8 Dumb Mistakes That Wreck Your Finances

Over the past six years, I've dedicated myself to the world of finance and money: 

• acquiring a degree in financial risk management
• a qualification in investing and finance
• and establishing a career in a hedge fund

Among the transformative skills gained, managing my personal finances, recognizing detrimental money habits, and liberating myself from them have been paramount. 

In this article, I'll unveil eight prevalent money habits that often hinder individuals and provide insights on breaking free from them.

Habit #1

First on the list is the habit of paying yourself last, a concept I first encountered in Robert Kiyosaki's "Rich Dad Poor Dad," which is a crucial blueprint for achieving financial freedom. 

Kiyosaki distinguishes between two approaches to managing finances. 

The first, characteristic of many with limited financial success, involves paying oneself last. 

In this scenario, upon receiving your paycheck, individuals tend to allocate funds to immediate needs like rent, phone bills, subscriptions, and social plans, and only save whatever remains, if anything. 

On the other hand, the wealthy adopt the opposite strategy—they pay themselves first. 

The recommendation is to allocate a minimum of 10% directly into savings the moment the paycheck arrives, treating it as a non-negotiable bill payment. 

This practice is significant because it ensures that a portion of your income is securely saved before it can be unintentionally spent. 

While some may initially think it's impossible due to living paycheck to paycheck, allocating that 10% triggers a shift in mindset, encouraging better financial planning for the entire month. 

The key is prioritizing paying yourself before contributing to the wealth of others through unnecessary expenditures.

Habit #2

The second detrimental money habit involves becoming comfortable with bad debt. 

Nowadays, it appears that debt has become the standard practice. 

Many people are resorting to debt to make even small purchases, buy gifts, or acquire clothing. 

I adhere to a straightforward rule: if I can't afford to pay for something outright in cash, then I should refrain from buying it using any form of debt. 

It's crucial to recognize that credit card companies encourage poor financial habits because that's how they generate profits. 

With the average credit card interest rate standing at 22%, any benefits or rewards provided by these companies can quickly be negated if the balance is not paid off promptly.

Habit #3

The third unfavorable financial habit revolves around not having a financial cushion, which is closely linked to the concept of paying yourself first discussed earlier. 

Essentially, it involves saving enough to create a three to six months buffer. 

This is immensely crucial as having such a reserve provides peace of mind, allowing you to tap into it if necessary. 

By establishing this buffer, you free up mental energy for more critical matters. 

The process of accumulating this six-month buffer starts by paying yourself first—putting that 10% aside. 

Once you've built your stockpile, you can then channel additional savings towards creating an investment fund and exploring investment opportunities.

Habit #4

The fourth detrimental financial habit involves not having a clear understanding of your income and expenses. 

It's crucial to know your financial baseline to chart a course toward your financial goals. 

Lifestyle inflation, where spending increases with income, can become a dangerous cycle. 

To gain control over your finances, use a comprehensive tracker that includes: 

• income, 
• the crucial 10% you pay yourself first, 
• expenses, 
• bills, 
• mortgages, 
• rent, 
• spending, 
• debt repayments, 
• etc. 

Regularly update this tracker every three months to stay on top of your financial situation. 

Those who have a precise understanding of their financial standing, including assets, liabilities, and clear financial goals, are more likely to accumulate wealth than those who merely daydream about financial success without a concrete plan or financial management skills. 

Being mindful of your financial situation, observing the numbers in black and white, can serve as a catalyst for proactive financial decisions.

Habit #5

The fifth detrimental financial habit involves indulging in costly hobbies. 

Many individuals enjoy shopping, often using it as a form of retail therapy. 

However, marketing, social media, and large corporations consistently encourage us to spend our money rather than save and invest it.

Habit #6

Moving on, let's discuss the habit of solely focusing on saving. 

If you aim to enhance your financial standing, you can either increase your savings from your current income or explore avenues to boost your earnings. 

The optimal strategy involves a blend of both. 

Relying solely on saving won't lead to wealth creation, just as spending all you earn won't. 

It's essential to find a balance between saving a higher percentage of your income and actively seeking ways to increase your income. 

While there's a cap to how much you can save, the potential for earning more is limitless. 

Whether it's through stock market investments, negotiating a salary raise, or starting a side hustle, breaking the habit of thinking that saving alone will significantly grow your wealth is key. 

It's crucial to consider both sides of the equation — saving diligently and finding opportunities to expand your income.

Habit #7

Seventh on the list is overpaying in taxes. 

Taxes represent the most significant expense in your life. 

While everyone is obligated to pay taxes, many people do so without exploring legal avenues to reduce their bill. 

The key term here is "legal." 

The wealthy leverage knowledge of legal corporate structures with tax advantages and employ tax advisors to minimize their tax liabilities. 

To gain an edge, understanding tax rules that work in your favor is crucial. 

For instance, investing through tax-sheltered accounts like an ISA or a Roth IRA can shield your dividends and profits. 

If you're a solopreneur, operating under a business structure instead of as an individual can also offer tax benefits. 

All these strategies are entirely legal. 

If you prefer to pay more taxes despite the legal options to reduce them, it's still beneficial to understand tax rules and redirect the saved money to causes aligning with your values, rather than letting someone else dictate its use.

Habit #8

Eighth on the list is delaying too long to invest. 

Once you've accumulated savings, that safety net we discussed earlier, it's time to consider investing to make your money work for you. 

Diversify your investments to navigate life's various challenges, but don't leave your money sitting in a bank account due to the impact of inflation. 

I personally blend safe and riskier investments, with a willingness to absorb potential losses. 

Explore different investment strategies once you've saved enough, and avoid keeping more money in a bank account than necessary. 

Excuses like lack of time, insufficient funds, or not knowing where to begin may surface, but the longer you delay investing, the harder you'll have to work for the same financial freedom. 

It's about finding the right approach, whether aligning with an employee's or entrepreneur's perspective, a risk-averse or risk-taking mindset. 

There's a style that matches your preferences.

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- Ivan