There are many financial mistakes that can be made, and most of us have probably made at least one of them. Many of us have made financial mistakes that have costly consequences, such as losing money in investments, becoming bankrupt, or struggling to pay off loans.
While some of these mistakes can be forgiven (such as using funds that you thought were a good investment but are now a bad loss), many of them cannot (such as using credit card debt to make up for cash shortages). In fact, credit card debt is one of the biggest financial mistakes you can make because it is so easy to fall into.
So, what are the most common financial mistakes? Where do you usually make them? And how can you avoid making them in the first place? Let’s find out.
1. Investing too much
This is perhaps the most common financial mistake. When you are young and ambitious, it is easy to want to invest in risky investments such as real estate or stocks. The problem is, when you are young, you are also incredibly optimistic.
As you get older, your investment decisions get more rational. You think more about the risk and likely hood of a given investment, and you also think about the return on your investment.
But even if you are not actively thinking about the risk, it still exists.
One of the biggest mistakes people make is investing too much money in one place. If you have a lot of money in one stock or real estate, it becomes a tempting target for hackers or thieves.
So, how do you avoid investing too much?
The best way is to set up an automatic transfer of funds to your savings account. Then, when you are paid, withdraw the funds and set them aside in a passive investment account. Over time, this strategy has delivered positive returns and kept me well above my threshold for risk.
2. Not saving enough
If you fail to set aside a minimum of 5% of your salary for savings, you will be less likely to build wealth. Not only that, but you will also have to pay tax on the earnings, which brings me to the next mistake.
3. Eating into your savings
You'll never reach your financial goals if you don't keep some money in a savings account. When you do have money in the account, you'll use it to propel yourself toward retirement.
But if you don't start saving early, when you do finally get a job and earn income, you'll quickly realize how difficult it is to save 5% of your income.
So, how do you save early?
You can set up a automatic transfer of funds to your savings account from your regular paycheck. Then, when you get paid, you'll generally want to put the money in a separate account that has a higher interest rate.
4. Using your savings account as a backup
If you're not careful about keeping your savings account in a separate account, you'll keep re-depositing the same funds into it over and over again. This is like putting a few drops of water into a swimming pool and then getting out of the way. Soon, the water is everywhere and you can't get clean.
Instead, you should set up a transfer to a separate account that is specifically for saving. From there, you'll be able to build equity in the account and reduce the overall interest rate by increasing your equity.
5. Investing it all
If you invest all your money in one asset class, you'll be less likely to build wealth. It's much better to divide your money between different asset classes to maximize the chance that one of them will grow faster than the rest.
For example, if you have £100,000 and want 100%
to grow into a successful retirement, you should consider investing £50,000 in a professional fund manager. The fund manager will then use the funds to invest in different companies, chosen from a list of available stocks. The stocks in the list will have very different prices, and the one that is right for you may be different from the one the manager ends up buying. However, if you seek to grow 100%, you should try to match the manager's buy-in with the goal of getting as close as possible to 100% ownership of the stocks in the portfolio.
6. Putting it all on one card
If you're like most people, you probably want to save as much money as you can before paying taxes. However, when you're just starting out, that might not be possible because of how much tax you'll have to pay in order to generate enough income to make saving for retirement.
To Summarize
When you're just starting out, try to save as much money as you can before paying taxes. Investing all your money in one asset class is not as successful as dividing it between different asset classes. If you're goal is to grow your money, try to match the manager's buy-in.
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