MSN Money calls this a list of seven ways to stay poor, but I prefer the simpler "stupid money moves." Here's their list and my comments on each point:
Getting the big stuff wrong. A lot of "save money" advice focuses on the little stuff: how to cut back on lattes or trim your utility bill by a few bucks. But those who are chronically short of cash often overspend on the big stuff, especially shelter and transportation.
I think everything is important -- the big stuff and the small stuff. Of course you can lose a ton a lot faster on the big stuff (like severely over-paying for a car or buying a house you can not afford), but the small stuff is a lot sneakier and easy to miss, so a ton can be lost without you even knowing it (for details, see Even a Small Leak Can Empty Your Money Bucket Quickly and Keeping Small Spending Under Control.)
Confusing needs and wants. This is a biggie, and it's a problem for people at every economic level. But when you're broke, the consequences of deciding you need something that's actually a want can be devastating.
What do people really "need?" Food, clothing, and shelter (plus a few other basics, maybe.) But do people really "need" cable TV, high-speed internet (not for business, but I'm talking personal use here), a brand new car, a 4,000 square foot home, a big-screen TV, etc. Of course we all want some of these and this is the reason many of us work -- to afford the finer things in life.) But when we "need" them all and buy them whether or not we can afford them, there's bound to be financial trouble. And, unfortunately, many Americans can't differentiate between needs and wants, buy whatever their hearts desire, often on credit, and get themselves in deep financial trouble as a result.
Considering only the monthly payments. Whole businesses thrive on getting you to ignore the total cost of your purchase. Payday lenders, rent-to-own shops and car dealerships want you to focus on the short-term payments, not the long-term expense. Avoid the first two.
Focusing on the monthly payments is one of the tricks car companies use to get you to pay them more money than you want to. Don't do it! Pay attention to the total cost, not the monthly payment. And why should you even need a monthly payment, aren't you saving up and paying cash?
Failing to track where the money goes.
You must, must, must budget -- at least until you have a firm handle on your finances. Here's how I've budgeted through the years and a resource on how to budget for those of you who need suggestions.
Carrying credit card debt.
Do I really need to dignify this suggestion with a comment? If you're carrying credit card debt, you certainly have some big problems and you need to address them immediately.
Living close to the edge.
No matter how much you make, you need to spend less than you earn. Then save and invest that amount for a long time and you'll be rich. Spend MORE than you earn, no matter your income, and you'll go backwards financially.
Squandering what you have. Most workers contribute to some kind of retirement fund, typically a 401(k) account that they can take to their next job or roll over into an individual retirement account.
In other words, you make money mistakes. Instead, focus on making great money moves.
Getting the big rocks right is the key to financial success. If you get the small things right but the big things wrong then you will just ruin all of your finance.
Thanks for the helpful tips
Posted by: Ryan @ Smarter Wealth | July 21, 2008 at 07:40 AM
This entry reminds me of a book I heard about a couple years ago that a finance-type person wrote that discussed all the mistakes he made pre and post-retirement. Does anyone know this book? I've always wanted to read it but couldn't remember the author or title.
Posted by: Paul | July 21, 2008 at 09:40 AM
Good post. Nothing on the list is new, but it still needs to be mentioned again. Repition is the mother of learning!
Posted by: "Mo" Money | July 21, 2008 at 09:44 AM
It's good to put these on one list. Many of them stem from the fact that most people don't know math. They often look for the lowest monthly payment and carry credit card debt because they don't understand how much it's really costing them. This should be taught in high school with the help of spreadsheets. Some financial planning advice wouldn't hurt either.
Posted by: Atul | July 21, 2008 at 11:16 AM
Two things about that list...I know a guy who's pretty darn rich, but he ends up being "pennywise, pound foolish" like the first point on the list. He'll pinch pennies on small expenses, but then spend exorbitant amounts on the big expenses.
Also, I saw the "monthly payments" method in action today at the car dealership. They were trying to point out how low my payments could be, and I kept pushing that I don't care about the monthly payments, but the whole total cost. He either was just playing dumb, or really was dumb about how important an interest rate is. He wanted to know my budget; really, they can make your payments as low as possible if you stretch out the length of the loan far enough...grrr, just made me angry.
Posted by: Stephanie | August 20, 2008 at 01:25 AM