While we know money makes the world go ’round, the financial advice we hear from friends, family and the media can, at times, take dollars out of your wallet. You’ve probably heard the “secrets” to financial success: how to save, how to invest, and how to know if you’re on the right path. What if some of these supposed secrets are actually taking us down a path to financial ruin? Yes, they may sound smart at first, but in reality, they could be quietly sabotaging your financial future.
In this article we’re going to break down 20 of those ‘financial secrets’ that are starving you without you even realising. They are the well meaning pieces of advice that seem good on paper, but can actually have unintended consequences.
Saving Every Penny
You should have heard the advice to save as much as you can. While saving is important, just clipping coupons and avoiding every little expense will keep you from building wealth. The fact is, saving without investing will not get you very far in today’s economy. Inflation slowly eats away at your savings, and low interest savings accounts aren’t going to provide you with the returns you need to grow your wealth.
Buying High Risk Stocks to Make Quick Profits
The surefire way to lose money is chasing the latest hot stock in hopes of a fast payout. It’s easy to get caught up in the excitement of stocks that look like a fast track to riches, but high risk investments usually result in big losses. It’s better to instead constructing a diversified portfolio that grows steadily over time rather than gambling on volatility.
Living Below Your Means
Building wealth frugally sounds great, but in excess, it can make you unhappy and miss out on opportunities. Excessive frugality can cause you to burn out and prevent you from enjoying life now. Living below your means is essential, but finding a way to enjoy the fruits of your labor is equally crucial, or else you’ll save a lot but never really enjoy the money for anything in particular.
Putting All Your Money in Your 401(K)
401(k)’s are a great way to save for retirement, but that doesn’t mean that’s where it has to go. Your employer’s plan may limit or be an expensive investment options. Similarly, focusing on your 401(k) alone could keep you from spreading out your investments throughout other accounts, like IRAs or taxable brokerage accounts, which may have higher returns or more flexibility.
Using Credit Cards to Earn Rewards
Cashback, points, or travel perks all sound good on credit cards with rewards programs. If used correctly they can be quite useful, else people end up carrying a balance from month to month and paying through the nose on exhorbitant interest rates. Essentially, the so called rewards are eaten up pretty quickly by the interest you’re paying. The rewards aren’t worth the debt if you’re not paying your credit card off in full each month.
Your Home as an Investment
Your home can appreciate in value, but it’s more of a liability than an asset. You’re paying property taxes, maintenance, insurance, and mortgage interest — none of which are going to give you a return until you sell. When the housing market is down, your home isn’t the get rich quick investment people make it out to be.
Student Loans for an Expensive Degree
For many young people, they are ending up in a major financial trap with student loans for an expensive degree. There is pressure to go to expensive universities, often with no thought to what you will make later in life, and you are left in debt for years. Taking on a significant amount of student debt, if you’re seeking a career that doesn’t require a degree or you’ll only earn a low paying job with that degree, can mess up your financial future.
Latest Tech Gadgets
In fact, the constant pushing of the latest model from tech companies makes it very hard not to upgrade every year. But constantly buying the newest gadgets doesn’t just cause your wallet to drain, they can also end up being a pile of outdated electronics. Buying better quality products so they last longer and investing your savings rather than constantly upgrading your tech is a better approach.
The Power of Compound Interest That You’re Likely Underestimating
Since compound interest can grow your wealth exponentially, it is often referred to as the ‘eighth wonder of the world’. However, many people don’t understand how powerful it can be. Or, they put off investing until too late, or keep their money in low yield savings accounts instead of allowing it to compound in investments like stocks or bonds. One of the best financial moves you can make is to start early and let time work for you.
When You Only Focus On Cutting Costs
Cutting unnecessary expenses is important, but it’s not the whole picture. Small savings, like skipping a morning coffee, is a thing people get stuck on, but really it’s about thinking about your income and making your money work for you. How much you’re earning and investing is just as important as what you’re spending. Grow your income too.
Avoiding Debt at All Costs
You’ve heard the saying ‘debt is bad’ but avoiding debt altogether can actually hold you back. An unfeasible debt, such as a mortgage or business loan, can be used to create wealth if properly used in the right direction. The trick is to distinguish between good debt and bad debt and make sure you’re not racking up high interest debt that takes money out of your pocket.
Having an Emergency Fund
While it’s good advice to have an emergency fund for 3 to 6 months of expenses, hoarding large amounts of cash in low interest savings accounts is a missed opportunity for your money to grow. Having too much cash in an emergency fund that isn’t earning much interest means you’re not investing that money where it can compound and grow.
Listening to ‘Get Rich Quick’ Advice
You’ve seen the flashy ads, or heard the guru promising easy money, but there’s no such thing. “Get rich quick” schemes tend to be scams or high risk, high loss ventures. There’s no shortcut to building wealth, it’ll take time, patience, and discipline and will ultimately require you to just put in work.
Stick to Only One Income Stream
In today’s uncertain job market, it’s risky to rely on only a single source of income. If you don’t make enough money in your main job to reach your financial goals, or if you lose that job, you’ll be left scrambling. Multiple income streams: Building side gigs to investments will give you financial security and will help you to faster on your wealth journey.
Not Diversifying Your Investments
The classic mistake that many people make is to put all your eggs in one basket. Failing to diversify means putting all your investments into stocks, bonds, or just one sector; and if things go south, you’ll be in trouble. Diversification is a safer way to protect and grow your wealth, across asset classes, sectors and geographies.
Relying on Social Security
Social Security was never meant to be the bulk of your retirement income, but that’s what it is for many. Social security is an average monthly $1,500; this amount might not even cover your basic living expenses. A comfortable retirement is built on additional retirement savings channeled from 401(k)s, IRAs, and other investment vehicles.
Neglecting Health Insurance Costs
Not having health insurance or trying to save money on insurance can be absolutely catastrophic financially. According to American Bankruptcy Institute, the leading causes of bankruptcies in the U.S. are medical bills. If you have good health insurance, it may help to protect you from financial ruin if you run across unexpected medical costs.
Retirement Savings Procrastination
Saving for retirement is easy to put off, but the longer you do, the harder it is to catch up. You are not taking advantage of compound interest, which can make the difference between an easy retirement and one where you are fighting to survive in your senior years.
Disclaimer: This list is solely the author’s opinion based on research and publicly available information.
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