I was leafing through the July issue of SmartMoney (the Wall Street Journal’s sister magazine) mostly because of the cover article, 7 Money Mistakes … And How To Avoid Them. Here are the seven mistakes in a nutshell:
#1. Saving with the right hand and spending with the left
#2. Playing it too safe
#3. Looking into a cloudy crystal ball
#4. Living in the moment
#5. Throwing good money after bad
#6. Letting your ego get in the way
#7. Following the crowd
The article was quite interesting and applicable to investors and non-investors alike, though the points themselves weren’t concisely written. Here’s how I would summarize their seven mistakes:
#1. Get a grip on your spending before you invest
Pay off all of your credit card debt before you even think about investing. If you get any sort of boon, don’t think of it as party time – use it to pay down debt or actually invest for the future. Learn how to be a little bit frugal, and cut out some of the big unnecessary purchases – you don’t need a new BMW.
#2. If you’re going to invest, invest
Once you have your financial house in order and plenty of money in a cash emergency fund, invest that money. Put your cash in investments that you can be confident in for a while – then let it sit there for a while. Don’t sell quickly to grab short term gains and don’t sell to avoid potential big losses, either. Wait until there’s truly a good reason to make a portfolio change.
#3. Don’t forget risk
Don’t put all of your money in one place – make sure that you’re invested in at least a few different things. Especially don’t put all of your cash in risky investments like lots of small-cap stocks.
#4. Get started ASAP
If you haven’t started your 401(k), do it now. Don’t hesitate another second, even if you don’t know what you’re doing. Just tell the person to put your money in the most conservative investment and worry about it later if you’re caught up in investment paralysis.
#5. Be sensible with your portfolio
If both the numbers and your gut are truly telling you something is a bad investment, stop putting new money in it for a while. If your gut still keeps telling you it’s bad even a long time after you stopped putting in new money, then move that chunk to something else. Don’t just keep tossing in money when it doesn’t work for you.
#6. Check your ego at the door
Don’t ever think you’re a killer investor – the second you believe that, the second your portfolio will fall apart. Don’t make frequent trades or else the fees will eat you alive.
#7. If everyone else is doing it, don’t do it
If you see the same talking point over and over, that means it’s time to avoid that investment. For example, only a fool would invest in ethanol stocks right now.
These are pretty good rules to live by, but aside from the first one, they don’t really cover the basics that allow you to actually invest your money. So, to complement these seven mistakes, I wrote my own set of seven mistakes people make when they are investing. Let’s take a look:
The Simple Dollar’s 7 Money Mistakes To Avoid
… before you even worry about SmartMoney’s mistakes
#1. Ignoring frugality
If you can trim $200 a month from your monthly budget, that’s the same as a $200 a month investment gain. Look for ways to trim your own spending, and the best place to look is your daily routine. When you flip on the light switch, are those bulbs energy efficient? Do you stop for a bagel and coffee each morning? Do you eat an expensive lunch with coworkers every day? Do you drink or smoke habitually? Do you subscribe to magazines or cable channels that you don’t utilize? Is your bank constantly dinging you with stupid fees? All of these changes can recoup huge money, but many investors forget about them and instead spend their time sweating over how to eke out an extra 1% from their portfolio.
#2. Paying any high interest debt
By high interest, I mean an interest rate higher than the 5.05% you could earn in a high-yield savings account. If you’re paying more than that in interest, you’re basically tossing money down the tubes. Eliminate all high interest debt before you even think about investing – don’t justify a little bit of it. High interest debt is like an investment with a large negative return – the longer you refuse to pay it, the bigger your losses are.
#3. Financing any purchases, from furniture to automobiles
Often, people wake up to the fact that credit card debt is bad, but then they still go put all sorts of things on purchase plans, paying high interest rates to have it now. Another mistake. If you’re going to buy a car in two or three years, start making the payments now into a high yield savings account, then use that to pay for most of – if not all of – the car. This way, interest works for you rather than against you.
#4. Not having an emergency fund
What happens if you lose your job and another one isn’t immediately forthcoming? If you don’t have an immediate answer that doesn’t involve panic, then you’re not prepared to be investing. Keep at least a few month’s worth of salary in cash in a savings account for such an emergency, money you can just grab and run with if need be.
#5. Believing that your “future self” will take care of it
This is one of my favorite things to hear because I used to tell myself the very same thing. “I’ll take care of it in the future,” I would say as I whipped out my credit card for some stupid expense and decided to go to Europe instead of getting started with investing. Guess what? Your future self might not have a job or might be sick or might have just had their car break down. Will you want thousands in credit card debt if these things happen?
#6. Spending money as soon as you get it
I know one person who doesn’t have any debt of any kind. Of course, he doesn’t have much of anything else, either. Instead, he lives his life completely by the seat of his pants, spending cash as soon as he gets it having fun. He has a lot of fun, but now he’s starting to realize that when you’re forty five years old and have no assets built up, the world doesn’t seem as much fun as it used to be. Start getting used to putting a little bit away to help “future self” out.
#7. Having big dreams but not making them concrete
You dream of big things, but then keep going through the same routines. What keeps you from having that amazing house or that nice car? A lack of a plan, that’s what. Start looking at what it would really cost, then break it down into small pieces that you can wrap your hands around. Piece by piece, you can have your dreams if you start looking at how to make them happen instead of just wandering along through life.
Once you solve these seven money mistakes, you’ll be on a path where SmartMoney’s mistakes might mean more to you.