Here are the Most Common Financial Mistakes You Should Avoid

Financial mistakes can be avoided. That’s the best offensive strategy on your wealth journey.

However, we are human. And, Human beings are not perfect; we make mistakes (constantly) especially financial mistakes. No matter if you pivoted from financial mistakes or barely avoided them, this is a great list for those who want to build wealth SMARTER and more effectively.

Here are the three most common mistakes by topic areas and opportunities to succeed:

Investing over Everything!

Investing is undoubtedly an important area of financial planning, but it isn’t only a piece of the puzzle.

It can generate a feeling of euphoria when stocks are charging up. In contrast, investing can lead to near-existential dread.

On June 10, 2022, the Dow dove 800 points, S&P 500 posted the worst week since January after inflation hits a 40-year high.

Before you jump to buying the dip, flip or etc, learn how to invest the proper way.

This means focusing on optimizing your current cash flow and risk management. The goal is to understand the risk and create a strategy where you can continually invest for the long term.

Here are some other financial planning mistakes to avoid:

Prioritizing tax avoidance over-diversification

Remember that selling stocks in your taxable brokerage account can increase your tax liability.

There are way more benefits to holding for a long-term period (ie over a year or more) for preferential taxes. Short-term investing is a high risk, high reward, and even higher chance of crying in the morning strategy.

Over 69% of short-term traders lose their shirts. Besides, short-term investing comes with high costs due to a high transaction volume and their corresponding brokerage commission fees.

Not having a rebalancing, dollar-cost averaging, or buying the dip strategy

Hold on for Dear Life (#HODL) is not a financial plan.

Before buying investments, have an idea of when you plan to sell them. If they drop in value, will you buy more? If they go to the moon, will you sell them?

In my household, we learned that it’s best to not get attached to any stock. The market tends to move by sector. Knowing and understanding that can give you an edge. We rebalance and sell semi-annually or annually. If a stock is up over 30%, it might be time to sell. If it’s down 20%, it might be time to buy.

Fear, uncertainty, and doubt — FUD — are the greatest risks for an investor. News media and naysayers often spread FUD.

Some many stocks might as well be Vanguard Total Market Index ETF

At one point, our TNFG after-tax portfolio had over 50 stocks in different slices (M1 Finance reference).

While choosing investments may be fun and exciting, you should likely keep around 10-15 individual positions. More, you are pretty much better off buying the store, i.e. Vanguard total stock market index ETF.

It is simple and easy.

Besides, it’s like owning over 400 stocks all in one with less randomness.

Negative Cash Flow with No Time Horizon Considerations

Even with gasoline prices topping $5 for the first time in US history; cash is not king, having a great cash flow is.

Even before the pandemic, most people were and still are blissfully unaware of their monthly expenses and even worst their monthly income.

It’s a problem.  

Here are some considerations that you should be aware of:

 Buying into the Minimums with No Time Horizon Consideration

Deciding to make minimum debt payments is a long-term poverty strategy. As of June 2022, US household credit card debt rose to $841 billion. In one lifetime, this is likely part of the worst financial mistake you can make.

It can cost you half a million. I did the math.

Your best counter is the Debt Avalanche method. Instead of paying the minimum on low-interest debt, knock out your highest debt first and do it quickly. Additionally, if you are 45 and older, it’s time to pay off your mortgage.

No point going into retirement broke with a massive bill every month. That is just a recipe to lose your home later.

Wait, you used your HSA for what?

Paying for current medical expenses with an HSA is unfortunately a mistake.

Instead of sounding like a hypocrite who doesn’t do that, I can tell you that it’s a massive mathematical error in the long run.

With long-term care increasing to as much as +$75,000 per year, you will need all the extra funds that you can stash. A Health Savings Account provides an incredible potential for long-term, tax-free growth.

Unlike with an FSA, the HSA balance can roll to future years and reimburse for past expenses.

Future Sense versus More Financial Mistakes

The easiest mistake to avoid is to stop living for your past. Focus merely on the future and where you are going by taking action today. When it comes to financial planning, it’s all about the time horizon. The longer you have, the more likely you need to invest. With the short time frame to work with, you are better off paying off debt.

What you do with your money in between will rest with your family’s goals. Here are some topic areas for change:

Return on Hassle brings peace of mind

Ignoring time and energy when optimizing financial decisions. Sometimes it’s best to pay a certified financial professional versus committing too much time trying to chase wealth and failing.

Return on Hassle (ROH) is crucial. If you spend dozens of hours researching, tracking, and even thinking about an investment, are you outperforming net of hassle?

If you are using all your time to make an extra $200 per week on a side hustle, is it worth losing valuable time with your family? Every dollar is not created the same.

Consider your time in association with your long-term purpose.

To Donate or Not to Donate that is the Question

Do you give time or money? Not all giving is created equally.

Many charities allow donations of appreciated securities from taxable brokerage accounts, helping you avoid realized capital gain. Whether you itemize or claim the standard deduction, consider how to give AND reduce taxes.

This is a Win-Win opportunity that you can’t avoid missing.

Final Peace. Massive Financial Protection Planning Mistake?

Most people don’t have life insurance or an estate plan. Additionally, some drafting estate documents but didn’t share them. This is a recipe for hell for your family post-mortem.

Set time with your family. Work on the plan and work on a backup to that plan. Ensure that your designated agents and executors have copies of the drafted documents. This will help save time and money and won’t warp up your estate in the court system.

Avoid these financial planning mistakes and your wealth will be better for it.

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