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Thursday, February 14, 2008

Most Common Financial Mistakes to Avoid

In Personal Finance for Dummies, by Eric Tyson they discuss some of the key traps that people fall into with their personal finances. I know these series of books have a mixed reputation, but I like his personal writing style as it is informative and yet fun to read.

Here are the Top 10 Most Common Financial Mistakes to Avoid with comments by moi:

  1. Not Planning - Sounds basic, but I read about so many people who are only focused on their debt. That's great, but it is only one part of your financial picture. Failing to plan really is a plan to fail. Get a Success Map in place that lays out your next 3-4 steps at least!
  2. Overspending - Um...yup. That's bad! Basic accounting, regardless of what web companies used to say, clearly shows that you have to have more coming in then going out. Positive Cash flow. You can borrow for a time, but no flow...no go.
  3. Buying on Credit - See above. A cash management system can literally save you thousands a year. I credit this as the single best move we made when we turned the boat around. We generally die from 1000 cuts, not an enormo blow out. Paying for dinners you had five years ago is pretty silly.
  4. Not Saving Early Enough for retirement - Guilty. "Don't worry I am gonna die young and leave a good lookin' corpse!" Well think of it this way...If you save early and often and you are that 0.001% that won't need the funds, you can leave the money to relatives or a great charity. If you wrong, you get to eat Meow Mix for 20 years :)
  5. Falling Prey to Financial sales Pitches - It is the herd mentality in us. No one wants to be the last in to a sure thing. Stock tips, unless you have illegal knowledge, are gambling. Even worse are the annuity sales people that get Grandma to sign over the mortgage payments.
  6. Not Doing your Homework - Don't be lazy with your finances. It won't miracle itself great. I know so many people who either have their 401K at a way too conservative number like 90%+ MMA funds, cause they are afraid to lose anything and those the are 90%+ in high risk high growth funds. It needs to be a balance, depending how close you are to retirement. Take the time to read everything and ask questions. At our 401K meeting no one asks any questions! Or they ask questions like...why is this down? A single extra percentage can mean thousands in your fund when you retire.
  7. Making Decisions based on Emotion - Another one I see, especially right now. a very nice lady in her early thirties in our department saw her 401k down 8% and wanted to flip everything to low-yield bonds. Another was gonna change their allocation every quarter depending on what was hot in the previous quarter. Chasing winners is a fools errand, don't do it.
  8. Not Separating the Wheat from the chaff - This refers to following advice from a single voice...like me! Get a bunch of different opinions, find someone you trust. Don't just take the first advice you hear.
  9. Exposure to catastrophic risk - Make sure your insurance is up to snuff. It is horrible enough to lose everything, but t have to start all over as well is unthinkable.
  10. Focusing too much on Money - Don't be a zealot! you don't really need to track who spent what on gum. Also money needs to be the ends to a mean, not the other way around. It is important, especially when you don't have it, but your relationships are far more valuable!

All in all a pretty darn good list. I have hit every single one of these mistakes...multiple times on some of them. I am not a financial planner just someone in the same boat as you. The important this is to be in charge of your Success Map, Budget and money management, not to let them be in charge of you!

Any other common mistakes that you have made? Comment! Share!

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Mrs. Micah said...

It was a really good thing my grandfather saved for retirement. He ended up with senile dementia for the last 4 years of his life and required care. We were able to use his money to get him pretty good care, instead of having to settle for much less or not even get care.

Fiscal Musings said...

I guess they couldn't have called it *** for dummies if they didn't mention "over-spending". Something so basic, but it needs to be said.

Ian Denny said...

I'm into the mistakes, and I've made all of them. Some of them I still do, so it's a timely reminder and a really useful list.

Be good to see you over on Stumble. Used it?

I've reviewed this one - you can see the review here:


RacerX said...

@Mrs M - That is really sad to hear about your grandfather. It is a disease that affects the familiy as much as the one suffering. It is a great cautionary tale though. Thank you for sharing!

@Fiscal - There is a FarSide cartoon in the book that is a favororite. A lady is looking at her checking acoount asking "where does it all go?" and behind her is a wrapped painting from "The Van Gogh of the Month Club!"

@Ian - Realizing tha you make those mistakes is an important part of learning, like touching a hot stove! That for the Stumble! I am going to check it out!

Anonymous said...

I think the one that hubby and I took awhile to learn, was sticking with it. We would get all psyched up to conquer the world - then when it didn't happen in 90 days, the enthusiasm waned and back to old habits. Consistency is the true key to this thing - getting right back on the path when we wonder off!

RacerX said...

Dawn, yep that was as well. The other bummer was that we would pay it off and then assume everything was OK and recharge it up. Only everytime ti was deep because our credit improved!

Thanks for visiting!

wealthy_1 said...

I can relate to most of these. These are fundamentals and so simple. Why do we make it so difficult?

RacerX said...

I don't know but we really do!

I guess it isn't sexy to say, "Spend Less, Save More!"

But that is the real truth!

Thanks for visiting!

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