Whether we want to admit it or not, we all make mistakes. From dating that girl our parents told us not to, to eating one too many rounds of food at the buffet, mistakes are simply a part of being human. Now, while I can’t magically erase the mistakes you’ve made in the past, I can help you dodge some costly ones in the future and as such I want to share with you 5 personal finance mistakes that will make you broke!
Mistake #1: Paying off your mortgage before investing
Sometimes in life, it’s not what you do but the order you do them in. We learned this lesson pretty quick in life when we came to realize that your pants need to go on before your shoes. Then, we were reminded of it when we added instead of multiplied and failed our middle school math test. I’m sure there are a million other examples but the point is that it’s great to do the right things in life but the sequence that said things take place is of the utmost importance. One pertinent example of this relates to your mortgage and investing.
Now, I know for some people the question of whether you should invest your money or pay off your mortgage first isn’t even up for discussion. Not that you have already determined what is the best approach for you but because you are miles away from being able to afford a house of your own. That’s fair. Home prices have been breaking orbit faster than Elon Musk’s rockets making the homebuying process even more challenging than it already was. But, I know at one point or another you will be making the leap into homeownership so as such you need to know in what order you should prioritize paying down your mortgage versus investing.
To put it bluntly, it seldom makes sense to wait until you’ve paid off your mortgage to start investing and this is primarily due to how compound interest, most people’s main wealth generator, works. You see, compound interest relies on two key factors: time and capital. Time is incredibly important when trying to invest your way to wealth and the more time you can let it work for you, the better. However, if you put off investing to pay down your mortgage, a liability that typically comes with somewhat low interest rates, then you are literally missing out on thousands of future dollars. Let me share with you just how costly putting off investing can be.
If you start investing $300 a month from ages 18–27 and receive a 10% return a year, you could stop investing at 27 and have almost $2 million when you retire at 65 with just $28,800 of your own money invested.
However, if you only start investing at 28 you’d have to invest $400 a month until you’re 65 or $175,000 of your own money to get the same results as someone who started investing earlier. In short, when it comes to investing, the sooner you start, the more money you accumulate, all other things being equal.
Now, the reality is that if you have a mortgage, you can’t simply neglect to make its payments and focus every penny you have on investing. As such, if you ask me, the best way to balance your mortgage and investing is the following. Every month, ensure you cover your mortgage payments. Failing to do so will have you out on the street and we definitely don’t want that. Then, with the other disposable income you have, use it for investing. Do this up until the point where your investing returns exceed your mortgage interest rate. If or when the two invert, then and only then, should you start to consider focusing more on paying down your debt. Otherwise, prioritize your investments and I promise you will be further ahead financially!
Read also: 15 ways you are wasting money (without realizing it) and how to stop it
Mistake #2: Assuming what worked for your parents will work for you
While our parents can act as a valuable source of information in many areas of your life, the reality is that they, like you, only know so much. Because of this, they will only be equipped to offer advice in certain situations but should not be relied upon in others. Need a few examples? Sure, I’ve got you covered!
One great example is modern day dating. Chances are, your parents aren’t even aware of the names of today’s most popular dating apps let alone how you can optimize your approach to get more dates. As such, they really can’t be any help in getting more people to swipe right on your profile.
Another example comes in the context of your career. Most people grow up with their parents preaching to them the importance of studying hard and getting a good job out of college. While I don’t have anything against formal education, the fruits it yields simply aren’t as great as they once used to be. When our parents graduated, entry level salaries were probably not far off what they are today yet you could buy a new car for $10,000 and a house for $100,000.
Today, the average new car cost is just over $40,000 and homes in major cities can easily start at $500,000 or more. Therefore when you could buy a car on only a fraction of your annual salary or a home on two years income and collect meaningful raises at work then of course this route made sense.
Unfortunately, with the rising costs of, well, everything, that same income escalation approach isn’t going to cut it. You’re going to be sliding backwards financially if you continue to collect 3% raises when home prices are rising at 10–20% a year.
The moral of the story is that to tackle modern day problems, you need to employ modern day solutions. In the context of modern financial management, in most cases, it’s not enough to simply rely upon your salary to keep you financially afloat. Chances are you’re going to need a side hustle or side business to keep you making financial strides forward. While this will mean less time to sit back and enjoy life, it’s better to be prepared when those financial challenges come than be surprised and struggling when they do!
Therefore, while your parents are still going to be a valuable ally to have in your corner, think through what advice or help you rely upon them for as what worked for them may not work for you!
Mistake #3: Not having any financial goals
Ask just about anyone around you and they will tell you that they would love to see their financial situation improve. Maybe, this comes in the form of lowering their credit card debt, paying off their mortgage or simply making more money for every hour they work. The crazy part is that we all want to see more financial prosperity than we are already achieving yet most people can’t connect the dots between where they are now and where they want to be. Why is that? Because they have no financial goals.
When it comes to financial goals, there are three types of people. The first are those without any financial goals. These people just go with the flow and let life determine where they will end up financially. While this seems like the most whimsical and laid back approach, which it is, it’s the most inadvisable one.
Next, there are the loose planners. These are people who will share their financial goals of “being rich” or starting their own business but have no idea how they will meet these poorly crafted objectives. Again, don’t be this person.
Finally, there are those that have clear financial goals and all the tasks they must complete to achieve them. It doesn’t take a rocket scientist to realize that this is the group of individuals you want to be a part of and for good reason. Unless you win the lottery or are born into wealth, your own financial prosperity will not be due to luck but hard work and planning instead.
For instance, if you know you want to retire at 55 and right now you are 20, you have two choices. You can just continue to tell people you want to retire early and hope it happens or you can calculate how much money you’d need to have to retire in your 50s, calculate your monthly investment to meet this mark and then execute month after month. Which of these two people do you think will have the better chances of retiring early? If you guessed the second person then give yourself a gold star because you’re right.
The reality is that becoming rich is simple. Create detailed goals and the tasks you must complete to get there. Will it be easy? No. Will you face roadblocks along the way? Absolutely. But at least with a plan you can ensure you are moving in the right direction instead of wandering aimlessly which is the case when you leave your financial aspirations up to luck and not proper planning!
Mistake #4: Thinking you must buy and not rent a home
Have your parents ever asked you, “well, if Jimmy jumped off a bridge, would you jump too?” At the root of this question is our need to fit in and one way that most of us try to fit the societal mould is to progress through the typical life path of going to college, getting a job, buying a house, getting married and finally starting a family. The reality is that none of these common life events are required, however society has made us feel that we must check off all these items on our “becoming an adult” list. While I’m not here to tell you who you should date or which college to go to, I do think it’s wise to discuss the realities of home ownership in today’s financial climate.
If you’re anything like me then you were sold the dream of one day owning your own home. Now, as a homeowner myself, I can tell you that there is a sense of pride that comes with owning your own place, however that sentiment is costing more and more by the day. As such, we are slowly seeing the number of people renting climb and if you ask me this is perfectly okay. Now, is it okay that people who want to own a home can’t because of how outrageous prices have become? Of course not. However, I think it’s great that with more people renting, hopefully we will start to see a shift in how society looks at renting as a means of long-term accommodation.
Now, for those who were raised to see homeownership as the only long-term housing arrangement to entertain, then you probably see renting as throwing away money and this is a common misconception many people hold. The truth is that while you may not be building up equity when renting, you will realize a ton of benefits by doing so. For instance, you don’t have to spend years saving for a down payment and can invest those tens of thousands of dollars instead. Moreover, you can sidestep property taxes, selling costs and move basically at will when renting. Finally, if something breaks, you can sit back and relax as your landlord bears the brunt of your misfortune. Therefore, while buying a home makes sense for many people, renting does as well!
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Mistake #5: Ignoring your investing costs
If right now you are regularly investing then give yourself a pat on the back because you’re doing something great for your financial future! Long-term investing is one of the most reliable paths to future wealth but there is one aspect that you must be aware of to ensure your money grows to its full potential. What is that one aspect? Your investing costs.
A 2021 poll found that around 30% of Americans use paid financial advisors to manage their money and while it’s great to have someone helping you through your investing journey, you need to know the costs that come with gaining this advice. The average advisor fee in the US is roughly 1%. Seems inconsequential right? Well, it isn’t. If you invest $1,000 a month for the next 40 years with your financial advisor, you would be handing them almost $600,000 in advisor fees. Do you have $600,000 to give away because if you do I’m willing to take it off your hands.
Fortunately, there are more cost-effective ways to invest. These days, you can invest in low-cost index funds that will have you paying just a fraction of those pesky costs while receiving as good or even better investing returns.
CONTRIBUTED BY Adam Del Duca
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