Your Finish Rich Plan - A Personal Finance Blog

3 Stupid Money Mistakes (Almost) Everybody Makes

In the realm of personal finance, it should come as no surprise that your money management skills and ability to generate wealth are strongly tied to your personality and your relationship with money. Allow me to share a couple of examples that will probably sound familiar; knowing and avoiding the mistakes that they highlight will probably get you one step closer to achieving your financial goals.

How much you’re saving vs how much you’re spending on a particular item.

Let’s say you walk into a store to buy an mp3 player, priced at $100. Once your decision is made, you notice that the competitor from across the street is offering the very same model for 30% less, $70. What would you most likely do?

Now suppose you walk into that store on another occasion, to buy a $2,799 entertainment system, and (for the sake of the example) happen to notice the competitor from across the street offering the same bundle for 2.5% less, $2,769. Would you cross the street for a 1% savings? Just remember. No matter how you slice it, a $30 savings is a $30 savings. Period.

Surprisingly, studies have revealed that most people will more readily cross the street for a 30% savings that for a 1% savings, even though they translate into the same dollar amount: $30. Apparently, in their mind’s eye, there’s too little a difference between $2,799 and $2,769. And that perception is strengthened by the widespread use of debit/credit cards, which brings me to my second point.

Underestimating the power of plastic.

Using cash makes spending tangible. When you pay with a debit or credit card, it’s very easy to lose track of just how much you’re spending. Using a cash system (like making envelopes for each budget category, and filling them with cash, dipping into them as the month goes by) will keep you aware of your spending because you literally see the bills decreasing in the envelope as you spend. So if you’ve used half of your grocery budget only 10 days within the month, you know it’s time to curb your spending.

In essence, had you had an envelope containing $2,800, you would most likely have crossed the street for that $30 savings because the proof of your wise decision would have literally been there. Not that I would recommend walking around with that much cash, but you get my point, which is that plastic makes it way too easy to overspend.

Focusing on only one aspect of saving.

This one comes straight from Robert Allen’s “Multiple Streams Of Income”. He states that there are two meanings to the word “save”: (1) to pay less for your purchases, as in Geico’s “Fifteen minutes could save you 15 percent or more on car insurance” and (2) to create a surplus, as in “I need to save money for retirement”.

Many of us are good at the first save. We like to shop for bargains. But we stop there. We save(1) but don’t save(2). And that’s the hard part, since save(2) should either help you reduce your debt or increase your investments. Let’s say you quit smoking and are now saving(1) $50 a month. Most likely, if I walked up to you and asked you “Where is that $50 you’re saving?”, you couldn’t tell me anything but “I don’t know”. You saved(1) the money, but didn’t save(2) it.

When you save(1) money, take that money away from your purse, wallet, or checking account to avoid spending it. Put it in a savings(2) jar, and frequently deposit the money into your savings(2) account. From there it can go into your emergency savings fund, or your long term savings, or towards your debt, or your investments.

In the end, here’s what you should remember.

1. When you’re spotting discounts, always calculate your savings in actual dollars. You will be more level-headed when buying time comes.
2. Debit and credit cards make it easy to overspend and/or impulse buy. If possible, use a cash system or strive to stick to your set limits
3. Saving is a two step process. Any money you save1 should be saved2 as soon as possible, then used towards achieving your long term financial goals.

Next post preview: The biggest excuse small investors make is always lack of cash to invest. Truth is, five companies offer the chance to get into an index fund with absolutely no initial lump-sum investment. How far can that get you? How about being able to retire comfortably with a $50/month withdrawal from your bank account? Got your attention yet? Subscribe now and make sure you don’t miss it!

Update: Another major money mistake people make is not having an emergency savings account. Follow the link to read the article.

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