After spending years on wall street amongst intelligent finance ‘experts,’ I realize smart people consistently make mistakes with their money. Effective money management does not require a high IQ; intelligent people often fall into traps because they believe they can outsmart the masses.
For some individuals, there is not enough time in the day, and they are too busy to learn how to manage their financial affairs. Sometimes, these people incorrectly assume they are making logical moves without careful enough consideration.
Good personal finance habits don’t involve sophisticated investment strategies or unreasonable risks. Staying disciplined and diversifying your investments will grow your nest egg over the long run.
Let’s take a look at four common money mistakes to avoid, which smart people seem to repeat consistently.
Investing in Assets You Don’t Understand
Many smart investors invest in assets they really don’t understand. A scarce or complex opportunity may be a homerun, but more likely, it’s a risky investment than may leave you broke.
If you don’t truly understand what or how the investment or company makes money, you should not own it. There is nothing worse than a permanent capital loss.
Most market bubbles and subsequent crashes occur when many people buy into something they do not understand. Whether it’s a tech bubble or a crypto bust, time after time, otherwise sensible people get caught in the hype.
Most investors buy individual stocks without an in-depth understanding of a specific company’s valuation. Although most of these investors will be fine if they buy stock in blue chip companies, they would be better served to invest in passive, diversified index funds, which require less specialized knowledge and better diversification.
If you do insist on purchasing an individual stock without knowing all the financial details, at a minimum, you should be familiar with the company, its products or services, and a general understanding of how it makes money.
Listening To The Wrong People
People love talking about their success but rarely brag about their big losses.
If your friends or neighbors are chatting about how much they made on a stock or bitcoin, this is probably the moment you should tune out. Unfortunately, it is human nature to want to ride the bandwagon with others’ successes, which can often lead to poor decision-making.
Intelligent people often seek out knowledge and information from friends, colleagues, journalists, and websites to further their understanding of investing. In reality, these insights are often perpetrated by non-experts who do not understand how capital markets actually work.
Financial markets move in cycles from overbought to oversold, and very few professional investors overperform by actively picking stocks in the long run. By following market trends or popular opinions without thoughtful research, investors essentially end up timing the market to their disadvantage.
If you aren’t knowledgeable about the best investing practices, you should either work towards building your financial literacy or work with a financial planner acting as a fiduciary with your best interests at heart.
Buying When You Should Be Renting
There are many arguments for buying instead of renting, but the most common is in support of ‘building equity.’ Homeownership has become a symbol of stability and financial status in the U.S., but often renting is much more prudent.
High-interest mortgage rates, homeowner association fees, maintenance, property taxes, and homeowners insurance are all significant expenses that often can make home ownership much more expensive than simply the purchasing cost. Furthermore, the opportunity cost of investing the down payment and upfront fees into the market should be fully accounted for, as they would offset some of the comparable rental costs.
Many younger people or families buy their first homes with the thought that they will be starter homes that they will upgrade within five to ten years. Buying and selling real estate is further hindered by expensive broker commissions, closing fees, mortgage recording taxes, and other local fees or ‘flip’ taxes. Buying a home that you intend to live in for five years or less is a needless financial mistake.
Spending, Not Saving
Smart people usually understand the need to save for retirement, but in many cases, they fall short of what financial targets they actually need. This leads to either cutting back later in life, working additional years past planned retirement, or running out of money at an elderly age.
Living Beyond Your Means
Many people fall into the trap of spending beyond their means to “keep up with the Jones .”There is nothing wrong with spending money or enjoying the occasional splurge. Nevertheless, a basic budget and financial plan will ensure you put enough money away for your future and life goals.
Every dollar splurged before paying down debt is usually a poor financial decision. By doing your own basic planning, you should be able to formulate how much money you should be investing or saving every year.
Most people avoid budgeting like the plague and rather not face the truth that they are borrowing from their future selves.
Not Starting To Save Early Enough
Time is the most valuable and finite resource. When it comes to building wealth, you need to utilize time to compound your investment returns and create more net worth. The more time you have, the easier it will be to grow your investments, so start as early as possible.
Tax-deferred retirement accounts are an essential tool for most individual investors as they allow money to grow more rapidly without tax drag. These benefits cannot be ignored, and investors should be investing in IRAs and 401(k) at a young age.
Conclusion on Money Mistakes
Sadly, many poor money mistakes that many individuals make are avoidable, given better money practices and guidance. The following is a review of the four dumb money mistakes smart people make regularly:
- Don’t invest in financial products you don’t understand.
- Don’t take financial advice from others who are not financially literate or act in your best interest.
- Don’t feel the need to buy a home. Instead, fully analyze the difference in expenses between buying and renting before making a decision.
- Make sure you have an investing plan and start saving and investing money as soon as possible.
Avoid these simple pitfalls, and your financial future will indeed be brighter.
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.