Let’s face it, very few of us has not made at least one costly financial blunder in their life. (Some of us have made quite a few, unfortunately.) The Consumer Federation of America recently produced a study showing that 2 out of 3 Americans have made at least one bad financial decision and nearly half had made more than that. In fact, the average cost of one bad decision was $23,000.00, which is quite alarming. It is for that reason that we’ve put together a list of the 7 financial mistakes that most people make. We hope that this blog will keep you from making them yourself and, without further ado, let’s get started. Enjoy.
- One of the worst mistakes is to pay more fees than are absolutely necessary when investing. The fact is, many investors are constantly putting themselves at a disadvantage by purchasing investments that carry hefty fees. Simply put, if you stick with no commission index mutual funds you will have a 1 to 2% advantage over someone who invests in an actively managed fund that carries a sales charge.
- Starting in the mid-1990s up until the financial crisis many plans relied on the expectation that their annual investments would return an average of about 10%. This of course was very overly optimistic and those people who were more conservative had fewer surprises. Ignoring this financial mistake comes at great risk.
- One of the worst mistakes that people make is failing to maintain an adequate emergency fund. The fact is, life has a habit of throwing us curveballs and those people who prepare for it usually are able to dodge them while those who don’t and sometimes get a baseball to the head.
- When it comes to insurance there are two mistakes that most people make. The first is having too much insurance and the second is not having enough insurance. Unfortunately insurance is a necessary part of any good financial plan and so figuring out just how much you need is vital. You’ll find a number of insurance calculators online and we recommend getting one and using it to determine your correct number.
- One of the dumbest mistakes that people make is to allow their emotions to control their financial choices. The worst emotional culprits are fear and greed. Greed has a habit of rearing its ugly head when the market tops and an investor assumes too much risk. When the bottom falls out, as it tends to do, many people make the mistake of letting fear guide their choice to sell. The best advice; create a diversified portfolio that spreads your investments, and thus your risk, around and protects you should one of those investments fail.
- Pride can be just as big a sin in your regular life as it can be in your financial life. Keep that in mind when you need financial help and ask for help rather than continuing blindly to make purchases and investments that you don’t know enough about. While we’re on the subject also make sure that you know what you’re paying for and how your financial advisor is going to be compensated. In our opinion it’s better to hire an advisor that is fee-only rather than one who works on commission. The fee-only advisor will normally act in your best financial interest.
- Lastly, assuming too big a risk can be very detrimental to your financial health. For example, purchasing too many shares in a single stock or investing in an untested company. If you’re still keen on doing this make sure that you only invest the amount of money that you are willing to lose. We recommend keeping your exposure to single digits as far as your net worth is concerned.
As we mentioned earlier, there are very few Americans who have not made at least one large financial mistake. We hope that these tips will help you to avoid any in your financial life and we wish you all the best with your financial plans and your portfolio. We also recommend that you come back and visit us very soon because will be giving you more excellent financial advice on a regular basis. See you then!