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Ten Common Money Mistakes, Part 2

This is part two of our Ten Common Money Mistakes series that we started yesterday. You can find Part one here [3]. In part one, we covered the following mistakes:

Here is part two and the conclusion of the Ten Common Money Mistakes:

5. Blindly Trusting Your Advisers

It’s important to have advisers in your life, whether it’s a professional with letters after their name or your parents. It’s also important to take what they tell you and make your own decisions about it. Perhaps it’s an investment you don’t feel 100% confident in or it’s a strategy you don’t think is completely legal. Maybe you don’t trust the adviser or you don’t trust the investment they’re recommending. Whatever it is, it’s your money, your credibility, and your freedom on the line, not the advisers’. If you’re going to agree to something, you have to be willing to accept the consequences as well as the benefits. And remember, rule #1 should always be “don’t lose money.”

The underlying problem in this mistake isn’t so much listening to others, it’s that you listen to others as a proxy for learning it yourself. It’s one thing to listen to a car mechanic, where there is a limit to the potential mistake you can make. If you overpay for a part or repair that you didn’t need, that’s not ideal but your limit is the cost of the work. If you invest in an idea that you don’t fully understand, the stakes are much higher. Don’t abdicate control of your life or your future to anyone.

4. Not Planning For The Future

As Cesar Millan, the Dog Whisperer [4], often says, dogs live in the here and now. As awesome as a dog’s life is, we can’t live our lives that way. One of the biggest mistakes we can make is not planning for the future. Everyone needs to chart out a one year plan, a five year plan, and a ten year plan (the actual years can vary, the idea is you need a short, medium, and long term plan). The goal of the plan is two-fold.

First, if you are in a family, establishing a plan puts everyone in the family on the same page. Reviewing the plan can be a great bonding and growing experience as well. Second, it can help you establish goals. If you plan on buying a home in five years, you can figure out how much you need to save each month to build up a sufficient down payment. By establishing a plan, you can chart your progress against your goals and be better informed about how you’re doing. You can also pro-actively save towards your goals, rather than leaning more towards using debt as a way to achieve your goals.

3. Violently Changing Directions

Violently changing your plan is when you take whatever path you were on and suddenly change directions, without much regard or planning for the consequences.

This is most often seen in new college graduates who hold degrees in majors that are currently in low demand. Whatever they had envisioned in their plan as a future career simply isn’t possible in our economic times and so they turn towards jobs where their expertise isn’t a differentiator. At first it sounds like you’re being pragmatic, but you’re in fact violently changing direction. You spend four, five, even six years studying a craft… and in a few months you’ve abandoned it. That’s pretty violent.

The solution to this is to ensure that you chart out your future plans and build contingencies into the plan. The best laid plans of mice and men often go awry, so it’s important to build up alternatives and contingency paths along that plan so you can adjust for the future. Your contingency plan may be to take a job in an unrelated field so you can build up some job skills with the future plan of returning to your field of study when the economy recovers. Having a contingency plan means that your changes won’t be quite so violent.

2. Not Paying Attention

Every month, I add up my net worth and put it in an Excel spreadsheet. The value in doing this isn’t in looking at my net worth increasing or decreasing. The value isn’t in seeing what it is versus my peers. It’s a valuable exercise because it guarantees that I will log into each of my financial accounts every single month. I will see how it has performed over the last thirty or so days. I will give it a small bit of attention each month and that’s very important.

My wife’s Roth IRA was 75% cash and has been 75% cash for quite a long time. In the last year, it’s gained exactly 0% and it has lost exactly 0%. We were fortunate that we didn’t lose as much as we could’ve if the money were in an index fund, like much of everything else of ours happens to be. However, we didn’t actively make that decision. We didn’t decide that cash was the best option, we simply didn’t decide at all and the default was cash. While it worked out in our favor, it’s a mistake because we weren’t paying attention.

The simple solution is to check in on your personal finances once a month. If that’s too much, check on them once a quarter.

1. Not Budgeting

The most common personal finance mistake, by far, is not budgeting. Having and keeping a budget is probably one of the easiest, cheapest, and most rewarding thing you can do to get your finances on track.

By keeping a budget, you take much of the mystery out of your money. You won’t get anxious because you feel as if you don’t have enough. You won’t spend recklessly because you mistakenly believe you have more than you really do. By budgeting, you not only know where you stand, but you know how much is allocated to each category each month. If you budget $100 on entertainment each month, you can enjoy paying for a $10 guilt-free because it’s in your budget.

If you’ve never had a budget, give it a try. It’s a liberating process and an enlightening one because it shows you exactly how much you can and can’t spend. You can make it as complicated or as simple as you want, the key is to start doing it. I started with an Excel spreadsheet and eventually started using tools to help me track line item expenses. You can use a pen and pad. It’s whatever you feel most comfortable with.

That concludes our two part series on the ten common money mistakes. There are far more than ten common mistakes but I felt these were the ten that are the most common and have the greatest impact if not stopped. What common mistake do you see a lot that I didn’t mention in this list?

(Credit: left-hand [5])