There are numerous mistakes you can make with your money and getting your financial life on track. I have made many of them myself, but if you can learn from others you can avoid making them and save yourself some grief. I don’t know if any one mistake will lead to financial ruin but they can slow your progress or even set you back.
Lifestyle Inflation Mistake
Many years ago, while waiting for a client meeting my former boss and I went into the Royal de Versailles Jewelers on Bloor Street. While there I tried on a watch at his insistence that was worth more than my condo. I said that it was stupid to spend $250k on a watch when there are people who are homeless. I asked how anyone could do that. He replied that it was because if you are making ten or twenty million a year, two hundred thousand for a watch didn’t seem like much money. It was all relative. Later after I left that job and started making more money I got it.
Lifestyle inflation will kill your wealth. Every time you get a raise, your expenses seem to magically rise to match it. That $50,000 salary felt tight, but somehow the $75,000 salary feels tight too. Now the $100,000 feels tight. You need to consciously fight this by banking raises instead of spending them. You have to be vigilant for lifestyle creep. Let’s say before you budgeted one night out a month. You might find that is now once a week.
Most millionaires spend less than they earn and invest the difference. Rather than living flashy lifestyles with luxury cars they have modest lifestyles and reliable used cars. Warren Buffet is the most well-known example of this. He lives in the same house be bought in 1958 for $31,500 and drives a 2014 Cadillac XTS.
Mistake of Chasing the hype
Don’t invest based on emotions or hot tips. The best time to buy stocks is when everyone is panicking and selling. The worst time is when everyone is excited and buying. I’ve seen people sell everything in 2008 at the bottom and miss the recovery. I have been guilty of this myself. I have bought stocks because of something I have heard or read and it’s never turned out well. Selecting individual stocks is risky, especially if you’re hoping for a big payday.
Avoid get-rich-quick schemes. If someone promises you guaranteed returns with no risk, they’re lying. If crypto/forex/MLM/real estate seminars actually worked, the people selling them would be too busy getting rich to sell you anything. I have never bought crypto because I don’t understand it. I’ve read the Satoshi paper and I still don’t get it. I remember when bitcoin cost pennies and now it trades at $156,000! Gold used to back currency. Now governments back currencies. Well, really their militaries do. People like Sam Bankman-Fried and FTX fill the crypto space with fraud.
Payday Loans can be financial ruin
Don’t cosign loans for family or friends. I don’t care how much you trust them, it’s a mistake. And one that can easily destroy a relationship. If the bank won’t lend to them without a cosigner, there’s probably a good reason. You’re taking on their financial risk without getting any benefit. Don’t let family pressure you into it either. “If you really loved your brother…”
Payday loans and cash advances are financial poison. The interest rates are insane – often 400% annually or more. If you’re using these, you need to fix your budget immediately, not find more expensive ways to borrow. Go talk to your bank and if you need to refinance your home to get away from these sharks.
When to Seek Professional Help
trying to do everything yourself is also a common mistake. Get professional help when your situation becomes complex. If you’re self-employed, have rental properties, significant investments, or a complicated family situation, a good accountant can save you more than they cost. They will often help you figure out what you can reasonable deduct and what will set of alarm bells with the CRA.
“My father was fond of saying you need three things in life – a good doctor, a forgiving priest, and a clever accountant. The first two, I’ve never had much use for.” ~ Oskar Schindler in “Schindler’s List”
Fee-only financial advisors are worth considering if you have substantial assets. They charge by the hour or a flat fee instead of commissions, so their advice isn’t influenced by what products they can sell you. But you don’t need a financial advisor to follow basic principles like living below your means and diversifying investments.
Estate lawyers aren’t just for rich people. If you own a house, have kids, or have a complicated family situation, spend the money to get proper legal documents. A lawyer can help you structure things to minimize taxes and avoid family disputes.
Don’t take financial advice from people who profit from the products they’re selling. Bank advisors, insurance salespeople, and investment brokers all have quotas and incentives that might not align with your best interests. Get educated so you can evaluate their advice.