If you had asked me a few years ago whether I had ever made any money mistakes, I would have flat out told you “No.” For years I worked hard, saved consistently, and invested in income-producing assets. What mistakes could I have made?
However, I’ve recently realized that this isn’t the right way to think about mistakes. Because mistakes are not only the foolish things that we do, but also the reasonable things that we don’t do. As the saying goes, “You miss 100% of the shots you don’t take.” This is why sins of omission can be just as damaging to your finances as making bad choices.
With that being said, I’ve compiled a list of the 10 biggest money mistakes that I see people make, with an emphasis on the dumb things we do and the smart things we don’t do. Enjoy!
1. Cutting Spending Instead of Raising Income
The default advice when it comes to building wealth is to cut your spending. But, as I’ve shown previously, this is the biggest lie in personal finance. Why? Because cutting spending has its limits. You do have to eat after all.
On the other hand, there’s no upper limit when it comes to raising your income. This is why focusing on income growth is far more important than spending cuts when it comes to building long-term wealth.
So, find small ways to grow your income today that turn into BIG ways to grow it tomorrow.
2. Not Thinking Like an Owner
Do you know who the wealthiest NFL player in history is? It’s not Tom Brady, Peyton Manning, or John Elway. It’s Jerry Richardson. Never heard of him? Me neither.
Richardson made his wealth from owning Hardees franchises, not playing in the NFL. He eventually got so rich that he started the Carolina Panthers franchise.
What about the 2nd richest player in NFL history? That would be Roger Staubach. Once again, most of his wealth didn’t come from the NFL either. He made his millions in real estate. Are you seeing the pattern here?
If you want to build real wealth you need to be an owner. It doesn’t hurt to start thinking like one either.
3. Overemphasis on Small Wins vs. Big Wins
I see people who happily drive across town to save $40 on a television, yet won’t spend 5 hours preparing for a salary negotiation that is 100x more impactful. Yes, saving $40 is great, but making $4,000 more a year is even greater.
The emphasis on small, inconsequential money wins can keep people from focusing on the bigger picture. It’s very similar to mistake #1 on this list since spending cuts are usually small in nature. It’s okay to celebrate small wins, but don’t ignore the biggest impact decisions when doing so.
4. Timing the Market
No one knows the future or where the market is going. 2020 taught us that more than anything. Being right about something and making money off of it are two different things. The differentiator is timing.
This is why so many short sellers have been burned during this bull run. They may be right, but that isn’t enough. To make money as short seller you have to know when you are right as well.
Though you may believe that you will be the exception to the rule, I wouldn’t count on it. Don’t time the market.
5. Borrowing Too Much
They say it takes money to make money, which is why borrowing to invest can be such a profitable strategy. Unfortunately, if things go south, you could lose it all. As I’ve discussed previously, you can know the future and still lose your shirt if you borrow too much.
Remember, the only guarantee when it comes to borrowing money is your monthly payment.
6. Paying Attention to Other Peoples’ Finances
Just focus on how you are doing relative to your financial potential. That’s the only one that really matters anyways.
7. Too Much Lifestyle Creep
Some lifestyle creep is fine (and I encourage it), but the data suggests that spending more than 50% of your raises pushes your financial independence further away. The reasoning is simple—every dollar you don’t save is a dollar you spend.
Therefore, unless you expect to decrease your standard of living in retirement, every dollar of lifestyle creep extends until death. This is why you need to make sure to keep it under control, before it takes control of you.
When good fortune comes, enjoy it. But don’t forget about your future either.
8. Investing in Products you Don’t Understand
If you can’t explain it to a five year old, then you probably don’t understand it. And if you don’t understand it, then you are probably taking risks you can’t even imagine.
Keep it simple and buy simple investment products.
9. Paying Too Much in Fees
Fees are the silent killer. As Dividend Growth Investor once tweeted:
If you invested $1,000 in Berkshire Hathaway in 1965, by 2009 your investment would have been worth $4.3 million.
If Buffett had set up Berkshire as a hedge fund, and charged a 2% annual fee plus 20% of any gains, the investor would have been left with only $300,000.
That’s a 10x difference because of fees! My first blog post ever discussed this idea, but it never hurts to hear it again. Sometimes, fees can be justified if your are investing in an illiquid asset class. However, those kinds of assets shouldn’t be the bulk of your portfolio. So keep your fees low and thank me later!
10. Obsessing Over Not Having Enough Money
Only about one in six retirees sell down their assets within a given year. In fact, many more leave behind hundreds of thousands of dollars in inheritances. As Michael Kitces brilliantly noted:
The 4% retirement rule has quintupled wealth more often than depleting principal after 30 years!
Don’t spend your life worrying about money only to let someone else enjoy it.
The Bottom Line
There is nothing wrong with making a financial mistake, as long as you never make it again. As I have said before:
A mistake is a dividend of knowledge that will pay you until the day you die.
So learn from your mistakes so that they won’t have been made in vain.
Happy investing and thank you for reading!
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This is post 227. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data