Top 10 Money Management Mistakes
Eileen St. Pierre, The Everyday Financial Planner
It’s been a while since I’ve written a top ten list. Here’s what I see are the top ten money management mistakes most people make:
- Not paying your bills on time. This should be a no-brainer, but you would be surprised how many people just can’t do this. Remember, the largest component of your credit score (35%) is your payment history.
- Having too much debt. The amount of debt owed is the second largest component of your credit score (30%). Avoid these first two mistakes and you should have a credit score at least in the 700s.
- Ignoring your bills. Ignoring a bill will not make it go away. All it does is compound the problem. I’ve seen this done with medical bills and student loans. People think “I can’t pay them so I will just not deal with it.” If you can’t pay your bill, call your creditor and negotiate a payment plan you can afford. Understanding the implications of your financial decisions before you make them is the key.
- Having little to no emergency savings. This will inevitably lead you to take on more debt, causing a debt spiral. This is a problem at all income levels.
- Playing it too safe. If you fail to take on enough risk with your long-term savings, inflation and rising health care costs will erode your retirement nest egg.
- Selling low and buying high. Whenever the stock market experiences a correction, people panic and start selling. This is actually a good buying opportunity. Likewise, many investors wait too long to buy stock. They wait until the stock experiences a run up and buy at the market peak. I’ve seen people do this with real estate as well. You need to buy in before the growth occurs. You can accomplish this with stocks by using dollar cost averaging.
- Not paying yourself first. I get so annoyed when parents decide to pay for their kids’ college educations first, and focus on their retirement later. If you don’t adequately fund your retirement, your kids are going to have to take care of you in retirement. Your retirement will last a lot longer than their college years. You need to automatically contribute to your retirement plans first – try to save at least 10% of your gross pay.
- Not being properly diversified. When investing for the long-term, you need to have the proper balance between stocks and bonds. We refer to this balance as asset allocation. I’ve seen many highly-educated people think holding funds by different investment managers is proper diversification. It usually isn’t. What I look at is what types of investments that manager chooses to hold in the portfolio – the fund’s investment objective. You can invest in four funds by four different managers but they may all have similar investment objectives. This could lead to you paying too much in fees. It’s the underlying asset allocation that’s important. Then focus on who can achieve that asset allocation at the lowest cost. You may be able to do this with just one fund.
- Trying to keep up with the Joneses. If you have to spend money to impress someone, perhaps that person should not be in your life. I’ve seen way too many people spend money on things they do not need and take on debt just to impress someone they do not like. This leads to what I find to be the biggest money mistake people make –
- Confusing a high salary with wealth. Having a high salary does not mean you are wealthy. Your wealth is measured by your net worth, which is defined as Assets – Debts. If you spend everything you make, you have nothing left over to save and invest. Saving and investing produces assets. Incurring more debt because you now qualify for larger loans can lower your net worth, if you do not use this debt to purchase assets that appreciate in value. I’ve seen people making $60,000 a year become millionaires faster than those making $250,000 a year because they live below their means and invest a larger % of what they make.