By Jason I. Henderson, Ph.D.
Financial issues are complex and challenging. In fact they are so complex that most Americans give up before they ever start. On every corner, newspaper, radio and television station, not to mention the myriad of websites you can find experts who claim to know the best-“guaranteed” financial strategy and the best way to structure your affairs for secure and optimal growth. But unfortunately for the average American, the so called “guarantee” is simply the experts opinion or projections based on assumptions. (i.e. no guarantee at all.)
Why is finances so difficult? Because the internet, television and talk radio is full of misinformation, misconceptions, and misconstrued facts. People who do not take the time to get the facts and correct information are doomed lose money. Here are 7 mistake people make that cost them dearly.
1. Confuse investing with savings.
Most think that investing is saving for something, i.e. college education, wedding, vacation, or retirement. Let me state this as plain as I can: investing is not saving.
Investing is a gamble. The outcome of any investment in the markets is simply unpredictable and therefore unknown. Have you ever seen this phrase before; “past performance is no guarantee of future results.” This is another way of saying the outcome of your investment is not guaranteed nor predictable. How can you prepare for something that will for sure happen, such retirement or college, with a strategy that admittedly does not know the outcome? See why I say investing is a gamble?
Saving on the other hand is putting money away in such a way that you will for sure have it in the future. You CAN prepare for something that will happen in the future by saving.
2. Trying to build a castle before building a moat
Before you focus on building an investment strategy make sure you are financially protected and secure. Here are a few questions to help guide you: “Can your current plans still complete if you are sued, you are unable to work due to sickness or injury, and could your family fulfill your current plans for them if you died?” Focusing on future dreams is important, but not having a solid foundation can lead to financial disaster if things do go wrong.
3 No clear vision for the future
You need a vision of where you want to go before you start talking investments. An airplane, due to wind, weather, and traffic from other aircraft has to constantly adjust its path. This causes them to deviate from the most direct course 99% of the time. While planes are constantly off course, they are always arriving at their destination. If you have no destination in mind… where are you going to arrive?”
4. Failure to understand that they finance everything the purchase.
One simple question can guide you when you are considering making a purchase, whether that be using credit or paying cash. “What does (insert your name here) living in 2025 (or any future year) want?” That is the person who is ultimately footing the bill for your consumption today. We still have to live and enjoy life today, but over indulgence causes pain in later years.
5. Fail to truly understand the fees and the power of compound interest
Tony Robbins’ infamous book about money raised the red flag on fees and it is still a mistake many make because of ignorance. While fees can appear to be small, i.e. 1-2% per year when you factor in compound interest, they can become much larger than you would ever expect. Over the course of your career, or after decades of saving, fees can cost thousands if not hundreds of thousands of dollars.
6. Failure to invest time to truly understand their investments and financial health
Pay now in the form of time it takes to understand how money works or pay a higher price later in life. Most people spend just two hours per year talking with their financial advisor. Is your future really so unimportant to you? Time to quit being lazy
7. Failure to plan to live longer than they think.
The good news is people are living longer today than they used to, often longer than the thought they would. The bad news is, not having a financial strategy that goes the distance can make some of your final years the worst. Income allocation, not asset allocation is one way to prevent the poor ending.