Imagine you buy a lottery ticket and put it somewhere in your room and forget about it after a few days that ticket wins the Jackpon for one million dollars.
But, since you’ve forgotten about it, you throw it away with the other old papers when you’re cleaning your room, how would you feel if you learned that you have thrown away 1 million dollars, I’m sure you’d feel horrible.
What if I tell you that you’re, probably throwing away more than 1 million by making certain money mistakes? It is true that you don’t throw it all at once, but you do it slowly. If you avoid making those mistakes, you can save hundreds of thousands, if not millions, of dollars over your lifetime.
In this post, I will talk to you about three money mistakes and how to fix them. Don’t worry, I’m not going to tell you to stop spending money on the things you love, such as coffee, eating at fancy, restaurants, buying, expensive shoes, etc.
Quite the opposite, I will show you how you can spend even more on such things and still save and invest a lot.
Mistake number one: relying on willpower
Probably the biggest lie, is to cut back on your morning coffee, the explanation goes something like this.
If you save two dollars a day by making coffee at home, you’ll save sixty two dollars a month which equals around seven hundred dollars a year properly invested that’ll grow into ten thousand dollars in ten years, wrong!!!. Let me explain why this does not work.
We have to make this choice every day, regardless of factors such as how much we love coffee. How stressed we are or drive by the coffee shop on the way to work.
We have to use our limited willpower first thing in the morning every day and what these no coffee finger, waggers aren’t taking into account as they gorge in their homemade coffee.
Is that every decision we make to not buy that latte to not consume that to not have that depletes our willpower? As a result, you start cutting back a few days and one day you feel really stressed, so you tell yourself that you can buy a latte from time to time and soon you realize you’re buying it again.
Every day you get motivated again cut it completely and the cycle repeats. Let us imagine you were able to resist and not buy coffee. Here’S another problem, two dollars savings from coffee is a small amount.
It is very hard to see its positive impact and stay motivated unless you transfer it to a different account or literally withdraw it from the atm and put it in some jar every time you save so that it keeps you motivated.
Otherwise, it will get lost in your account and you will end up spending it on something else. Let us imagine you have a super discipline and you are able to keep all your coffee savings in a jar. Here’S the next problem. How do you invest it?
What account do you put it in? I hope you can see how this becomes much more complicated.
Mistake number two: debating over small things
Did you ever wonder why so many people get fat after finishing high school after graduation? You may have noticed a lot of your friends have gained weight. Usually these are the friends who used to say things like there’s no way i’ll ever get fat.
Why is that? Well? Weight gain doesn’t happen overnight. Instead, it creeps up on us a few grams at a time and before we know it, we’re 10 kilos heavier. So what do we do?
We overwhelm ourselves with small choices such as which brand of protein bar to buy, which running shoes are the best. Instead of focusing on the big wins of eating less and exercising more, if you think about it, money works in the same way.
We spend years obsessing over every single, tiny financial detail and never taking action on the areas that matter. Before we know it we’re financially. In trouble and fixing, it seems overwhelming as a result, we just ignore the topic of money completely because it makes us feel guilty like our fitness and food.
The reason comparing food to money makes sense is because, when it comes to food, we don’t track our calorie intake in a similar way, we don’t track our spending.
We eat more than we realize in a similar way, we spend more than we realize we debate over small things, such as types of diets, types of shoes or type of workout again in a similar way. We debate about interest rates and hot stocks.
We listen to recent anecdotal advice about food. We listen to our parents or tv, giving us financial advice just like with our fitness when it comes to our personal finances.
Most people only need to focus on two things: first, setting up a no fee bank account and automating spending, investing and saving. Second, investing earlier in life, so we can let our money grow for 30 plus years, but this is not sexy and it’s not as tactical as the penny pinchers, who tell you to stop spinning on everything.
Mistake number three: thinking you can wait
Procrastination is a silent but slow killer for your money. We all put things off, of course, but waiting until the last minute to get smarter with our money is one of the worst things we can ever do. Every year. We wait to get started with investing and saving which puts a huge dent in our long-term financial plans.
Here’S an example: let us say you start investing 100 a month when you are 25 years old, you keep putting the same amount into your portfolio for 10 years. Until you are 35 years old at the age of 35. You stop putting money into your portfolio. You simply let your investment grow until the age of 65. Without you adding any extra money to it.
Your friend knows about your investment, but always postpones to start. Finally, he starts to invest at the age of 35. 10 years after you exactly like you did, he puts a hundred dollars a month into his portfolio, but compared to you he continues putting 100 a month until the age of 65, which means he continuously invests for 30 years. You only invested 10 years, but your friend kept investing 30 years until the age of 65.
So now the question is at the age of 65, who has more money, you or your friend? It might be surprising, but the answer is you, even though your friend invested 20 years longer than you did simply starting earlier, allowed you to have $50,000 more money than him by the age of 65.
It’s not hard to become rich, but it takes work and consistent saving, and so it’s easier for a lot of people to shrug their shoulders and put it off for another day. Unfortunately, every extra year you wait to start investing, makes it dramatically harder to make the same amount of money.
Let us say your friend saves two hundred dollars every month and invests with an annual return of ten. You also decide same thing as your friend, but you start one year later now. Let us look at the 40 year future and see how this one year difference has impacted your portfolio from the surface.
It seems like you only invested one year less, which is twenty. Four hundred dollars less twelve times two hundred, but if you look how it impacted your portfolio, you will see that you have earned almost one hundred and twenty thousand dollars less compared to your friend.
Yes, you heard that right, just starting one year later made you earn $120,000 less. So don’t just say that it is only one year or it is only $2,400. Now you’re, probably saying okay, I heard enough about mistakes.
Can you tell me now, then, what works when it comes to saving and investing? the answer is automating and building a system that saves invests and pays your bills while you sleep, I will explain this more in a bit but for now keep in mind that if You follow the steps that I’m going to describe to you we will be ahead of 99 of people.
You will gain three big advantages. Number one, your behavior of spending, saving and investing will be automated; number two, you will not have to force yourself; three, all of your money will go where it is supposed to automatically.
The main reason we can’t save and invest as we want is because of too many choices we face every day. Automation is the solution to reduce choices and dominate your money.
Think about the 20 plus money decisions you have to make every day, should you save more? What should you cut down on what about investing real estate or stocks or index funds pay off debt? Did you send the payment on time? Is it time to rebalance your portfolio, etc?
Faced with an overwhelming number of choices, most people respond in the same way, they do nothing. as Barry Schwartz, explains in his book called the paradox of choice, the more choices we face, the less likely we are going to take action.
Many people believe that personal finance is only about willpower. The idea goes like this. If I just try harder I’ll start, saving more pay off my debt keep a budget, stop spending more start investing.
Unfortunately, regardless of how strong your willpower is, you will not be able to do all of that. Putting money into our saving account every month is painful.
Just like cutting back on coffees, you may do it once or twice, but if you have to make the decision every paycheck you’re setting yourself up for failure. That is why automation is critical to successfully getting control of our finances.
Now 85 percent of alex’s money is remaining in his checking account. One day later, on the 18th of the month, his system automatically pays his fixed costs like netflix, cable, loan insurance and transfers automatically for his credit card bills.
At this point, the money that remains in his account is used for guilt-free spending. That’s the fun money, since every important thing is taken, care of automatically Alex can use this for anything he wants Alex, loves, partying and shoes, so he spends 800 a month on just partying and buying new shoes.
I hear you judging Alex for wasting money on things such as partying and shoes, but what you don’t know is that Alex has a conscious spending plan.
I’m sure you were wondering what is that conscious spending plan start with this mindset spend extravagantly on the things you love and cut cost mercilessly on the things you don’t.
Let me repeat: spend extravagantly on the things you love and cut costs mercilessly on the things you don’t alex lives in a very cheap neighborhood in a very small apartment. For him, an apartment is not important, since he is single and he spends most of his time at work.
He also does not pay any gym membership, he prefers running in the park rather than training at the gym.
To put it simply, alex has identified what are the less important things for him and cut the cost mercilessly on them and have directed that money into things he loves, such as partying from outside.
He might look like a guy who is not responsible with his money because of his spending on parties and shoes, but in reality he is ahead of the majority of people.
The biggest problem is that most people aren’t deciding what’s important to them and what’s not, most of us are not consciously thinking about our spending, we’re not looking at the future and planning where our money should go.
We are usually going through life doing whatever and seeing our spending patterns from the bills we get at the end of the month. So by the end of the month, Alex has spent less than two hours monitoring his finances.
Yet he has invested ten percent saved five percent paid all of his bills on time, paid off his credit card and has spent extravagantly on the things he loves without feeling guilty about it. If you are interested in automating and creating conscious spending plan, then here is a two-step formula.
First categorize your spending recommended categorization can look like this:
Category 1: fixed costs. Fifty to sixty percent of your net income should generally go to fixed costs. These are things like your rent, your mortgage utilities, etc.
Category 2: Investment minimum ten percent should be going to investments, these are long-term retirement investments.
Category 3: short-term savings, this is where 5 to 10 of your money will go. These are things like saving for a down payment on a house, gifts or a vacation.
Finally, here is the most exciting.
Category 4: guild free spending 20% to 25% should go here. This is money you’re going to use for things such as eating out at restaurants, buying new clothes or whatever else you want once categories are done.
Here is a second exercise to complete your conscious spending plan. This exercise is called, think want and do take a blank piece of paper and write down how much you think you are spending in each of those categories we just described above then write down how much you want to spend in those categories and finally write down How much you actually do spend?
To make it easier you can take a look at your spending over the last 30 to 60 days. Once you are done, you are going to know what type of changes you need to make you might find out that you are spending on certain things more than you should be, and you need to adjust it based on the newly adjusted plan, you can start setting up automatic payment orders in your account so that your new plan gets implemented without any involvement from your side.
I’m sure some people are going to say that creating a plan is not going to work for them, since they have a lot of unexpected expenses. Probably you have heard things such as god every time I think I’m getting ahead.
My car breaks down, or I have to replace some appliances. I didn’t expect to get that traffic ticket, etc. Here’S the trick a lot of what seems unpredictable is extremely predictable over the long term.
What seems like surprise expenses is actually not a surprise if you analyze your spending for the past year, which of course, nobody does, for example, that surprise car repair it might not happen in the same month, but every year you might average spending about $400 on a car repair.
That’s $33 a month once you know that set up an automatic deposit into your savings account and you’re done. I hope it was helpful.