Many smart people make poor financial decisions because they think they could outsmart the crowds instead of putting together a solid investment plan. Unfortunately, these individuals assume they are making smart investment decisions without enough research or consideration for individual risk tolerance.
Stay disciplined and create a detailed plan in order to grow and diversify your wealth. Let’s take a look at some common money mistakes to avoid, which smart people seem to repeat continuously.
Buying the Wrong Financial Products
Disaster usually strikes when people buy products or investments they do not understand. Whether it’s high-growth technology stocks of the dot com era or credit default swaps during the financial crisis, throughout history, smart people get caught in the overhype over rational.
Just because others are making fortunes does not mean the investment is logical or suitable for your specific financial circumstances. If you don’t understand the company or asset you should never invest. Products can have varying risk characteristics and should not be assumed to be a wise decision just because they seem to be unstoppably rising.
If you plan on investing in specific stocks without company-specific research, at a minimum you should understand the company, brand, and how their business model works.
Taking Advice From the Wrong People
If you are hearing about the latest stock tips in the elevator, on a train, or during the neighborhood BBQ, remember to consider who is doing the advising. The old wall street saying goes, “People who know don’t say, and people who say don’t know.” Most people love bragging about winning positions, but rarely discuss their losers in as much detail. According to S&P Dow Jones Indices over 90% of active managers did not beat the S&P 500 over the past ten years.
It is human nature to want to follow in the path of people who are seemingly making smart decisions. Nevertheless, intelligent passive index investing in low-cost index ETFs or mutual funds has consistently proven to outperform active investors over the long run.
In hindsight, it always seems foolish to have listened to advice on a hot stock. Remember, the primary driver of wealth is consistent returns and time. Additionally, your investments should reflect your specific circumstances and needs such as risk tolerance and time until retirement. As you approach milestones requiring you to withdraw your returns your allocation should shift toward lower-risk assets, such as bonds or real estate.
Not Enough Retirement Savings
Saving enough for retirement is a crucial part of your investment plan and financial independence. It is very common for individuals to end up with too little saved for retirement. Unfortunately, this requires either delaying retirement, cutting back, or running out of money at an older age.
The primary reasons people don’t accumulate enough wealth for retirement include poor time management and budgeting.
Not Starting to Save Early Enough
Time is critical to building wealth. Money compounds with respect to rates of return and time. By starting to save even seven or eight years earlier, you give your savings the opportunity to potentially double by the time you retire. There is simply no substitute for time.
Tax-advantaged retirement accounts such as IRAs and 401(k) are essential tools for tax-deferred growth. These essential tools are the most valuable account most investors can take advantage of because earnings will not be paid out and can continue to compound over time.
These tax advantages cannot be ignored, and investors should put away as much as possible into these accounts as soon as possible. Most people working for companies can contribute far greater total to a 401(k) and may even be able to contribute to an IRA in addition. Check the IRS website for the latest contribution limits for both company-sponsored 401(k)s and Individual Retirement Plan limits.
Also, consider Roth IRAs or in some cases a backdoor Roth IRA. Although Roth IRAs do not allow for an immediate tax deduction, they do allow contributors to grow their money tax-free forever with after tax dollars.
Remember, don’t delay your retirement savings. The difference of waiting ten years could possibly cost you several hundred thousand dollars or more over a lifetime.
Living Beyond Your Means
Budgeting is not a sexy concept, but you should not be spending too much relative to your earnings. Often smart people believe they will make more later in their careers. Living beyond your means does not necessarily mean you are wildly spending money, it just means your need to conduct an investment plan and determine where you can and cannot afford to splurge.
A good financial plan will identify how much you can spend as well as how much you need to save to achieve your long-term goals. Budgets don’t have to be constricting or painful, but they do need to evaluate your current income and savings levels intelligently.
From a financial standpoint, any dollar you spend today is being borrowed from your future self. You should work out your own budget or work with a financial planner to determine how much you need to be saving to reach goals such as home ownership, children’s education saving, or any other financial goals you hope to achieve in the future.
Avoiding good money management will not solve your money problems. Rather, facing them head-on could actually be empowering and help you understand it is not complicated to build significant wealth.
Don’t delay creating a budget and an investment plan so you can continue to enjoy your life without unnecessarily living beyond your needed savings.
Conclusion
Poor money management and errors are usually avoidable in hindsight. Sadly, there are no do-overs so try to take action as soon as possible by creating an investment plan and saving for your future. Remember, if you need guidance, speak with a trusted financial advisor who acts in your best interest and understands your specific financial needs.
Recap
- Don’t buy financial products you do not fully understand.
- Don’t take advice from others who do not know your specific financial goals or act in your best financial interest.
- Created an investing plan that allows you to begin saving early and often.