7 Costly Money Mistakes to Avoid for Financial Success

In today's rapidly changing economy, many traditional financial tips no longer apply. However, you don't need an economics degree to take control of your money and build wealth. By avoiding some common pitfalls, you can pay off debt, start investing, and even accumulate over a million dollars to spend on what truly matters to you. Let's explore the 7 costly money mistakes you need to avoid to achieve financial success.

Mistake #1: Relying on Willpower Instead of Automation

Many frugality experts preach cutting back on small daily expenses like coffee as the key to saving money. They'll show you charts demonstrating how saving $5 a day on coffee can add up to thousands of dollars over time if invested properly. While the math may be correct, this advice fails to account for human psychology and behavior.

The problem with relying solely on willpower to cut expenses is that it requires making a conscious decision every single day, indefinitely. This quickly depletes our limited willpower and motivation. Even if you manage to skip your daily coffee for a year, most people won't actually invest those small savings.

A more effective approach is to automate your finances:

• Set up automatic monthly investments of at least $50 (or more if you can afford it)
• Automate your savings
• Set up automatic bill payments

By taking willpower out of the equation, you make it much easier to consistently save and invest over the long-term. Automation allows you to "pay yourself first" before you have a chance to spend that money elsewhere.

Mistake #2: Buying More House Than You Can Afford

Your home will likely be the biggest purchase you ever make, so it's critical to carefully run the numbers before buying. Many Americans, especially in high-cost cities, end up overspending on housing.

A good rule of thumb is that your total monthly housing costs should not exceed 28% of your gross monthly household income. This includes not just your mortgage payment, but also:

• Property taxes
• Homeowners insurance
• Maintenance and repairs
• Utilities
• HOA or condo fees

In expensive housing markets, you may need to stretch this to 30-33%, but going beyond that puts you at risk of becoming "house poor." This means so much of your income is tied up in housing that you have little left for other financial goals or unexpected expenses.

Here's a quick calculation to estimate true housing costs: Take your expected mortgage payment and add 50% to account for all the additional expenses. So a $2,000 mortgage likely means $3,000 in total monthly housing costs.

Let's look at an example:

A couple earning $180,000 annually should aim to keep total housing costs under $4,200 per month (28% of gross income). Assuming additional costs are 50% of the mortgage, their monthly mortgage payment should be no more than $2,800.

With a 30-year fixed mortgage at 7.5% interest and 20% down payment, they could afford a home around $500,000. If they stretched to buy a $600,000 home instead, it would cost them an extra $840 per month. Investing that $840 monthly difference for 30 years could potentially grow to over $1 million.

The lesson? Run the numbers carefully and don't stretch your budget too far when buying a home. Consider alternatives like renting if it makes more financial sense in your area. Remember: rent is the maximum you'll pay monthly, while a mortgage is the minimum.

Mistake #3: Waiting to Start Investing

Many people procrastinate when it comes to investing, thinking they'll start once they've paid off their mortgage or reached some other financial milestone. However, this delay can cost you dearly due to the power of compound interest.

Let's compare two scenarios:

1. Savvy Sally invests $200 monthly from age 20 to 30, then never invests again.
2. Naive Noah waits until 45 to start investing $200 monthly until age 65.

Despite investing for only 10 years compared to Noah's 20 years, Sally ends up with $369,486 at age 65 - a whopping $267,000 more than Noah.

If we increase the monthly investment to $800, the difference becomes even more staggering - over $1 million more for Sally.

The key takeaway? Start investing as early as possible, even if it's just $50 a month. If you're older, don't get discouraged - the second-best time to start investing is today. You'll need to be more aggressive with contributions, but it's still worthwhile.

Use online compound interest calculators to experiment with different contribution amounts and time horizons. Aim to invest at least 5-10% of your take-home pay, or more if possible.

Mistake #4: Paying a Percentage to a Financial Advisor

If you work with a financial advisor, be very wary of percentage-based fees, also known as Assets Under Management (AUM) fees. While 1% may not sound like much, it can cost you hundreds of thousands of dollars in lifetime returns.

Let's break down the math:

Assume you invest $600 monthly from age 20 to 65 (45 years), with a conservative 7% annual return:

• With a low 0.1% fee: You'd have about $2.14 million at retirement
• With a 1% advisor fee: You'd have significantly less, with the difference amounting to hundreds of thousands of dollars

Many people don't realize the massive impact of these seemingly small percentage fees over time. A young woman who thought she might pay her advisor $30,000 over 30 years was shocked to learn the true cost would be $315,000.

Instead of percentage-based fees, look for advisors who charge hourly or flat project fees. Better yet, consider managing your own investments - it's simpler than most people think. Resources like my book "I Will Teach You To Be Rich" provide step-by-step guidance on choosing investments and setting up your accounts.

If you do want professional help, ensure your advisor is a fiduciary (legally required to act in your best interest) and opt for flat or hourly fees instead of percentages.

Mistake #5: Obsessing Over Minor Details

Many people get caught up debating minute details of their finances, like which credit card offers the best rewards for a specific purchase. This often leads to analysis paralysis and inaction.

Instead, focus on simplicity in your financial life:

• Use a small number of credit cards
• Maintain consistent bank accounts
• Invest in simple, accessible investments
• Automate your finances

Remember, getting started and taking action is more important than striving for perfection. Aim for the "85% solution" - get your finances mostly right and then move on with your life.

To get started:

1. Read "I Will Teach You To Be Rich" (available at libraries, bookstores, or online)
2. Watch my YouTube videos that complement the book's lessons
3. Download and use my conscious spending template to understand your spending patterns

For help tracking expenses, consider using tools like Rocket Money. You don't need to track every single purchase, but having a system to monitor your major spending categories can be very helpful.

Mistake #6: Letting Debt Pile Up

While credit cards can offer convenience and benefits like rewards points, they become dangerous if you don't pay the full balance each month. Carrying a balance means you're now in financial quicksand, with a growing portion of your income going towards interest payments instead of savings or investments.

In early 2024, the average American household had around $88,000 in credit card debt. With a 28% APR and minimum payments, it would take decades to pay off this debt while wasting enormous amounts on interest.

But the damage goes beyond just the interest payments. All the money going towards debt could have been invested instead, potentially growing to a significant sum over time. This opportunity cost means credit card debt is a double whammy - it forces you to struggle now and prevents you from building wealth for the future.

To avoid this trap:

• Pay your credit card balance in full every month - no exceptions
• If you already have credit card debt, make it your top financial priority to pay it off
• Consider taking on extra work or starting a side hustle to accelerate debt payoff
• Make extra payments whenever possible - even an additional $100 per month can significantly speed up debt repayment

Remember, there's a limit to how much you can cut expenses, but no limit to how much you can earn. Focus on increasing your income to tackle debt faster.

Mistake #7: Getting an Expensive Car

Many people justify expensive car purchases based on occasional needs (like having extra seats for visiting grandparents) or perceived requirements (like needing a truck for hauling). However, the financial impact of these decisions is often overlooked.

Never make a large purchase decision based solely on the monthly payment. The new car smell wears off quickly, but those loan payments persist. Beyond the car payment itself, you need to factor in "phantom costs" like insurance, registration, gas, and maintenance.

Let's put this in perspective: The average car payment in the US is now $735 per month. If you invested that $735 monthly instead for 35 years at a 7% return, you'd have over $1.2 million.

To determine how much car you can actually afford:

1. Calculate your fixed costs (housing, groceries, debt payments, etc.)
2. Aim to keep total fixed costs under 60% of your take-home pay
3. Subtract your current fixed costs from that 60% threshold
4. What's left is the maximum you can spend monthly on a car, including all associated costs

For example, if you take home $5,000 monthly and your current fixed costs are $2,396 (48%), you have $600 left for total car expenses to stay under the 60% threshold.

By understanding these numbers, you can make smarter decisions about car purchases. Once you've paid off a car, keep it as long as possible to maximize the financial benefits.

Conclusion

By avoiding these seven costly money mistakes, you can take control of your finances and build long-term wealth. Remember to:

1. Automate your finances instead of relying on willpower
2. Buy a home you can truly afford
3. Start investing as early as possible
4. Avoid percentage-based financial advisor fees
5. Focus on the big picture instead of minor details
6. Pay off credit card debt aggressively
7. Be realistic about car expenses

Implementing these strategies will help you build a strong financial foundation and work towards your long-term goals. Take action today to secure your financial future!

Article created from: https://www.youtube.com/watch?v=X5wFT_Dz6Og