Let’s get this straight – We all make mistakes and that is human. However, what differentiates a successful person from others, is their ability to learn from mistakes and avoid them in the future. It is more prudent to learn from the mistakes of others. So, here are 7 financial mistakes, and the ways to to avoid them.
1) Not Knowing Where All Your Money Is Going.
If you are an ordinary family in America, you are busy. You have all the right intentions, but you have no time to sit and figure out where the money is going. It can be for activities like kids sports, or necessities like grocery. In addition, without your knowledge, your standard of living went up over time, and now you find yourself paying more for everything from milk to vacations.
Having a written zero dollar budget is critical for your financial success. Once a budget is created, then you can track using any of the available apps. You can compare various apps in the market at Budget App Comparison.
2) Not Having An Emergency Fund
There are several money market accounts available in the market place, and here is Nerd Wallet’s Top List. An Emergency Fund is a financial safety net to catch you when life knocks you off track. Yes, life can throw you off track. It can be in the form of car repairs, washer/dryer malfunctioning, or a health concern. We recommend having 3-6 months of expenses saved in a money market account, which gives you a better interest rate than a normal savings account. This helps you to have quick access to funds, and will prevent you from signing up for a high interest credit card debt, or borrowing money from family.
3) Accumulating Depreciating Assets
A depreciating asset is defined as any asset that has a limited effective life, and can reasonably be expected to decline in value over the time it is used. They include items such as computers, electric tools, furniture and motor vehicles. The most common among this category are cars and trucks.
According to Thomas Stanley, the author of ‘The Millionaire Mind‘, an average millionaire buys used cars where the depreciation has already been accounted for, and pays for it with cash. According to Cars.com, the average new car price in 2017 after incentives is $31,400. The general concern about buying used cars is the increase in repair costs. However, US News study shows that the depreciation you have to appropriate for a new car is way more than the repairs that need to be done on a used one. Our recommendation is to minimize the purchase of depreciating assets, and instead invest that money. Yes, Opportunity Cost is REAL.
4) Thinking Of Retirement As Something In The Distant Future
Okay, I get it. Retirement is not about sitting on the beach and playing golf. It is about doing what you like when you want because you could afford to do it. Chris Hogan says that retrirement is not an age, but a financial number. With that definition, you can retire in your 50s, 40s or even 30s. However, it won’t happen overnight.
Compound interest is real and Albert Einstein said that it is the 8th wonder of the world. So it shouldn’t be a pipe dream. It should be a real event you plan for in your future. And it’s never too early to start saving and investing. In fact, the longer you put off beginning to save for retirement, the less you may have at retirement. If you have a employer sponsored program, go for it. However, be aware of common mistakes.
5) Not Having Enough Financial Knowledge
As per Investopedia, “Financial literacy is the education and understanding of various financial areas. This topic focuses on the ability to manage personal finance matters in an efficient manner, and it includes the knowledge of making appropriate decisions about personal finance such as investing, insurance, real estate, paying for college, budgeting, retirement and tax planning.” Alan Greenspan says that number one problem in today’s economy as well as generation is a lack of financial literacy.
The expectation is not that you become an expert, but that you have sufficient basic knowledge to ask intelligent questions of your financial advisor or coach. We recommend attending one of the Financial seminars or workshops.
6) Not Having An Accountability Partner
Life is hard and demanding. All of us have good intentions. But, life happens and we always take the path of least resistance. For financial success, one quality that is above everything, even knowledge, is accountability. It is as simple as having someone check on how we are doing financially.
We highly recommend that you have an accountability partner. You can learn more about the different types of accountability and how to select one. It is ideal that the person you select have personal and professional experience along with the right certifications and educational background. The financial world is challenging to maneuver and the jargon can be overwhelming. You need to have somebody with the heart of a teacher who can walk you through the financial concepts, and then hold you accountable.
7) Not Tracking Your Networth On A Regular Basis
Net worth is probably the single most important measure of personal wealth, and that is why knowing one’s net worth is very critical. But, how do we know ours? In simple terms, it is what we owe minus what we own. What it provides is an overview of our strengths, weaknesses, and areas of improvement. For example, if we have debt, it gives a perspective on how debt is destroying our future financial success. On the other hand, if we are not getting enough return on our investment, it helps us to work on that aspect.
Tracking networth also helps us to see the improvements we are making on a weekly/monthly basis. There are several tools available in the market to track your networth.