How to Make Big Money Mistakes
Most people are sensitive to losing money. It boggles my mind when people become wasteful spenders. These are the same pusillanimous people who mention their aversion to losing money in the market. They will spend their hard-earned, 9am-5pm (sometimes overtime) job money on useless, forgetful, unwanted and expensive purchases. Ever heard someone say “Oh, it’s just $5?” If so, then I am sure you have also heard of the old adage “a penny saved is a penny earned. Other times, these are people who feel a sale is really a discount. A discount is nothing more than paying less for something than what you have intentionally wanted to pay for. Say for example, you wanted to spend no more than $800 for a flat screen TV. The original price is $1,500. The store discounts it or puts it on sale for $1,000. It may seem like a $500 savings but you are really spending $200 more than you originally intended to spend.Then, there are people who don’t see themselves as reckless spenders but can’t save money. They compartmentalize their money. At times this can be advantageous, such as paying the mortgage/rent, bills, etc. On the other hand it can be disadvantageous. For example, Sara invests in her retirement account, puts money aside for a rainy day, and she has set herself up on a budget. From the looks of things she seems to be preparing herself financially. However, when she receives her tax refund she blows it on a flat screen TV. She’s able to manage her “working” money but not “gift” money. Sara doesn’t view her tax refund as her hard-earned money being returned to her because she overpaid in taxes. Before using this money towards a purchase, she could place it in her savings account and revisit it in three months. By that time she would have viewed her money as “savings.” The same holds true if you receive inheritance money, gambled money, and any money that was not derived from your paycheck.People are overconfident which can be hazardous to your wealth. They feel what they currently know is absolutely correct and you can’t sway their decision when presented with contrary evidence. Overconfidence can impede you from earning and saving more money. If you feel you can “beat the market” consistently then you are overconfident. You don’t have the time to read the myriad of financial information. Did you know that at least 70% of all stock funds underperform the market over period of a decade if not more? As Generation Y and X you have plenty of time to invest in the market. The key is to consistently invest every month. Index mutual funds are designed to try to match the average performance of stock and bond markets over the course of your investing life with them. The result is not too bad. The average return in the market is roughly around 11 percent. Yet, people –yes, you— think they can beat the average. I’m not saying it isn’t possible. There is a handful—very small—group of investors and fund managers who had exceptional performance over the years. Furthermore, an average means just that, an average. There are periods in the market when returns are exceptional and vice versa. Eleven percent is an average taken over a period of time. And that time constitutes high and low returns. I think you see where I am going with this. You have to have been invested in the market when the favorable returns are occurring because you can’t predict it. For many people, picking the right stocks is like throwing darts from 100 feet away of the bull’s-eye. Don’t expose yourself to more risk than you can deal with properly. You have to assess your risk tolerance: If the market took a 25 percent nose dive over the short-term, would you pull your money out right away? Determining your risk threshold will be important.The best way to avoid making big money mistakes is to view choices objectively from beginning to end of your decision-making process.