Be Financially Smart. Don’t Make These 5 Money Mistakes Anymore
I don’t know.
I’m working on not going broke again, my mom used to say. She worked 2 jobs. Many people do, especially single moms like her.
We often make financial decisions to please other people or because of pressure from ourselves. Most of the beliefs we use about money, we adopt unquestioningly from advertising, from our circle of family and friends, or from bank advisors.
But just because they are widely used doesn’t mean these recommendations are helpful — some may even conflict with our financial goals.
1 –” I deserve it”
I see this often mostly in advertisements for expensive cosmetics, branded products, or wellness products.
Behind it is the seductive notion that everyone has the right to pamper themselves. After all, if you work hard, you can afford a little luxury without having a guilty conscience.
In principle, there is nothing wrong with rewarding yourself when you do something particularly well or when you excel.
In fact, rewards are very important for motivation. However, the idea becomes a financial mistake when it is used to justify buying overpriced goods and services that we don’t actually need.
If we spend our money carelessly without thinking about the real value, we have unfortunately just been cheated.
2 — ”I can afford it”
There is a phenomenon that prevents people from progressing financially even though they earn very well.
This tendency is to immediately convert every salary increase into higher consumer spending.
Just in anticipation of future income, people are already buying a bigger car, a bigger apartment, and more exotic vacations.
A typical sign of this financial mistake: despite a bountiful salary, there is nothing left at the end of the month. As a result, you, unfortunately, become extremely dependent on the next salary payment.
Sudden unemployment, industry crises, or interest rate adjustments tear the financial rug from under your feet.
Of course, before making any purchase, it is important to ask yourself whether you can afford it or not. However, this question is inadequate as the sole criterion for financial decisions.
3 — Disregarding running costs
Some financial mistakes creep up silently.
Small but regular expenses quietly mount up over the years to tidy up the sums.
Making financial decisions without considering the accompanying costs can cost us dearly.
The costs of subscriptions, loans, and administration fees throughout the contract period should also be carefully considered before the contract is concluded in order to avoid a financial mistake.
A good example is the price difference between actively managed equity funds and passive index funds.
The difference in the management fee is about one percent. But profit prospects are better the lower the fund fees, and actively managed funds do not even outperform the market index.
4 — Underestimating inflation
Do you think that if you leave your money in your current account you are not at risk?
Financial mistake.
In the current account or any form of interest-free deposit, your money will certainly lose value.
Again, your money is guaranteed to lose value. The reason is inflation.
This ensures that you can buy less each year for the same money.
The loss of value of money due to inflation is usually about two percent per year. In times of war and other crises, significantly more.
Two percent spread over a whole year is not particularly noticeable. But we should not underestimate the long-term consequences of inflation.
They make the price of all kinds of goods more and more expensive, while money loses value. With 2% inflation, a sum of $10,000 will be worth only about $8,200 in 10 years.
5 — confuse spending with investing
Best example: the property you live in.
Looking at it objectively, it is not an investment, but a rather expensive consumer good.
Investing is using funds to increase personal wealth or increase the profits of a company.
The goal of an investment is to make more money with the money.
According to this definition, owning a house is not an investment because it does not generate income.
On the contrary: With a property, you have to face annuities, taxes, loan installments, and insurance premiums, as well as the costs of renovations, remodeling, and repairs.
The whole thing is different if you rent an apartment and thus generate regular income. So it’s actually an investment.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.