7 financial mistakes smart people never make twice

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We all have a financial history, but sometimes that history is littered with more blunders than we’d care to acknowledge.

You might reflect on your financial decisions and cringe at the memory of past mistakes or wonder if your financial missteps were typical or not.

How do you know if you’ve made truly significant financial errors or just the common slip-ups that even the smartest people stumble upon?

After years of careful observation of my own financial journey and those of my colleagues, I’ve compiled a list of 7 financial mistakes that smart people never repeat. If these ring a bell, it might be time to reassess your money management strategies.

1) Ignoring the importance of a budget

Possibly one of the most common financial mistakes that even smart people can fall into is ignoring the importance of a budget.

Budgeting might seem tedious and restrictive, but it is, in fact, a powerful tool that gives you control over your money. It allows you to see where your money is going and where you might need to make adjustments.

Smart people understand this. They might make the mistake once, but after experiencing the chaos of uncontrolled spending and the subsequent financial strain, they quickly learn their lesson.

A budget doesn’t just help keep track of your personal finances, it’s also a roadmap that guides you towards your financial goals. It’s the difference between wandering aimlessly in the financial wilderness and marching confidently towards a secure future.

2) Chasing after the latest investment trends

It may sound counterintuitive, but one of the major financial mistakes smart people avoid repeating is jumping on the bandwagon of the latest investment trends.

In a world where information is readily available at our fingertips, it’s easy to get caught up in the hype of new investment opportunities. The fear of missing out (FOMO) can push even the most rational people to make impulsive investment decisions.

Smart people, however, understand that investment isn’t about trends, but about careful research and informed decisions. They might get swept up once in the frenzy of a hot new trend, but the burn of a hasty decision quickly teaches them a valuable lesson.

Investment is a long-term game that requires patience and a clear understanding of your personal financial goals. It’s not about chasing after every new opportunity that comes your way, but about making strategic choices that align with your financial objectives.

3) Not having an emergency fund

Life is unpredictable and can throw us curveballs when we least expect them. A sudden job loss, unexpected medical expenses or a major car repair can quickly deplete our resources and leave us in a financial lurch.

Financially savvy people understand the value of being prepared for such uncertainties. They might overlook the necessity of an emergency fund once, but the stress of dealing with unforeseen expenses quickly teaches them the importance of having a safety net.

While the common advice advocates for an emergency fund equivalent to three to six months of living expenses, this guideline may not be practical for individuals dealing with high-interest debt, such as credit cards or student loans.  

Erin Lowry, the author of the Broke Millennial book series, suggests that, for those actively working on debt payoff, having a minimum emergency fund equivalent to one month of essential living expenses is essential.

For those without any outstanding debt, the recommended goal is to accumulate a financial safety net equivalent to three to six months of living expenses.

4) Carrying too much debt

One financial mistake that can be a heavy burden is carrying too much debt.

Did you know that the average American has around $38,000 in personal debt, excluding mortgages? That’s a substantial amount of money that could otherwise be put towards savings or investments. 

Money-wise people are acutely aware of this. They might fall into the debt trap once, but the strain of high-interest payments and the impact on their credit score quickly teaches them to manage their debts wisely.

Debt isn’t just about owing money. It’s a financial obligation that can restrict your freedom and limit your financial growth. It’s the invisible chain that keeps you tethered to a cycle of repayments and financial stress.

5) Living beyond your means

In a society where consumerism is glorified, it’s easy to get caught up in the allure of shiny new gadgets, luxury vacations, and designer labels.  

Even those of us who usually make financially responsible choices might find ourselves lured into this trap at times. However, the unforgiving truth of accumulating bills and dwindling savings serves as a stark wake-up call, urging us to reconsider our spending habits and prioritize financial well-being.

Living beyond your means isn’t just about reckless spending. It’s about losing control over your financial health and compromising your future security. It’s the fast track to a life of debt and financial instability.

6) Not investing in yourself

In our pursuit of financial stability, we often focus on external investments like stocks, real estate, or setting up a business. What we often forget is that the most profitable investment we can make is in ourselves.

Smart people understand this. They might overlook it once, but the realization that personal growth directly correlates with financial growth quickly shifts their perspective.

Investing in yourself isn’t just about spending money on education or personal development. It’s about enhancing your skills, expanding your knowledge, and improving your health. It’s about becoming the best version of yourself, which in turn opens doors to better career opportunities and higher income potential.

7) Ignoring insurance

A financial mistake that can cause devastating consequences is ignoring the importance of insurance.

Insurance might seem like an unnecessary expense, especially when you’re young and healthy. But life can change in an instant, and without adequate insurance, you could find yourself facing a mountain of medical bills or struggling to replace lost property.

Smart people understand this. They might neglect insurance once, but the daunting prospect of dealing with a crisis without a safety net quickly changes their approach.

Insurance isn’t just about protecting against potential disasters. It’s about safeguarding your financial future and providing peace of mind. It’s a proactive measure that can save you from financial ruin in the face of adversity.

Financial literacy: The key to avoiding mistakes

Financial mistakes often stem from a lack of financial literacy – a skill rarely taught in schools. Beyond just balancing a checkbook, true financial literacy involves understanding how money works, grows, and serves as a tool to achieve life goals.

Smart individuals recognize that financial literacy is crucial for avoiding mistakes; they actively educate themselves through books, seminars, podcasts, and financial advisors. This proactive approach isn’t just for personal gain—it contributes to overall economic stability and can help narrow the wealth gap.

While learning from financial mistakes is essential, improving financial literacy is equally important.

The path to financial success involves inevitable blunders, but the key is to use them as stepping stones toward smarter decisions. Don’t be discouraged by past mistakes; view them as opportunities for learning and focus on enhancing your financial literacy.

Lucas Graham

Lucas Graham, based in Auckland, writes about the psychology behind everyday decisions and life choices. His perspective is grounded in the belief that understanding oneself is the key to better decision-making. Lucas’s articles are a mix of personal anecdotes and observations, offering readers relatable and down-to-earth advice.

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