When it comes to money, even smart people can make mistakes. What’s more, financial literacy is one thing and certain psychological mistakes that can damage our finances are quite another. These range from cognitive biases to our own ego, or a simple oversight that can wipe out years of work and savings in a matter of months.
So let’s look at some of these mistakes, which I would venture to say we have all made at some point in our lives. And if you haven’t fallen into them yet, you very probably will at some point, unless you keep the points we are about to discuss firmly in mind for when the time comes.
8 money mistakes we have all fallen into, and that you will fall into at some point
Let it be a comfort, but not an excuse, to know that even the best finance experts have made these financial mistakes.
See also: 10 tips on money and success from the world’s most successful people
1. Living beyond your means
At 21 I was earning more money than most adults. In a sales job, my pay slips and commissions made me think I was rich. I moved to a more luxurious flat in the city centre, because I could afford it. I started buying clothes I didn’t need, suits costing more than €900, and I ate lunch and dinner out. I could afford it.
The company went bust, and that was when I discovered that I had been living a lifestyle that had to stop once the company closed, because I couldn’t cover the expenses. In reality, you can’t afford many of the things you can easily pay for today.
I thought I had learned my lesson after going through that, but after recovering and starting a small business, I was riding high again just a couple of years later. Once again I thought I was king, and once again I raised my standard of living to match my new income. I forgot about saving because I thought the good run would never end. The fact is, the run ended again. I had made the same mistake twice. Since then, I make sure there isn’t a third time. Whatever my income, I no longer raise my lifestyle.
See also: 10 ways to have more money, plus products you don’t need to pay for
Finance lesson: we tend to adjust our spending to our income. And that is probably one of the worst mistakes we can make with our money.
See also: How do you know if you are living beyond your means? 5 telltale signs
2. Spending too much money on travel and holidays
Of course you have to enjoy life, because tomorrow we could die without having enjoyed it. But then, if it turns out you don’t die tomorrow, you will regret not having saved. Travelling the world is highly recommended: getting to know other places, other cultures and so on. But in personal finance, a passion for travel is among the reasons people end up with empty pockets.
A long time ago I was given a good piece of advice: instead of needing to travel constantly to feel happy, make sure you build a life you don’t need to escape from. And that is what I managed to do. I don’t need to go to China to have a great life experience. Sometimes it is enough for me to visit the countryside 50 kilometres from home.
I try to keep my holidays short but intense. After all, I’m not one for lying on a sun lounger at the beach for 30 days a year. I try to make them just long enough to rest, relax and recharge my batteries. In fact, I prefer to take three or four days off several times a year rather than going away somewhere for 20 days in a row. My wallet has thanked me for it.
See also: The worst money mistakes people make in each decade of their lives
3. Not having a budget
Having a budget is one of the best pieces of financial advice you can be given. You should always know exactly where your money is going. That way you can measure it, and if you can measure it, you can manage it.
What’s more, having a budget and following a savings method will keep you from making many other mistakes with your money. If we have a budget and know where our money goes, we can see those expenses and go on to combine or drop insurance policies, cancel subscriptions, cut back our spending on leisure and nights out, and so on.
Do you know exactly where your money is going? Aren’t you saving for an emergency fund? Don’t you have money to invest? You can very probably do all of this, but you need a budget to sort it out.
4. Running up credit card debt
I learned this lesson fast. It was the 18th of the month, I was broke, and I got paid on the 25th. And there was that suit I didn’t need. It was on sale. Why let it go when I could use my credit card and, instead of paying for it all at once, pay just a small percentage each month?
And that is what I did. I wore that suit three times all year, but I ended up paying a fortune for it because of the interest. I kept adding more debt to that credit card, because it really was convenient to buy things and keep paying the same fixed instalment each month. Before I knew it, I realised I had a repayment running for three years, because even though I was paying €60 a month, only €20 of it went towards the balance. That was when it became crystal clear to me that credit card debt is a real cancer if you are not going to pay it off in full at the end of the month.
But… who hasn’t been tempted to use a credit card at some point?
See also: Types of credit cards
5. Prioritising saving over paying off debt
We have already looked at when you should pay off debts instead of saving, and vice versa, but it is true that it is tempting to love cash and watch it grow in our account even though we are paying off some debt every month.
However, paying off debt is the best investment you can make. Put simply, if you have a debt charging you 20% interest, paying off that debt is like making an investment with a 20% return. Without a doubt, the best investment you can make.
6. Not valuing your work or your time
There is a time for everything. When you are not an expert in something, or you are very young, you will have to accept less money for your work if you want to land the job in question. However, there comes a point in life when you should not be afraid to turn down a job or a collaboration if you think the offer isn’t good enough for you financially.
Learn to say NO to poor terms, learn to turn down work and to negotiate your salary. Try to get paid what you are worth. I know it can be scary to push hard in a negotiation or ask for what you are due, but it is part of being a good professional. Always remind the other side that if you pay peanuts, you get monkeys. Don’t be the monkey.
7. Not using money to make money
We spend on countless unnecessary things, but sometimes we don’t use our money to generate more money. This is known as leverage, and it is a trait shared by people who earn a lot of money.
At times, because I didn’t spend some money on subcontracting certain tasks to other people, I have ended up working far more hours than I should, getting exhausted and not being able to give 100% to what really matters. When you spend money on help that will bring you more profit, don’t think of it as an expense. Think of it as an investment.
8. Getting married without talking about money with your partner
Unfortunately, marriage has become one of the biggest financial risks. Couples are afraid to talk about money because they think the magic would be gone, but the truth is that not having certain money conversations with your partner can make a marriage start taking on water later on.
If you don’t feel comfortable baring yourself financially to your partner and talking about these things, you will very probably have problems later on.
See also: When your partner doesn’t want to talk about money
And let’s not forget that one of the pillars of personal finance is saving, so we are always looking for ways to save and earn more money.
See also: 7 very creative ways to save more money
