If you are reading this, then you are likely more financially savvy than 90% of your peers. Considering that the average person spends about an hour per year learning about finances, knowing just a little of the information can go a long way. But money knowledge doesn’t mean you are going to avoid every mistake out there. In fact, sometimes too much information can be a detriment to your financial situation. Here are 5 money mistakes that people make even when they are smarter with money than the majority of their peers.
Money Mistake 1: Over Saving
Despite what you have heard, you can save too much money. Now keep in mind that there is a difference between saving and investing.
We all know the importance of having an emergency fund. And we all know that emergency fund should account for between 3 and 24 months worth of income (it all depends on how much you need in order to sleep comfortably at night). But what many people who are smart with their money do is put too much into their savings and emergency funds, and not enough into their investments.
Your savings will only earn you about 1%; your investments can earn 5, 10, or 20 times that.
Money Mistake 2: Chasing Interest Rates
There are a lot of personal finance “experts” out there that are constantly analyzing the market and seeing where they can move their money for the best interest rate. Most of them are wasting their time.
Suppose you have an emergency fund of $10,000 in an online savings account earning .5%. You discover another one paying 1% so you go through the process of moving everything over. Over the course of an entire year, you managed to earn an extra $50. You then find a new account paying 1.2%, so you move everything again and earn an extra $20. How much hassle for those extra few dollars?
If your emergency fund has been sitting in the savings at your local bank earning .1% interest, then by all means move it to a high yield online savings account. But don’t chase fractions of a percent.
Money Mistake 3: Investing
Money smart people know that they need to invest. But not all investments are created equal. There are many different mistakes that can be made when choosing investments including:
- Everything in one stock
- High fee mutual funds
- Index funds that underperform a managed fund
- Expensive 401k’s (especially after leaving the job)
- Inappropriately allocated
The list could go on and on. The point is that many people end up paying too much for their investments, when they could sit down with a financial advisor (most of the time for free) and get better advice.
Also Read: Automated Investing With The Best Robo-Advisors
Money Mistake 4: Avoiding Credit Cards
Some money gurus out there claim to be wealthy you have to avoid all debt like the plague. They advocate a cash only system is the only way to go. This is great advice for those who find themselves getting into trouble by racking up too much debt. But money savvy individuals can benefit tremendously from credit cards.
There are dozens of cards out there that offer 2% cash back on your purchases (that you are making anyway). Take for instance the Citi Double Cash Card pays 1% at time of purchase and another 1% when you pay your bill (which you should do in full every month). If you spend $20,000 per year on essentials anyway, why not pocket an extra $400?
Money Mistake 5: Buying a House
There are experts out there that claim you can’t grow rich by renting. Or that renting is just throwing your money away. For many areas of the country, that is absolutely untrue.
The real estate market has rebounded tremendously since the crash in 2008 and 2009. Places like San Francisco, Seattle, and many east coast cities are outrageously expensive again. Depending on where you live, you may be better off renting and investing the difference instead.
Historically, the value of a house will appreciate between 3% and 5% each year. Historically, the stock market appreciates around 8% each year. By buying a house, you are missing out on as much as 5% return on your money.
Obviously location, goals, hobbies, and many other factors come into play here; but the bottom line is that buying a house is not always the best financial decision.
Wrapping It Up
Smart people make mistakes. The difference is that when a smart person makes a mistake, they learn from that mistake and never make it again (read my post on co-signing a loan). If you haven’t made these mistakes yet, then keep them in mind so that you don’t end up making these mistakes.
What’s your biggest money mistake?
I have a friend who is very savvy when it comes to money. He told me that until now he don’t use a credit card because he still prefer to use cash all the time.