10 Financial Mistakes You Should Never Repeat

10 Financial Mistakes You Should Never Repeat

There have been a number of financial mistakes that we've all been living with for the past several years. During economic downturns, those mistakes become apparent, and our options become limited. It's important for us to understand what got us here so that we don't end up here again. Here are The 10 Financial Mistakes You Should Never Repeat.

1. Living Above Your Means

We routinely live 20% or more above our means. That means we spend all of our money, and then live on borrowed money from credit cards, equity in our homes and loans for the rest. For a while, it seems as if we are able to survive this way, as we pay the minimum due for each creditor. However, when interest rates increase and our amount due likewise increases, we find ourselves "underwater" and unable to afford our payments anymore.

Return to the days where you spend only what you have. A squirrel stores nuts so he has food for the winter. He knows he can't borrow more. Once his store is depleted, he knows he has no more. He must then either try to find more at the worse possible time or starve. Let's take this queue from nature as a model for how to live within our means.

2. Buying High & Selling Low

As prices increased for houses & cars, stocks and other investment vehicles, we bought more and more. Credit was flowing and we were living high. We bought high, but we thought that prices would continue to move up so it wasn't a big deal. Then, when credit seized up and prices began to fall, we sold at a lower price in order to protect the little bit of money we had left. The loss we suffered was "unrealized", meaning, we still held the asset, so it was a devaluing verses a true money loss. The moment we sold the asset for less than we bought it for, we suffered a "realized" financial loss. That loss was locked in with the sale of the asset.

The rule of thumb needs to be that we make money, not lose money. Panic over the cycle we are in caused a lot of people to lock in major losses. During these times, remember that you still own the asset (the stock, the house, the investment program). When prices rise again, the value will return. It may take some time, but the experts believe that the market is going to rebound.

Now, image what the people who sold before this crisis are doing? They have cash on hand to invest in anything they want, and everything is on sale right now. They will once again buy low, and sell when they hit their investment goals. They will not try to ride gains until it is too late and they suffer a loss. Remember to buy low and sell high. If you are poised to do so, do so now. If not, prepare yourself to be able to do so after this crisis has abated.

3. Little To No Savings

There are very few families that have taken the advice of saving 6 months to a year of salary for "just in case". The families that have sacrificed a little each month over the course of years are well prepared to hunker down and weather this storm. The families that spent everything they earned, and then some are in a very different position.

If there was ever a time to understand why saving 6 months to a year of salary is important, it is now. Change your mentality and put money away for a rainy day. It may take years to develop a large savings account that can be blown during a bad year. However, right now, everyone can see the value in doing so. Save. Save enough so that you the ones you love will not have to struggle when the next recession comes about. Just as the good years will return, so will another dip. Prepare for it.

4. Determining Affordability on Minimums

Basing whether or not we can afford something by our ability to pay the bear minimum on the loan or credit card is a mistake. Many credit card companies are announcing the increase of their interest rates. It will now cost you more to borrow the same amount of money as you did before. That means your payments will be bigger. Paying off only the minimums was always a losing strategy. Now, it's a losing strategy on a fast track.

Never make this mistake again by always paying more than the minimums or better yet, pay off the balance at the end of the month. If you don't borrow or charge a lot, there won't be much to pay off at month's end.

5. Investing What You Can't Afford to Lose

There is always the chance of loss whenever you invest in anything. The higher the potential return usually equates to the higher the risk. However, if you need the money you are investing in the short term, you must re-think where it is invested. Money needed for short term needs should be held in low risk or no risk accounts. Higher risk investing should be saved for the long term. The danger is that during a dip, the value of your account drops to below the level that you require in the short term. This could mean working instead of retiring, delaying the start of college, and putting off plans to purchase a dream house.

Before investing money in any vehicle with risk, ask yourself if you will be ok if you lose it all. If the answer is no, then you should consider adjusting your investment amount downwards.

6. Lack of Financial Goals

Many of us don't have a plan. We work, we spend, and then we find ourselves working to pay off what we spent.

When you have a financial goal, you know what you are targeting to earn. Those that set modest and well balanced financial goals were able to get out of the risky investment after they hit those goals. They then waited for prices to decrease before putting their money back into the market again. Those are the people you read about in the news that are waiting for "the market to bottom out." They already set their "buy in" price and are just waiting for the investment vehicles they've identified to reach those target goals. Then, they'll repeat the cycle.

When you set your goals for what price points to buy and sell, stick with them. Don't get greedy and try to push the envelop more and more. When you do, you risk losing it all.

7. Advice From the Wrong Sources

There are 3 kinds of advisors. First, there are those that don't know what they are talking about. These are the people that tell you about what they heard others did, but are at the same level of success as you are. Second, there are those that know what they are talking about, but that have their own interest at heart. These are the fund managers that are paid to sell a certain stock or fund, regardless of whether or not it will benefit you long term. Their success is not tied to your success. Therefore, after they get you involved in what they are pushing, they can care less about your results.

Lastly, there are those whose success is tied to your success. They have a vested interest in making you as much money as possible because their income depends on it. Triple check that they also know what they are doing. Ensure they have a track record of success. Test them out with a little to see how they perform first. Then, you know you can trust their advice.

8. Lack of Diversification

If you put all of your money into your house, and then the value of your house declines, what do you have left? If you own a whole lot of shares of one particular stock, and then that company goes bankrupt, what do you have left? If you only have one source of income, and it is removed, what income are you left with? This has been a big problem in the market today. You must diversify.

Talk to your financial planner about ways to balance your portfolio so that you have steady increase in market value rather than major spikes and dips. Create multiple streams of income by turning your hobby into an income producing home business. Make sure you are getting all of the tax write offs you are eligible for. Assume the mantra, "never pay full price" and don't forget to safely invest your savings.

9. Valuing Short Term over Long Term Thinking

Adjustable Rate Mortgages (ARMs) cause people a world of hurt. When rates were low, these mortgages were very attractive. The problem is that over the short term, they were great bargains. However, over the long term, rates were bound to increase, thus causing payments to sharply increase, double or triple. Those with a long term mindset avoided these ARMs like the plague and opted instead for a fixed rate mortgage, which was much more predictable.

A long term thinking mentality will also ensure that you put some money aside for savings before paying your first bill. Pay yourself first. We always seem to run out of money if we pay our bills first and then look at what's left for savings. If you pay yourself first, and then your bills, you'll find a way to make it to your next pay period. Make sure the amount you choose to save is reasonable and fits within your budget. Then, treat your savings or investment account like a high priority bill that must be paid.

Long term and short term strategies always conflict. Choose the long term every time.

10. Spending Instead of Investing

When you spend money, you receive equal value in exchange for what you bought. The money is now forever gone and the transaction is complete. When you invest though, you earn money on that investment over and over again in time. $25,000 can buy you a car. It can also help you to start a business that one day earns $25,000 per year. When you spend the $25,000, you have a depreciating asset you can drive. When you invest the $25,000 into a business with time and wise decision making, you have an asset that is income producing. You could buy the equivalent of a new car each year with that income.

When there is something that you want to buy, give some thought into what asset you could invest in to produce the money needed for what you want to buy. The asset will continue to produce income for you long after you made the purchase. It will take time to get the money you need to buy what you want when you do it this way. But as was explained in #9, long term thinking strategy is preferable to short term whims.