A group of financial podcasters get together every other Thursday on Twitter Spaces to talk about different personal finance topics. On January 20, 2022, one of the topics we discussed was common financial mistakes people make:
Car Payment Shopping: Most Americans are accustomed to having car payments. Whether conscious or unconscious, they’ve decided they will always have, a $400/month car payment, for example. A lot of people I speak with get a new car when they feel like a large repair is coming, however, this is flawed thinking. Once you pay a car off and rid yourself of the $400/month car payment, that’s $4800/year that is freed up for repairs, and most vehicles won’t have repairs totaling that much. Once folks decide to get a new car, they go to a dealership and look for the best car they can get for a similar payment. Getting off the payment treadmill is a great way to free up money for investing.
Lifestyle Creep: If you have a high-paying job, but your lifestyle is such that you spend all or almost all of what you make, then you are basically stuck making that much money. Your freedom is limited. Studies have shown that happiness doesn’t increase in proportion with how much more you spend, yet too many people allow their lifestyle to increase over time. I like the approach of treating yourself to something nice, like a purse or a dinner, to celebrate an increase in pay while keeping recurring expenses the same. Another approach is to save a portion of your raise. For example, if you get a 10% raise, put half of your raise into savings or investments, and spend the remaining.
Dining Out: Most people probably don’t even know how much they spend eating out. If you were to pause and add it up, you’d probably be shocked. I know I am every time we do. I like tracking this one a weekly basis. For example, if we have budgeted $150/week, we can go out to a breakfast, lunch, and dinner out.
Unused Subscriptions/Memberships/Services: Subscription business models have increased significantly in recent times, so it’s important to keep and eye on automated payments. It’s so easy to keep paying month after month. You should put a lot of thought into adding recurring payments and review them often to make sure you’re only paying for what you use.
Too Much Risk/No Foundation: It’s easy to want to skip saving an emergency fund and go straight to sexy investments, like individual stocks or cryptocurrency. However, it’s absolutely imperative that you have an emergency fund before you start investing. It’s also a good idea to buy some index funds in your retirement accounts from there. Only once this solid foundation is laid should you move on to real estate, individual stocks, or cryptocurrency.
Too Little Risk: The possible returns of an asset are directly related to the inherent risk in the asset. If you are not willing to take any risk, you will have very little returns and over time, and this can be detrimental to your financial future. You’ll either have to save a lot more by the time you retire or live off a lot less than you could have had.
To hear about the speakers’ financial mistakes from the Space, and how to rebound from them, you can listen to the recording here: https://www.personalfinanceclub.com/time-the-market-game/.
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