Top 5 Common Money Mistakes

Do you ever find yourself scratching your head wondering where all your money went? In this week's newsletter, we'll dive into the top 5 most common money mistakes that people make and how to avoid them. Whether you're looking to save for a big purchase or build long-term wealth, these tips will help you get there.

Money Mistake #1: Not setting clear financial goals

A lot of the confusion around personal finance stems from not having clear goals around what you want for yourself. This makes people spend their money more reactively rather than with a long-term plan in mind. Try the following exercise: visualize yourself at the end of your life and think about what you wish to have accomplished during your time on Earth. For me, I want to develop generational wealth to pass on to my children, and also to live a fun and exciting life.

From that north star, I can start to plan long and short-term financial goals for myself. Let's say I want to have a healthy retirement at age 65 with about $75k/year in annual income until I’m 100 years old. To achieve that, I need to save about $3.5M, or $1,900/month across my retirement accounts. To clarify your dreams and convert them into attainable goals, get specific with what you want, and plan it out.

I am a big fan of sports cars and spirited driving, so another goal of mine is to own an Audi S3. To plan this, I’d use the 20/4/10 rule for vehicle purchases to make sure it fits my budget.

The rule states that you should:

1. Pay a down payment of 20% of the vehicle price

2. Finance the loan for no longer than 4 years

3. Keep monthly transportation expenses at 10% or less of your annual income
   

Here’s what that would look like in this example:

• Assumptions: $100k annual income, 5% interest rate

• Vehicle Price: $35,000

• Down payment: $7,000

• Loan Terms: 4 years (48 months) at 5% interest ($644/month payment)

• Additional expenses: adding in gas, insurance, and maintenance costs would likely get the total right around $1,000/month, or 10% of the assumed annual income, within the guidelines for vehicle affordability

You can use tools like Calculator.net to help you plan for different financial goals like these

Money Mistake #2: Not tracking your spending

When I first started my personal finance journey back in 2014, I began by tracking every single expense I made every month. As a first-generation college student who knew very little about managing money, having the discipline to do this was pivotal in my financial success.

The real value in that activity was to adopt the mindset of someone who knows where there money flows. Tracking your spending allows you to measure if your money is going towards your long-term financial goals rather than towards conveniences or cheap thrills.

Here are some helpful money tracking tools that I’ve used to manage my finances:

• Chase’s Spending Summary is useful to track which categories you are spending the most money on each month across all your Chase credit cards

• Mint allows you to track spending across various accounts including checking, credit cards, loans, and investments

• If you’re serious about getting your spending under control, I recommend using spreadsheets to manage your personal finances - check out my free personal finance tracker to track your net worth, asset allocation, and monthly budget.
  
  

Money Mistake #3: Buying things too quickly

We’ve all been there – you see something you like at the store, and it’s 25% off! So you throw it in your cart without a second thought. ‘I’m saving $25’ you think to yourself. But did you really need to spend the $75 in the first place? Oftentimes, buying unnecessary items too quickly can take bites out of our budget without us realizing how fast it adds up. This quote from BecomingMinimalist sums it up nicely:

We think it will make us secure. Our logic goes like this: if owning some material possessions brings us security (a roof, clothing, reliable transportation), owning excess will surely result in even more security. But after meeting our most basic needs, the actual security derived from physical possessions is much less stable than we believe. They all perish, spoil, or fade. And they can disappear faster than we realize.

Here are some ways you can make more mindful purchase decisions:

1. Taking time to thoroughly research your purchases, especially with bigger ticket items like cars, can go a long way in ensuring that the purchase you make gives you the most ‘bang for your buck’

2. Ask yourself the following questions:

•  Do you need to buy the item now or can you wait at least 24 hours?

•  Is this the cheapest place to buy the item? (look into price matching)

•  Are you having a rough day? (Are you buying this in an attempt to self-soothe?)

3. Don’t completely restrict yourself from buying things you want, but make sure you have a budget for ‘wants’ and that each 'want' fits into your plan for how you want to spend your money.

4. Limit your ad intake. Today the average American is exposed to over 5,000 ads per day. Clear out your promotions inbox, scroll past ads immediately, and limit your social media use. This will lower the volume of noise your mind has to deal with when making buying decisions.

Money Mistake #4: Carrying credit card debt month-to-month

Towards the end of my college years, I leveraged 0% intro APR offers on credit cards to increase my spending ability while I didn’t have an income. (Big mistake) I then would transfer the debt to a new credit card with 0% APR once the 0% APR period on the original card ended. While this helped me pay the bills for a short time in college, what I was actually doing was stealing from my future self, as I eventually had to pay back that accruing balance once I started working after college.

While you should try to avoid all forms of debt when possible, high-interest credit card debt is especially sinister because compounding credit card interest can put you into a financial hole that is extremely difficult to climb out of, especially when dealing with multiple credit accounts with various balances and interest rates.

To avoid getting trapped in a cycle of paying off credit card debt only to accumulate it again, it’s important to only buy things that you have the money to pay for at the end of your billing cycle. Personally, I pay off all my credit cards three days before their due date and then avoid putting additional charges on them until the statement date passes. This ensures that 1.) I am never paying interest on credit cards, and 2.) My credit card utilization is always at 0%, which helps to maintain a strong credit score.

Money Mistake #5: Developing a scarcity mindset

The opposite of over-spending, it can become tempting to adopt a ‘spend as little as possible because I have no money’ mindset. While it’s smart to be thrifty when you’re climbing out of debt, once you are at a healthy place financially, it’s important to set aside money for what you truly enjoy in life.

Whether it’s traveling, fine dining, or spending money on equipment for your favorite hobbies. Remember to treat yourself and your family well to avoid becoming miserable on the long road to financial freedom. It’s a marathon, not a sprint.

Adopting an abundance mindset in your personal finances allows you to see opportunities more clearly. Instead of focusing all your attention on penny-pinching, you’ll shift to thinking of ways to make more money by providing value to others. This will help you attain more of the things and experiences you want in life.

Personal finance is all about striking the right balance of spending vs. saving for your personal financial goals, so make sure you’re clear on your financial goals so that you can spend your money conscientiously.