Thirteen fatal financial mistakes
13 mistakes you can make with money
We would learn to avoid 13 common mistakes most people make and gain greater financial stability
Why do some people earn a substantial income each year and have impressive assets while others with the same earnings just manage to stay one step ahead of the bill collector? In many cases, it has to do with their financial attitudes and habits. The following 13 basic mistakes cost many people a great deal of money. Learning to avoid them can add to your financial stability.
Mistake 1: Assuming that money management is only for the rich:
Suppose a rich man earns $1million a year, while we earn $30,000. He needs cash management and we don’t or so we may think. But we really need it just as much as, if not more than he does. For example, if we can save $1,000 on our income taxes, that amount is worth the same to us as a taxing savings of $33,300 would be worth to him. However, because we have less to start with, the $1,000 is actually going to mean more to us. The difference between us is that we should be prepared to be our own money manager; he can afford expensive professional help that we can’t.
Mistake 2: Failing to be businesslike:
Budgeting is boring, so many people never budget. As a result, they really aren’t sure what’s coming in or going out and hey of ten winds up with no savings and even with crippling debts. Make a once a year budget at tax time and live within it the rest of the year.
Mistake 3: Signing legal papers without understanding them:
Never believe the interpretation a salesperson gives to a contract. If we cant’ understand it to read and approve it before we sing.
Mistake 4: counting on two incomes:
Today with innumerable women aged 16 through 60 in the work force; it’s easy for working couples to count on two incomes. The fact is, though, illness can strike anyone, anytime, or because birth control doesn’t always work, an unexpected bundle of joy can mean financial sorrow. Avoid hardship by realizing that there is a possibility of illness or an unplanned pregnancy and budget accordingly.
Mistake 5: Failing to expect unexpected expenses:
Murphy’s Law of spending says that everything always costs more than we think it will. The principle applies no mater what our plans may be; always allow extra for the unexpected.
Mistake 6: Failing to face financial realities:
Sadly, many people suffer from the ostrich syndrome. They hide their heads in the sand when dunning letters start coming in and they quit reading the mail or answering the phone. Or the bills mount up and they count on winning a lottery. This is the prelude to disaster. Know your financial status, even if it hurts. Then if necessary, we would take steps to improve it.
Mistake 7: Failing to keep basic savings:
Almost every money expert agrees that people should have the equivalent of two to six month’s income in highly liquid savings before they invest in anything.
Mistake 8: Failing to understand the time value of money:
A penny saved is more than a penny earned if it’s invested at compound interest. For example, suppose our boss gave us a choice between a bonus of $10,000 in cash or one cent to be invested for one month with interest compounded at the rate of 100 percent per day. Should we take the ten grand? No way! In five days the one cent would grow to 32cents; in 10days it would grow to $10.24; in 15days it would grow to $327.68, in 20 days it would grow to $10,485; we’d now be ahead on the original offer, in 25 days, it would grow to $335,544.32 and in 30 days, it would amount to $10,737,418! With compound interest, the rate and the period of time for which the money is invested both count. They figure mightily in the time value of money.
Mistake 9: Failing to factor in opportunity cost:
If we buy a stereo for $1000 in cash, that’s $1000 we don’t have the opportunity to invest. If we assume the life of the stereo to be 10 years and assume 10% as the possible annual interest that $1000 could have earned, the opportunity cost of the stereo is not $1000, but $2593.74- that’s $1000 + 10% annual interest, compounded annually, over a period of 10 years.
Mistake 10: ignoring the cost of credit:
Credit card purchases paid in installments add from 18 to 23% per year to the cost of goods financed in this way. Thus, unless we pay cash, buying a car for $7000 doesn’t mean the cost is $7000. With an annual percentage rate of 10%, a $7000 car financed for 5 years actually costs $8923.76, less the value of the interest paid as a tax deduction. If the person in this example were in the 30% marginal tax bracket, the net finance charge, after tax savings, would be $1346.63, and the net cost of the car would be $8346.63. When we buy on time, add in the cost of credit.
Mistake 11: having a garage sale mentality:
Many people buy the latest fad item at a premium price, use it two or three times, then sell it a year later at a garage sale for 10% of the original cost. The loss? 90% per item. For example- if our children nag us to buy a computer game system, just wait – they’ll become common at garage sales.
Mistake 12: trying to keep up with the Joneses:
When a person buys things he or she cant’ afford just to impress friends and neighbors, it can waste a great deal of money. Younger people are especially vulnerable to snob appeal.
Mistake 13: failing to cut losses:
Whatever the investment or item involved, don’t count unrealistically on future growth in value to recoup loss. Sell while we can for what we can get. For example- if an investor buys a stock and it’s plummeting with no apparent hope of regaining ground, he or she should sell it and take a minimal loss before losing everything.