strategy for my age and risk level
M1 Finance will keep you in-line and make sure you reach your financial goals through a simple and easy-to-use investment application.
2. Stuffing your Money in a Savings Account
Originally, I thought that Millennials were aggressive investors.
I was proven wrong.
I’ve met multiple Millennials that do not believe in investing in the stock market. Period.
Why?
Some reasons included:
- The government may take their money
- Their accounts could be frozen by the government
- They may lose every cent of their hard-earned money
Because of these worries, these Millennials do not invest.
You may have noticed that interest rates in a high yield savings account are not very high.
In fact, the average interest rates are 1% or sub-1%.
If you only dump your cash in savings accounts, here is the situation you’ll likely see:
| Scenario | Description |
|---|---|
|
Initial Deposit |
$50,000 |
|
Interest |
1% |
|
Holding Period |
30 Years |
|
Additions |
No |
|
Interest Earned |
$17,392 |
|
Ending Value |
$67,392 |
If you had invested that money in the stock market, your results would have been very different. Let’s take a look:
| Scenario | Description |
|---|---|
|
Initial Deposit |
$50,000 |
|
Stock Market Allocation |
100% Large-Cap Value Stocks |
|
Rate of Return |
7% |
|
Holding Period |
30 Years |
|
Additions |
No |
|
Compound Interest Earned |
$330,613 |
|
Ending Value |
$380,613 |
Let those numbers sink in for a minute.
You could be $313,221 dollars ahead simply by investing versus if you just stuffed your money in a bank account.
And listen – for those of you who are ready to level up and start investing – check out M1 Finance.
3. Credit Card Debt
If you think you can pay off credit card debt tomorrow – you’re wrong.
Why?
The exorbitant interest rates that are charged on credit cards.
"Credit card debt can destroy lives."
The average investment account, over a 50-year period, only generates roughly a 7% return while credit cards easily can charge north of 20%. Pay off that 20%-plus interest debt first before doing anything else.
Let’s consider this chart, for example. I want you to see how credit card interest rates compare to other common interest rates.
| Debt Type | Interest Rate |
|---|---|
|
Loan shark interest rates (average) |
40% |
|
Store card interest rates (average) |
24% |
|
Credit card interest rates (average) |
20-24% |
|
Investment Account |
7% |
|
Home Equity Rates (2020) |
5.205% |
|
Federal Fixed Graduate Student Loans (2020) |
4.30% |
|
Car loan (5 years) |
4.25% |
|
30-year fixed mortgage (2020 rates) |
3% |
|
Federal Fixed Undergraduate Student Loans (2020) |
2.75% |
|
Savings Account |
1% |
Note how credit card and store card interest rates rank just under loan shark interest rates.
If you are having trouble with your credit card debt, it’s time to look at other options, such as:
- consolidating your credit card debt
- considering a balance transfer for 0% APY intros with other credit cards
This is where Tally comes into play 👇
Tally makes it simple to stay on top of your credit cards.
You scan your cards. If you qualify, tally gives you a line of credit at a low APR and manages all your payments.
No late fees. No gimmicks. Just a faster way to pay down your balances.
4. Not Taking Advantage of Employer Matches
Are you leaving free money on the table by not taking advantage of your employer matching retirement contributions?
Let’s take a further look into what I mean.
Let me explain in English.
An employer matching contribution is when the following occurs:
| Employee | Employer | |
|---|---|---|
|
Annual income |
$100,000 |
N/A |
|
Matching Contribution |
N/A |
4% |
|
Example 1:
Employee Contribution |
$3,000
(3% of annual income) |
$3000 |
|
Example 2:
Employee Contribution |
$4,000
(4% of annual income) |
$4,000 |
|
Example 3:
Employee Contribution |
$5,000
(5% of annual income) |
$4,000
(maximum employer matching contribution of 4% of annual income) |
|
Example 4:
Employee Contribution
|
$0 |
$0 |
Notice how if you do not take advantage of your employer’s matching contribution, your employer will not deposit money in your employer-sponsored retirement plan.
"Missing out on your employer’s matching contribution is like walking by a $1,000 check with your name lying on the sidewalk."
In other words, if you are not contributing at least 4% of your annual income (so $4,000), you are leaving $4,000 on the table – since your employer is not contributing.
Remember to keep track of your net worth.
As you continue with your employer-sponsored retirement plan contributions, it’s always fun to see how your wealth has grown over the past few years.
I’ve always tracked my net worth using Personal Capital.
Believe it or not – it’s actually fun to check out how much your have grown over the years. Seeing growth is like the frosting on a chocolate cake for me!
5. Timing the Market
So I’m going to be very honest with you.
I thought timing the market was the only way to make money.
And in theory, timing the market could make you wealthy.
In the short-term, this strategy may outperform the market.
In the long-run, however, chances are the market will outperform you.
Let me provide you with some statistics:
Let’s say that you were fully invested in the S&P 500 (this is a typical American benchmark for stocks) for the past 20 years.
Your return would have averaged about 5.62%.
"If you missed just 10 of the best days in the stock market, your return would have decreased by 3.61%."
Let’s say you missed the top 20 best days in the stock market.
"If you missed the 20 best days in the stock market, your return would have decreased by 5.95%."
Take a look below.
| S&P 500 Return | |
|---|---|
|
Fully Invested for 20 years |
5.62% |
|
Missed top 10 days |
2.01% |
|
Missed top 20 days |
-0.33% |
The average equity investor (someone who actively invests in the market through day trading activities) typically underperforms the S&P 500 by 2%.
| Typical S&P 500 Investor Average Returns over 50-years | Day Trader / Regular Equity Investor Average Return over 50-years |
|---|---|
|
7% |
5% |
If you had kept your money in the S&P 500 for 20 years and not day-traded, your return would have scored you 2% higher than if you had actively managed your investment accounts on a daily basis.
"Aside from underperforming the markets, day trading also adds a lot stress."
Sometimes it might serve you better to invest in proven, slow, and steady investment opportunities (or hand your investment portfolio over to an experienced investment advisor) and enjoy your life instead of monitoring the markets daily.
Stick to your investment strategy just like M1 Finance will help you do.
Along with the help of robo-advisors, M1 Finance helps you select an investment portfolio that is best for your age, risk tolerance and investment preferences.
Closing Thoughts
In the end, if you are looking to accomplish millionaire status, you’ll have to learn to avoid these 5 common financial mistakes.
It’s very easy to fall into the traps of:
- Buying consumer products on credit cards
- Falling victim to the YOLO or FOMO ideologies
- Spend money on things that you don’t particularly need
- Thinking you can wait to invest in employer retirement accounts
Although my husband and I can help guide you and help advise you on the common financial mistakes I’ve seen in my day – it’s really up to you to make that leap of faith for yourself.
"To become a millionaire, all you’ll need is self-discipline and your mindset."
If you are determined to accomplish your financial goals, then you will likely accomplish them.
My husband and I both hope that our list of these 5 common financial mistakes to avoid will help you live a better financially fulfilling life.
Your bank accounts will thank me later!
What common financial mistakes have you witnessed?
