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17 Money Mistakes You Need to Avoid to Achieve Financial Freedom

We all make financial mistakes. I’ve made more than my fair share.

But the fewer financial mistakes you make, the faster you can build wealth, and the more likely you are to reach financial independence. Plus, you avoid the stress that comes with major financial mistakes.

As you create and update your financial plans and goals, keep a watchful eye out for these financial mistakes. Many are easier to run into than you think, and they’ll sneak up on you the moment you take your eye off them.

Money Mistakes to Avoid

1. Failing to Keep an Emergency Fund

If you ask five financial experts how much you should keep in an emergency fund, you’ll get five different answers. The reason is simple: What you need depends on the stability of your income and expenses.

First, bear in mind you should measure your emergency fund in terms of the number of months of living expenses it can cover. If your living expenses amount to $4,000 per month, and you have $8,000 in your emergency fund, then you have two months’ expenses.

Note the distinction between your monthly living expenses and your monthly income. Those should be two very different numbers.

Some personal finance experts suggest saving up as little as one month’s living expenses, while others recommend a year or more. Dave Ramsey recommends three to six months’ expenses held in cash in his Baby Steps program. This range is wise for people with variable living expenses, variable income, or both. Those with stable income and expenses can likely keep less in cash and maintain other sources of emergency funding, such as recession-proof investments and unused low-APR credit cards held in reserve.

Regardless, everyone needs an emergency fund, and it should contain no less than one month’s expenses in cash.

Pro tip: Make sure you keep your emergency fund in a separate bank account so you’re not tempted to use it. We recommend a Savings Builder account from CIT Bank.

2. Not Having Health Insurance

People feel invincible in their 20s. That is, until they break a bone playing sports like I did or get diagnosed with cancer like my former housemate did.

Even many middle-aged Americans fail to maintain proper health insurance. A troubling 28 million nonelderly Americans remain uninsured, according to the Kaiser Family Foundation. And when they inevitably face a health crisis, they won’t know how to pay for it.

Sure, it’s nice if your employer provides health coverage. But many employers don’t, and in the ever-growing gig economy, many workers make ends meet through side gigs and 1099 work. That means no employer benefits.

If you fall under that umbrella, you still need insurance. It’s up to you to find health insurance without employer coverage. Fortunately, you have more options than ever before to find it.

If you do cobble together gig income, consider getting high-deductible insurance and supplementing it with a health savings account (HSA) from Lively. These accounts offer the best tax benefits of any tax-sheltered account, with plenty of flexibility. Some Americans even use them as a second retirement account.

3. Not Having Life Insurance

Many financial experts swear by life insurance, and some go so far as to use whole life insurance as an investment. Although its usefulness as an investment instrument is up for debate, anyone with dependents needs life insurance.

Ask yourself a critical question: If you shuffle off this mortal coil tomorrow, could your family continue their current lifestyle? Or would they fall under serious financial pressure? Make sure you ask the same question of your spouse.

If your family would find themselves strapped without you or your spouse, you need life insurance.

Research the different types of life insurance policies, as they vary widely. When it comes time to talk to insurance agents and compare pricing quotes, remember insurance agents are salespeople paid on commission. They will pitch you on more expensive policies because they get a larger commission check. Before you speak with them, do your own homework on how much life insurance you need and come to your own conclusion.

4. Failing to Set Short-, Mid-, & Long-Term Financial Goals

In Lewis Carroll’s “Alice in Wonderland,” Alice asks the Cheshire Cat which way she should go. The Cat asks her where she’s going, and Alice says she doesn’t know. “Then it doesn’t matter which way you go,” replies the Cat.

It’s hard to plan a route without a destination. You need to know where you want to go if you are to have any hope of getting there.

In this context, consider short-term financial goals as achievable within the next year, mid-term financial goals as within the next five years, and long-term goals as anything longer.

Start with your long-term financial goals and work backward from there. For retirement, that includes a target monthly income from investments, which you can then use to calculate a target nest egg using the math behind safe withdrawal rates.

Other long-term financial goals may include helping your children with college expenses or buying your dream house, although the latter often falls under mid- or short-term goals.

Once you set your long-term financial goals, you can set short- and mid-term goals as milestones along the way. For example, if you aim for a $1 million nest egg for retirement, then you can calculate how much you need saved for retirement at every age between now and then.

5. Failing to Save Enough for Retirement

In surveys of older Americans’ financial regrets, the No. 1 regret cited is usually not saving more — and earlier — for retirement.

Working Americans, listen to your elders.

How much you should be saving each month depends on several factors, including your retirement horizon (how many years before you want to retire), your target nest egg, and your expected rate of return on your investments. But the exact numbers aside, the higher your savings rate, the faster you build wealth.

If you have 30 years before you plan to retire, aim for at least a 15% savings rate. For shorter retirement horizons, aim for more. My wife and I save and invest around 60% of our household income because we want to reach financial independence at a young age.

Take advantage of tax-sheltered retirement accounts to slash your tax bill and save more money, such as an IRA, 401(k), or SIMPLE IRA. Or save yourself some taxes in retirement — which means a lower target nest egg to generate the same monthly income — by using a Roth IRA.

Pro tip: If you’re investing in an IRA, 401(k), or any other type of retirement account, make sure you sign up for a free portfolio analysis from Blooom. They will make sure your portfolio is properly diversified and has the correct asset allocation. They’ll also check to see that you’re not paying too much in fees.

6. Failing to Invest in Stocks

Only 55% of Americans own any stocks at all, including in their retirement accounts, according to a 2019 Gallup poll. In 2004, 63% of Americans owned stocks. This change highlights a disturbing trend of lower- and middle-income Americans forgoing stocks in the wake of the Great Recession. These gunshy investors missed out on more than 300% growth in the U.S. stock market between 2009 and 2019.

Still scared of stocks?

Imagine two people in 1928 who each had $100 to invest. One was scared of the stock market, and invested $100 in U.S. Treasury bonds. By early 2020, they would have $8,013 based on their returns.

The other invested their $100 in the S&P 500, and by 2020 would have earned $502,417 — almost 63 times as much money as their conservative friend who only invested in government bonds. (See this ongoing chart from NYU’s Stern School of Business for a visual breakdown of returns on stocks versus bonds.)

Stocks belong in everyone’s investment portfolio. If you don’t know where to start investing, review the best robo-advisors on the market and pick one you like. Many are free, and all are more affordable than paying a human investment advisor.

7. Failing to Diversify Your Investments

Stocks are wonderful. But you don’t want your life savings invested in one stock. Look no further than Enron for an illustration of why not.

Among your stock portfolio, you want exposure to small-, mid-, and large-cap stocks — fancy finance lingo for small, medium, and large companies. You also want exposure to a wide range of industries, from tech to health care to utilities. Equally important, you want not just U.S. stocks, but also international stocks, both in developed countries like those of Western Europe and in developing economies like those of South America and Asia.

This is called diversification, and it’s one of the many ways to reduce risk in your stock portfolio.

But don’t stop at diversifying your stock investments. Also explore bonds, real estate, and more alternative investments like fine art through Masterworks and crowdfunding websites. The more baskets you spread your nest eggs among, the more protection you get against one basket toppling over.

I particularly like real estate, and you don’t need to run out and buy an investment property to diversify into it either. Explore the various ways of investing in real estate indirectly if the idea of becoming a landlord doesn’t appeal to you. I’ve experimented with investing money through Fundrise’s private REIT, for example, and have had success with it thus far.

8. Failing to Reduce Risk as You Near Retirement

As much as I love stocks, I wouldn’t want to retire with a portfolio of 100% stocks. Diversification aside, stocks are simply too volatile to provide reliable monthly income. They create a unique risk for new retirees, known as sequence of returns risk: the risk of a market crash in the early years of your retirement hampering your ability to live out your years comfortably on what’s left.

As you approach retirement, your asset allocation should change. Start shifting some of your stock investments over to bonds and lower-risk real estate investments. Keep in mind not all real estate investments are low-risk, so pay close attention to the risk factor when you invest in real estate as an income-oriented investment over bonds.

Although not perfect, a reasonable rule of thumb is subtracting your age from 110 or 120 to determine what percentage of your portfolio should stay in stocks, versus the percentage you should move to more stable, income-oriented investments. By this rule of thumb, if you’re 35 years old, you would keep 75% to 85% of your portfolio in stocks. If you’re 70, the percentage may be 40% or 50%, with the remainder kept in lower-risk assets.

9. Trying to Time the Market

Smart, well-informed people in particular feel the temptation to time the market, then come to regret it after a humbling experience (or several).

There are many reasons why you shouldn’t try to time the market. Consider the following example: Say you believe the stock market is overpriced today. You might be right, but it doesn’t matter. Unseen forces could drive the market even higher over the next two years, and when it corrects downward, the low point could still be higher than today’s pricing.

The simple fact is that markets aren’t 100% rational. They move based on emotions and perceptions just as much as they respond to economic fundamentals. So stop trying to outthink the markets, because the markets don’t “think” at all.

Instead, stick with dollar-cost averaging. Invest the same amount every other week, or every month, in the same spread of investments. It may not be sexy, and it doesn’t flatter your ego by letting you congratulate yourself on how clever you are, but it works. Best of all, you can automate it and forget about it. This allows you to spend more time and energy on earning money and enjoying time with your family and less time trying to outsmart institutional investment banks with far more resources and information than you.

10. Failing to Budget

Most people hate the “B” word: budgeting. It conjures images of sacrifice, of giving up all the things they want now in favor of some far-distant goal like retirement.

Welcome to the world of “adulting.” You shouldn’t eat ice cream for breakfast, and you shouldn’t spend every penny you earn on gifts for yourself like clothes, gadgets, and restaurant meals.

There are dozens of ways to approach budgeting, from the classic envelope budgeting system to the Japanese kakeibo budgeting system to budgeting alternatives for people who hate budgets. Regardless of the approach you take, implement these three simple steps:

  1. Choose a Target Savings Rate. If you want to save 25% of your income to put toward building wealth through investments, start with that number, not by listing your current expenses. Your goal becomes nonnegotiable, and the rest merely involves figuring out how to achieve it.
  2. Set Your Monthly Revenue as Four Weeks’ After-Tax Income. That’s all you can count on in any given month, so budget based on this most conservative number. When you get the occasional bonus paycheck, great. It can go straight toward a goal such as paying off debt, a down payment for a home, or your next trip to Europe.
  3. Question Every Item in the “Expenses” Column. Nothing is sacred, not your even housing payment, car payment, or cable TV bill. My wife and I don’t pay for housing, we don’t have a car, and we don’t have cable TV. Think big. Brainstorm ways to reduce the cost of every line item, from eliminating your housing payment through house hacking to getting rid of a car.

Put every single expense under the microscope, and don’t ask yourself whether you can live without it, but how you could eliminate or reduce it.

11. Succumbing to Lifestyle Inflation

If you ask the average person whether they could survive on half their current paycheck, they usually say no. When you ask them what they consider a successful income, they usually come up with a figure roughly twice their current income.

Most people spend nearly everything they earn, regardless of their income. When you were 22, you managed to get by on a small salary. Then you got raises and you started spending more, until you started believing you couldn’t get by on less. If someone doubled your salary tomorrow, by next year, you’d find new fun and exciting ways to spend the extra money — perhaps a nicer house, fancier car, more meals out, or pricier vacations. And it would feel hard to go back to what you make today.

It’s called lifestyle inflation: Every time you start earning more, you start spending more.

Want to build wealth? Start by freezing your current budget when you get a raise or earn more through your side gig. Better yet, reverse the process by returning to your budget from a previous payscale before you got that last raise or two.

12. Failing to Track Your Progress

What’s your net worth? What was your savings rate last year? How much passive income from investments do you bring in during an average month?

Most people can’t answer these questions off the top of their head. But it’s important to track financial progress toward your short-, mid-, and long-term financial goals. Otherwise, you have no idea if you’re on track or need to make a major course correction.

Go beyond net worth as a financial yardstick. Use a complete set of financial checkup numbers to track your progress as you build wealth each year.

If you track nothing else, track the following three numbers each month:

  • Investable net worth, not including home equity
  • Savings rate
  • FIRE ratio — the percent of your monthly living expenses you can cover with passive income from investments

Consider using tools like Mint or Personal Capital to help track your assets automatically and do most of the heavy lifting for you.

13. Maintaining Credit Card Balances

Pay your credit cards in full every month so you don’t carry a balance over to the next month. Period.

Credit cards charge outrageously high interest rates, usually in the high teens or low 20s. You can’t afford to waste money on credit card interest if you want to build wealth.

It helps to keep an emergency fund to avoid carrying debt. If you spend more than you planned one month because of a surprise expense, you can dip into your emergency fund to help pay your credit card balance in full. Just make sure you replenish your emergency fund next month.

Credit cards are tools that can be used for good or for ill. In the hands of a consumer with some personal finance savvy, credit cards can deliver free vacations through travel rewards, provide protection against fraud, and sometimes offer perks like insurance for car rentals.

In the hands of the average American, they deliver high interest and debt — $6,506 in average credit card debt in 2018, according to Experian.

If you currently have credit card balances you can’t pay off at the end of this month, use the debt snowball method to pay them off one at a time. Then ensure it doesn’t happen again through aggressive budgeting and keeping a healthy emergency fund.

14. Taking on Too Much Student Loan Debt

Student loan debt cripples many young adults. According to Experian, the average American carries $35,359 in student loan debt. That makes it awfully hard to save up a down payment to buy a house, let alone save money for retirement while you’re young to take maximum advantage of compounding and tax-sheltered accounts.

Before enrolling in college, look for ways to reduce or avoid student loan debt entirely. If that ship has sailed, look into student loan forgiveness programs and use the debt snowball method to eliminate your debt as quickly as possible. If your loans have high interest rates, you can also look to refinance with Credible.

If you’re a parent with college-age children, get creative with ways to help them with tuition without incurring student loan debt or delaying your own retirement. Those include cobbling together various scholarships and grants, 529 plans, educational savings accounts (ESAs), building passive income through investments to help shoulder the costs, and dozens of other inventive ways to pay for college.

15. Staying in a Dead-End Job Too Long

Deep down, you know whether your job offers opportunities for you to advance your career where you want it to go. If it does, congratulations, and keep riding the elevator that only goes up.

If not, it’s time for a change. Immediately.

Start rekindling all your relationships, both personal and business, in and outside of your target career niche. You can call it a cliche, but it’s not what you know, it’s who you know. According to Forbes, a full 85% of workers find their jobs through networking. So brush up on your networking skills, even if you consider yourself an introvert.

Also, remain open to jobs in other fields or in other locations. Don’t overlook jobs that provide free housing or let you work remotely. I’ve been working remotely since 2008, and I’ve logged hours on five continents. When you can work from anywhere, it opens up more options for choosing your home based on other factors like walkability, cost of living, family, climate, or simply living in a town you love.

16. Quitting Without a New Job Lined Up

Another cliche that rings true is “It’s easier to find a job when you already have one.”

Nothing turns employers off faster than the scent of desperation. They wonder, “What do other employers know about this person that I don’t? Why should I take a risk on this worker when no one else wants to?”

Even more important is your own mental state when you network and apply for jobs. When you job hunt from a place of calm confidence, secure in your ability to take your time and find the right fit, you can do exactly that. Self-assurance shines through in every interview you take and every networking move you make.

The last place you want to find yourself is unemployed and wondering how you’re going to pay the mortgage next month. If you see the writing on the wall for your job, start networking aggressively, and find your next perfect job before you join the ranks of the unemployed.

17. Assuming You Can Keep Your Job Forever

In a worrying trend, older Americans are increasingly being pushed out of their jobs. It should serve as a wake-up call, no matter your age: You can’t count on coasting any job into retirement.

It also means you can’t necessarily “just work longer” if you find yourself behind on retirement savings. You may not have the option of working until 68 instead of 62, at least not at your current job and salary.

Your employer may not end up being the one to sever relations, either. You could fall ill tomorrow and become unable to continue working.

It’s one more reason why the No. 1 regret among older Americans is failing to save enough for retirement.

Final Word

The list above is filled with “don’ts” and cautionary tales. So what should you do, aside from the opposite of all these mistakes?

Get intentional and design your perfect life. Most of us simply drift along in life, carried wherever the winds of fate blow us. It’s a recipe for dissatisfaction and cynicism.

Instead, take 15 minutes and write out exactly what your perfect life looks like. Include your career, but don’t stop there. Go on to describe the ideal city where you live, your family life, the number of hours you work, the kind of home you live in, and other goals.

Once you have a clear vision, you can set about working backward to plan how to get there. It’s called lifestyle design, and it helps you achieve the exact life you want. If you don’t know what you want in life and where you want to go, you can’t expect to get there.

Which of the mistakes above have you made or are you currently making? What steps are you taking to correct them? Most importantly, what does your perfect life look like, and how do you plan to create it?

G. Brian Davis
G. Brian Davis is a real estate investor, personal finance writer, and travel addict mildly obsessed with FIRE. He spends nine months of the year in Abu Dhabi, and splits the rest of the year between his hometown of Baltimore and traveling the world.

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