The Biggest Money Mistake

Here's a Vanguard interview with Eric Tyson, one of my favorite personal finance writers. In the article they ask him what's the biggest mistake people make with money? His response:

The number one problem is overspending. Some Americans, frankly, are not savvy consumers. They lack the discipline to live within—or below—their means. They live in the moment, pursuing instant gratification instead of doing what's in their long-term interest. They abuse credit cards, buy stocks without doing research, and generally have little or no idea how much they should be saving toward future goals.

This isn't especially surprising. We're all bombarded by advertising 24-7, and it's difficult to insulate yourself from the pressure to drive the "right" car, live in the "right" neighborhood, own the "right" stock, and so forth. Americans need to learn that giving in to that kind of pressure can have serious consequences to their financial well-being.

Well said.

I take a lot of grief for saying that my best piece of financial advice is to spend less than you earn. Why the complaining? Because some see the advice as too simple, too easy, too common sense. And granted, for many readers of this blog, this is very simplistic advice. However, for many American (probably MOST Americans) this is advice that they need and should take to heart. Otherwise, they'll never make progress in their financial lives.

And even for those of us a bit more advanced in our finances, the fact that we spend less than we earn is the one habit that makes all other financial decisions possible -- where to save, how to invest, what to buy, etc. For if we don't spend less than we earn, all the other money questions are moot.

For related thoughts on this topic, see these posts:

• Thoughts on Becoming Wealthy

• How to Blow $10,000 in $30 Chunks

• You Only Need $40,000 a Year to Be Happy

Comments

[RIch Money Million]

Spend less than you earn: the simplest, most fundamental rules in life are the best! I think that whether you're just starting to evaluate your financial situation or are a veteran, this maxim rings true. It's good to be reminded of the basics.

[Kari]

Hi

It’s not the easiest thing to spend less in an era when everyone is trying to keep up with the Jones’. But spending wisely can be aided in part by how you physically spend your money, for example, with a reloadable prepaid debit card, like the UPside Visa card. Unlike a debit card from your bank (which many allow overdrafts, getting you into even more debt), you are only able to spend what you put on the card. You are able to fund the card periodically or automatically with allowance schedules, from family, friends and employers. And with multiple plans to choose from, you can find a card that fits you and/or your family's lifestyle, as you can get the card for yourself or one for family members that are either already in need of debt-help or you would like to teach healthy financial living to, like your kids (as young as 13 years of age).

Kari

[fathersez]

This advice is the mother of all PF advice.

Yet it is very difficult to adhere to, especially now with credit being made so freely available.

It was a lot easier to follow during my parent's and grandparent's times.

Now it needs severe discipline, another skill that is not so easy to follow.

Sigh....

[Zook]

What I find amazing is that with all the troubles we hear about and the trouble people are in with their houses, debt and income, it seems everyone I have talked to has already spent the $600-$1200 rebate from the government.

I understand we are in trouble now and the government wants folks to spend the rebate, but it is just troubling that we continue down this path.

If you make $50K and spend $25K and invest the rest, you are a much smarter person than someone making $100K and spending $115K.

[PT]

"Some Americans, frankly, are not savvy consumers. They lack the discipline to live within—or below—their means."

I'd say that Eric Tyson is saying this nicely. It's MOST Americans who are living this way, not just some.