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?
Well I have made all 5 of those mistakes. The funny thing about finances are most people consider it taboo to talk about them. Not talking about finances with my parents or friends left me to my own devices and helped me to make those 5 mistakes. Now that I’m much smarter with my finances I can see all the errors of my past self. Now I talk openly about them hoping to share some knowledge and break the taboo. If we can help to shed light on these mistakes to just one person, we’ve made a difference.
Nice summary
Jeff´s last blog ..Emergency Fund Help Needed
Great post Jason. We’re all aware of the mistakes that broke people make. So, thanks for pointing out some of the mistakes that people with ‘the smarts’ are guilty of. Maybe they aren’t as smart as they think?
People should always ask themselves two questions before chasing returns that sound too good to be true… How would my life change if this money doubled? How would my life change if all of this money was gone? That usually helps skirt emotional investing.
Three of the five apply to decisions I’ve made in the past. I am a work in progress which means I can still learn from those mistakes. An additional mistake is “spending money I don’t have.” I assume that big income tax refund is coming and the tax man tells me “not gonna happen” Good post!
Ken´s last blog ..New Rules for Credit Cards – Good or Bad?
Great thoughts! It reiterates the fact that when it comes right down to it, making good decisions with money involved pretty simple math. It’s the learning to be content part that’s such a challenge. A good practice for me is to turn off the TV and pick up a good book. Learn to be satisfied with less (I haven’t perfected this yet).
Andrew @ Earn Give Save´s last blog ..Not another grocery saving post
@ Andrew – great point – the contentment piece is a big challenge. I like your idea of turning the TV off and picking up a good book!
Thanks Jeff, we’ve probably all made some of these very same mistakes. You’re right, sharing knowledge and our experiences will shed light on these things and hopefully help others to overcome.
@Ashley – Great questions! Especially asking what if I lost this money. It seems like a lot of folks think of risk only in terms of upside, but not the downside.
@ Ken – We’re all a work in progress!
But if we can continue learning and changing then we’re headed in the right direction.
in my opinion, the worst one is keeping up with the jonness. This makes people not want to invest long term, want quick returns and thus settling for speculation, and getting into all manner of debt so that they can sport the latest cars or fanciest gadgets. It is something in my life that i an in constant battle with
kenyantykoon´s last blog ..PREFERRED STOCKS MAY NOT BE BETTER AFTER ALL
to be honest they all sound like basic errors that stupid people will do, when all you see is money then these mistakes are what you will make.
mark´s last blog ..Teen Diets: Types Of Diets
@KenyanTykoon – keeping up with joneses is deadly to personal finance because we will seemingly do anything (load ourselves with debt) just to impress other people.
Good advice here. One of my favorite pieces of advice to give lately is, “Smart people learn from their mistakes… but REALLY smart people learn from other peoples mistakes!”
Do these things in this order if you want to win at money:
1. Pay off non-mortgage debt
2. Build liquid savings for self-insurance (Emergency Fund.)
3. Max out IRA & 401k/403b retirement account contributions.
4. Pay off mortgage.
There, sounds easy enough right? So let’s get started!
Matt Jabs´s last blog ..3 Ways to Get Started Investing with $1,000 or Less
Matt, good call! I like your list – and you’re right. Really smart people learn from other’s mistakes and avoid them!
Leasing cars they can’t afford has to be added to the list. I recently read that more than 70% of luxury cars are leased. Most of these people have no idea how much they’re throwing away with their leases.
Solid list
Austin @ Foreigner’s Finances
Austin´s last blog ..Lease or Buy? What to Know Before Your First Car Purchase
Austin, I have not heard that statistic, but it wouldn’t surprise me. It’s a way to get a bigger and better car with a relatively low payment and a lot of folks are very tempted by that.