5 Dumb Mistakes That Smart People Make

by Jason on November 9, 2009

Wouldn’t you agree it doesn’t take an Ivy League education to be good with your finances?

What’s amazing to me is that many smart people make some really dumb financial mistakes!

It seems like a person blessed with “brains” would be good with personal money management, but sometimes this just isn’t the case.

I’ve talked with many very smart people who are making some very dumb mistakes.

Here’s a look at five of them:

1. Keeping Up With the Joneses

A lot of times it doesn’t matter how much money we make, we still want to keep pace with our neighbors or friends.

This is a sure way to get into trouble.

What’s ironic is that many times those same people we’re trying  keep pace with and impress are buying things they can’t afford with money they don’t have either.

Think of how much better off we’d be if we’d just learn to be content.

2. Spending More Than They Make

I see it time and time again – many smart folks spend way more than they make!

It’s personal finance 101.

I feel like a broken record on this site, but the ONE thing you must do to get ahead is to spend less than what you bring in.

3. Chasing Returns & Investing Emotionally

It seems like some very smart people will change investments so often looking for the next best thing to eke out an extra percent while throwing caution to the wind and completely overestimating their risk tolerance .

Like dogs chasing their tails, they try to catch that elusive “hot stock” or “hot fund” that will help them retire.

Typically, these folks will buy when stocks are up and sell when they’re down.

It’s no wonder that the 2008 Dalbar study showed the return for the S&P 500 for a 20-year period ending 2008 was 8.35% while the average equity investor earned 1.87%!

That’s a lot of emotional decisions and return chasing going on!

4. Borrowing From Their 401ks

This just doesn’t make sense to me, yet I hear about it a lot from some pretty smart people.

Borrowing your own money and paying yourself interest sounds like a great idea – that is until you look more closely at what you’re doing.

The opportunity cost of taking out an investment that could be earning higher than what you’re paying yourself in interest — plus the loss of compounding — not to mention the risk hazard of having to pay all of that money back or end up paying taxes on the money should you lose your job are all things that should scream “NO!”.

Yet, many folks borrow from  First 401k Federal like it’s their own personal bank reserve.  Your 401k should be (one of) the last places you get money from.

5. Leaving Money on The Table

There’s numerous examples of this, but here’s a few of them:

  • Not putting enough money into their 401k to fully take advantage of the employer match – some folks don’t put in at all.
  • Ever buy something that has a rebate attached to it and then forget to send everything in to collect on the rebate?
  • How about automatically renewing your auto or homeowner’s insurance without shopping around to see if there are some better rates or even some discounts to be had.
  • Have you ever gotten an insurance policy when you were maybe a little overweight or perhaps a tobacco user and then later you lost weight or quit smoking?  Guess what!?  Your insurance company can re-issue a policy to you with lower premiums!

This is all money that’s being left on the table!

The Kicker

Whether you are “smart” or not really doesn’t make a difference.  You see, we’re all prone to these mistakes.  The “smart” people will be the ones who change their habits and start doing the things necessary to become better stewards.

My goal is not to pick on the smart (or not-so-smart), but rather point out a few areas that we are all prone to making mistakes in.

How about you – What are some mistakes you’ve made?

What are some other things that could be added to this list?

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