Ten Financial Mistakes
Why do we make so many financial mistakes? Studies in the
new fields of evolutionary economics and behavioral economics
are starting to shed light on this. In the meantime, here are
ten common money mistakes to avoid. How many are you making?
1. Getting Competitive
Unless you are playing poker or negotiating a business or
investment deal, trying to "beat" anyone else is a
bad habit. Being the first to buy new technology means you get
the worst version at the highest price. "Winning" at
an auction means you paid more than anyone else was willing to.
The science of evolutionary economics explains why we feel this
need to "win." It has to do with position in the tribe,
which used to increase one's survival odds, but this tendency
of ours is of very little value in a modern economy.
2. Thinking Someone Owes You Something
Unless you have a contract or at least a promise, nobody owes
you a thing. Not the government, society or your boss. Getting
hung up on what is "owed" to you is a financial mistake
because it gets in the way of doing what is necessary for financial
health. Consider how health insurance came to be expected of
large employers. It was based on nothing more than the fact that
many provided it. If many companies had provided cars to employees,
we would think we are "owed" a car by any good employer.
Never mind what is "owed" to you. Work honestly
to get what you can. Try for that raise, but if you aren't paid
enough, find another job. Take that unemployment benefit if it's
available, but don't rely on these programs. When you stop looking
for your "due" you can start looking at what others
want, and then provide that for a profit, even if that profit
is in the form of a paycheck.
3. Thinking Value Is All About Prices
If a television normally sells for $900 and is on sale for
$400, most people think it's a great deal. But the value of personal
items is measured by what the individual user needs and wants.
If you can be as happy with a $200 television, then the other
is over-priced from your perspective. A personal purchase is
worth what usefulness it has to you, and nothing more.
4. Thinking Value Is All About You
I saw a man lose $30,000 by pricing his home too high and
leaving it empty for years. This is one of the more common financial
mistakes. Value, when it comes to investments, has nothing to
do with what a thing is worth to you. Value is what the market
will pay.
Don't confuse personal consumption items with investments.
A car is not an investment. Even that $22,000 kitchen remodeling
project isn't, if future buyers will pay only $10,000 more for
your home as a result. It doesn't matter at all if you think
it added $30,000 in value. Enjoy that new stove and cupboards,
because they were not investments, but a $12,000 (your net loss)
personal purchase.
5. Thinking High Profits Are Unfair
If a sale is honest, the price is fair. It wastes your time
and mental energy to think a business makes too much profit.
Suppose your own house has a market value of $400,000. You wouldn't
lower the price to make it more "fair," so why expect
any business to charge less than what the market dictates? The
profit made on something is entirely irrelevant to what its value
is to you. Buy it or not, but don't waste time complaining about
a profit you would gladly accept if you were on the other side
of the transaction.
6. Comparing Yourself To Others
The classic "keeping up with the Jones's" is perhaps
one of the worst financial mistakes. There is little evidence
that buying more toys and better cars and homes makes people
happier. On the other hand, there is evidence that the debt taken
on in this process creates stress that does get in the way of
a happy life. Never think about what others have when deciding
what you need.
7. Buying For Status
Again, there is no evidence that impressing others with what
you have makes you happier. In fact, this catering to the ego
makes one more dependent on the opinions of others and therefore
more afraid of losing that status. Apart from the resulting stress
and desperation, there are the financial consequences of buying
more than you need. Unless you need something for a particular
financial purpose (a real estate agent may need a nice car to
drive clients around in), don't think at all about what others
will think. That includes thinking you'll impress others with
the "deal" you got. The latter is a good way to go
broke "saving" money on purchases.
8. Not Considering The Bottom Line
I once worked at a casino where 20 employees quit because
of a change in pay that amounted to a 20% increase in hourly
pay. The details are funny, sad, and not worth getting into here.
A summary of the reason for the departures: employees were angry
about the $1.50 per hour base pay (the casino was on an Indian
reservation which didn't need to abide by minimum wage laws).
Though with tips they would get more than they used to make,
many preferred to work for less money than be paid "unfairly."
You may have also seen people take jobs that pay several dollars
per hour less than others because they have better benefits -
even though those benefits could be easily bought from the excess
pay of the other jobs.
9. Looking Only At The Bottom Line
It's important that you make enough money to pay the bills,
but looking only at the bottom line is one of the worst financial
mistakes you can make. You may not always love the work you do,
but if it only pays the bills you better like it or look for
something else to do. Jobs you don't like can serve a temporary
financial purpose, like providing savings to buy a home or eventually
follow your passion. On the other hand, if you can work at something
you love, why look for more pay elsewhere?
10. Looking To Government To Solve Financial Problems
This one is under the category of "cultural financial
mistakes." We want something for nothing, preferring for
example, to believe that government can make more oil appear
on earth rather than adjust our habits as prices rise. Looking
to government to "control" prices or solve financial
problems creates a victim mentality that gets in the way of simply
doing the best we can with our time and money.
We forget too, that all laws are enforced at the point of
a gun. Is it really fair for us to negotiate that way? We always
have a choice to buy or not to buy. No honest company sells a
single thing for more than buyers are willing to pay, or there
wouldn't be a sale.
Of course there are many other money mistakes that people
make. This list didn't even touch on the issues related to buying
on credit. There are enough financial mistakes made in that area
to create a whole new list.
You my also want to visit the page:
Money Mistakes - Are You Making
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