What are the biggest financial mistakes people commonly make?
The seven most common financial mistakes we all make occur because
we don’t understand our own financial situation.
Years ago, I suffered a traumatic financial crisis, entirely of my own making. I’ll describe the most common mistakes first, then use my story of that challenging time to illustrate my points.
Your mistakes are your greatest asset.
Mistakes are inevitable. The great thing about mistakes, yours and those of others, is that they teach you something. If you can accept a degree of vulnerability and accept the shame arising from your mistakes, you can use the lessons you learn to great advantage.
After a lifetime’s experience of talking to clients about life and money, I identified seven common financial mistakes:
- Buying products without a plan or strategy
- Thinking short term instead of long
- Failing to understand the risks and pitfalls of a financial decision
- Unaffordable payments
- Not thoroughly assessing the costs of a product
- Confusing investments with tax wrappers
- Getting emotionally involved and letting fear and greed influence their decisions
However, behind each of these situations sits the mother of all mistakes. People make financial mistakes because they don’t understand their own financial situation. They probably have a reasonably clear idea of their income and only a hazy idea of their expenditure. Ask most people what they can expect their income and spending to be in five, ten, twenty years, or in retirement, and they will not be able to tell you.
How I screwed up
Let me tell you my own story to illustrate the mistakes I’ve just listed.
After graduating from University in the ’80s, I joined a City investment firm.
Its is hard work, well paid, with excellent bonuses. However, I never ‘shine’ in my career. In fact, I find myself getting deeper into a rut. I feel there is no purpose in my life. I become a slave to money. My salary goes straight out across the bar, and I certainly don’t save. I dread opening bank statements (I don’t have a clear picture of my finances and cannot make informed decisions). At the same time, I am afraid to leave a comfortable position. Instinctively I know I am not true to myself.
This changed in October 1987 when a hurricane caused chaos in London, preventing us from signing the management buy-out we had arranged. Next day, Black Monday, the stock market fell 25%. All bets were off, and the world changed. Both the business and I were in limbo, and now I really don’t know where I want to be.
So, egged on by the siren songs of fabulous wealth and great careers that come to MBAs, I borrowed money. I took a year out and studied for an MBA (I let my emotions get the better of my decisions. I buy a loan without insight, plan or strategy).
This led to a severe personal financial crisis. As I finished the MBA, the 90/91 recession hit and I could not get a job. My finances deteriorated (I have not assessed the cost of the project fully; I cannot afford the payments).
I hit a low point and feel a fraud and a failure. My income dries up, as do my assets and I am left with nothing but a mound of debt. I am supposed to be an expert with money. I am worthless, ashamed and humiliated, so much so that I cut ties with my family and friends, which only makes things worse.
Our financial mistakes are our most excellent teacher
However, my shame precipitates a seismic shift in my thinking. In my cups, I benefit from powerful insights that shape my future life and career. I tell myself I have to get control of my life. It isn’t that I want to gain control of my money, which has been my main driving force to date. Instead, I realise I have to get control of my life. I understand that money is a means to an end, not an end in itself. To think only in terms of making more money and getting better investment returns misses the point of money.
I returned via a roundabout route to financial services, got back on track, married and moved to Yorkshire with my family. Here I established Planning for Life, my own authorised financial planning consultancy.
The essential element of this story is not what happened. The value of the experience comes from the lessons I learnt at the time, which helped me to reshape my life and become more mature about money.
As I said at the start, our mistakes are our greatest asset.
Please read my leaflet Smarter Investing – Seven Mistakes to Avoid when Buying a Financial Product for additional background.
This post has been adapted from Jeremy Deedes’ original answer to a question on asked by a Quora member.
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