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Do You Make These 5 Money Mistakes?

You must learn from the mistakes of others. You can’t possibly live long enough to make them all yourself.

– Samuel Levenson

I will confess. I’ve had my own share of financial mistakes. When I was new to the investing world, I decided to buy call options. It had the potential to generate immense returns, like 20-30% in weeks. I was so sure of it. But I was blinded by the fact that it can also generate large losses, which it did for me.

We all make mistakes and can learn from them. But what if we just learned from other people’s mistakes?

1)  Not paying yourself first

I was talking to a friend of mine, who shared that when she was young, her parents trained her to set aside 40% of her weekly allowance. She hated it. At first. But then, she discovered that now she had a pot of money she can use when she wanted to buy a face painting set or a Narnia box collection.

If you don’t pay yourself first, you might end up spending all of your take home pay each month. In fact, latest statistics show that about 55 million Americans have no emergency savings.

But if you automatically set aside money to your savings account, you can save money for your next vacation. Maybe watch the 2019 Women’s World Cup in France? (I heard the U.S. team is once again a heavy favorite.)

Just make sure you have a clear picture of your other spending needs, so you don’t over save (which might deplete your checking account and trigger overdraft fees).

2)  Not having a system of tracking Fun expenses

I used to use an app that tracked all of my monthly discretionary expenses, like dining out, entertainment, and shopping. It was very effective in keeping me within budget. But it was also tedious. At some point last year, I said to myself, “I’m pretty financially savvy, I can do without this app.”

Without a system to track my Fun expenses, I felt I was driving blind. I didn’t know if I was spending above or below my means. I soon realized the error of my ways.

But I didn’t want to use that time-consuming app anymore. Luckily, I found an equally effective and more manageable way to stay within budget. I again feel in control of my money.

3)  Opening an IRA with a bank

You’ve read about the value of opening a Roth IRA, so you can grow your money tax-free. However, your first instinct might be to open the IRA through your bank. In fact, a handful of our clients initially had theirs through Wells Fargo.

The upside of that is your IRA savings are most likely FDIC-insured, if it’s in a savings account.

The downside is it will not have the potential to grow, because it’s just in a savings account.

Consider opening or moving your IRA to a brokerage firm, where you can invest in diversified bond funds for higher yield or stock funds for potential growth.

4)  Buying individual stocks

Purchasing stocks are back in the groove these days, as the U.S. stock market continues to breach all-time highs. In fact, I know someone who wants to put ALL of his hard-earned retirement savings in just one stock (which he predicts will double or triple in price).

I get it. Buying individual stocks can be really exciting, because there’s the possibility to strike it rich.

But studies consistently show that more than 90% of stock pickers, including professional money managers, underperform the general U.S. stock market over a 15-year time period. If you were betting on a horse, would you bet on one that’s predicted to lose 90% of the time?

Oh, did I mention the huge risk involved? You may think it’s a safe bet because it’s a huge company. But look at General Electric. Widely respected firm with top-notch products. It’s down by more than 75% from its peak.

5)  Not having a written financial plan

Latest research shows that only 1 in 4 Americans have a written financial plan.

This same study also reveals that having a written financial plan can lead to better daily money behaviors. “Planners” are more likely to save regularly and effectively manage their debt.

Close to half of the survey participants said they don’t have enough money to merit paying for a financial plan.

But let’s say you have $50,000 in your 401(k). Another study of 425,000 savers showed that those who worked with a professional on their retirement investments achieved an annual return that was three percentage points higher. So having someone re-tool your 401(k) allocation can potentially gain you at least $1,500 annually (on the average). So even if you paid $600 for a consult, you can still be so much ahead.

Here’s another research. A 2014 academic study showed that those with a comprehensive financial plan accumulated up to four times more wealth.

It’s human to make mistakes. But the important thing is we learn from them, and take steps so we prevent ourselves from making bigger, more costly ones in the future. A credentialed financial planner can help you identify blind spots and prevent you from making money mistakes.

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Alvin Carlos, CFA, CFP®

About Alvin Carlos, CFA, CFP®

Alvin Carlos, CFA, CFP® is passionate about helping middle class professionals make smarter financial decisions. He is the CEO of District Capital Management, a financial planning and investment management firm for the everyday people. Alvin is a CERTIFIED FINANCIAL PLANNER™ practitioner and has a Masters degree in International Relations from SAIS-Johns Hopkins. In his spare time, Alvin enjoys swing dancing and Ultimate Frisbee. He also volunteers for Catholic Charities’ new Financial Stability Network, which helps low-income folks with their finances.

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