Building wealth isn’t only about actively making decisions that make you more money – it’s also about avoiding mistakes that can hold you back.
Mistake avoidance over a long enough period of time can have a potent effect on your net worth. Simply by avoiding key money mistakes, you’re setting yourself on a fast track for financial success.
Here’s a list of 15 of the top money mistakes to avoid if you want to get gain momentum in your wealth building journey.
1. Living Beyond Your Means
One of the most common money mistakes that people make is living beyond their means.
Very simply put, living beyond your means happens when you regularly spend all of the money you make, or you spend more money than you make.
It’s easy to fall into the trap of excessive spending, indulging in a lifestyle that exceeds your financial capacity. After all, there are so many things that are vying for our attention and our money these days.
But the habit of living beyond your means can and will erode your wealth. It will also keep you from building any meaningful wealth.
Wealthy individuals understand the importance of living below their means. Instead of spending for status or short term indulgences, they focus on building a solid foundation for their financial future. By living well within their means, and maximizing their personal savings rate, wealthy individuals can allocate maximum resources towards savings, investments, and wealth-building opportunities.
Wealth comes from accumulating assets and generating passive income, rather than investing in material possessions that lose most of their value almost immediately after purchasing.
2. Financing A New Car
Cars can be an absolute wealth killer because 1) they are a depreciating asset, 2) people tend to buy a more expensive car than they can really afford, and 3) because many people tend to finance their car.
Cars generally lose their value fast. Like really fast. In fact, Kelly Blue Book (a company that literally exists to help customers understand the value of a vehicle they own or are purchasing), says that most new car models lose 20% of their value within a year of purchase.
And within 5 years, most makes and models lose around 60% of their value relative to purchase price. The below chart visually shows a car’s value assuming 15% per year of depreciation, which is normal loss in value for each year after the first year of purchasing a new car.
Of course, every make and model is different so this chart doesn’t apply perfectly to every single car. But it paints a picture of what you can generally expect to happen to your car’s value over time.
And if you combine a rapidly depreciating asset with overspending on your car and an interest bearing loan, you are creating a serious financial hole to dig yourself out of.
It’s tempting to splurge on luxury vehicles or upgrading to the latest models, but this habit will quickly drain your financial resources and hinder wealth accumulation. And oftentimes, the dopamine hit that comes with purchasing a new vehicle is short lived anyways.
A good general rule of thumb is to buy a used or slightly used car you can afford with cash. Or at a minimum, a car you could have paid cash for (but financed by choice). That way it’s just a one time capital expense and not a drain to your monthly cash flow.
3. Taking On Bad Debt
There is a crucial difference between good debt and bad debt.
Debt is an incredible wealth building tool for the wealthy because they use it to invest in real estate or acquire a business, where the debt is used to generate income or appreciate in value over time. Debt that is used to finance the acquisition of an asset that will put money in your pocket is considered “good” debt.
Bad debt on the other hand would include high interest credit card debt used for lifestyle spending, or taking a high interest loan to purchase something that will depreciate in value, like a new car or a new boat.
Student debt can fall into the good debt or bad debt bucket depending on what it’s used for. If you use student loans to take a course, get a certification, or college degree that you are confident will greatly increase your ability to earn, then it’s good.
On the other hand, student loans taken for the sake of getting a college degree or that are used to finance 4 years of partying would be a use of student loans that fall into the bad debt category.
Bad debt will erode your wealth and should be avoided to whatever extent possible in your circumstances.
4. Relying On A Single Source of Income
Wealthy individuals don’t rely solely on one source of income. They understand the importance of diversifying their income streams to build financial security and create wealth.
For most people, this single source of income tends to be a day job, which can leave them vulnerable to unexpected financial setbacks in the event of a layoff.
Even diversifying to just two income streams, instead of one, makes a big difference when it comes to reducing your financial reliance risk. Take some time to educate yourself about a second income stream, whether it’s investing stocks, starting a side hustle, or learning about investment properties.
5. Neglecting Personal Development
Neglecting personal development can limit your earning potential over the course of your life, which is the biggest lever you have when it comes to building wealth.
By making personal development a priority, you can grow your skill set, increase your earning potential, and open doors to new opportunities. Any time you learn a new skill, it’s something that can’t be taken away from you which you can leverage to make money.
Wealthy people understand this, and spend time and money on growing their knowledge and skill set. Like compound interest, knowledge compounds over time and can have an exponential return over a long enough time horizon.
6. Waiting Until Tomorrow To Invest
There are a lot of reasons why waiting until tomorrow to invest is a mistake, but the most potent reason has to do with compound interest.
Compound interest will build wealth for you like a snowball gets bigger as it rolls down a mountain. But it takes time to get rolling, and delaying at the beginning has a massive result 10 plus years into the future.
Avoiding procrastination and starting as early as possible is key because any delay will have exponential implications on your long-term wealth-building goals.
7. Not Understanding Taxes
For most people, taxes are the single biggest expense you will pay in your lifetime.
Tax law is complicated no matter where you reside (speaking from experience here in the US!), and there are countless nuances and intricacies to it.
However, there are fundamentals of tax strategy that are incredibly important to understand because it’s very possible to legally reduce your tax burden simply by understanding how taxes work.
The wealthy know this and do not remain ignorant to tax rules. They understand the importance of educating themselves on the basics and surrounding themselves with professionals who can help them legally reduce their tax liabilities.
One of the best things you can do is build a relationship with a CPA or a tax attorney who knows what they are doing. If you’re totally starting from scratch, Tom Wheelwright’s book ‘Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes‘ is a great resource to get started on understanding how taxes work.
8. Thinking Short Term
It’s human nature to get caught up in immediate gratification and prioritize instant pleasures over long-term financial goals.
On the other side of the coin, when something bad happens in the markets or in the world it’s easy to give in to the fear of uncertainty and make rash financial decisions because of it.
Wealthy people are playing the long game and simply don’t make big investment decisions based on short term trends or events. Instead they make financial decisions with a 5, 10, or 20 year time horizon in mind.
9. Trying To Keep Up With The Joneses
On a somewhat similar note, it’s also easy to fall into the trap of comparing ourselves to others and striving to match material possessions or lifestyle choices of those around us.
That could mean buying new cars, clothes, too much house, or really anything else that isn’t within your means.
This vicious cycle of chasing external validation can and will erode your wealth. Because your money will go towards things that you percieve will earn you the validation of others.
The most successful and wealthy people have reprogrammed their minds to feel a sense of validation from internal sources and generally aren’t swayed by the approval of others.
By avoiding the trap of trying to keep up appearances for others, you can instead put your money and time to work on activities that will build wealth and true contentment.
10. Buying Or Renting Too Much Home
Buying or renting a home that exceeds your needs and budget is a mistake, especially early on in your wealth building journey. It can strain your monthly budget, leaving less money for other important financial goals such as saving and investing.
Additionally, it can increase your debt burden, making it harder to build wealth over time. Wealthy individuals understand the importance of housing affordability. They recognize that their home should be a place of comfort and security, but it should also align with their financial goals and priorities.
By avoiding this mistake, you prioritize your ability to invest and set yourself up for long-term financial success. Opting for a home that meets your needs without stretching your finances to the limit is a much healthier way to go.
By avoiding the temptation to buy or rent too much home, you can allocate more resources towards building wealth. You’ll have the flexibility to save more, invest wisely, and pursue opportunities that can lead to financial growth.
11. Using Home Equity Like A Piggy Bank
Home equity refers to the value of your home minus any outstanding mortgage or loans secured by your property. And with financing tools like HELOC’s (Home Equity Line Of Credit) readily available, it’s become easier than ever to access the equity you’ve built in your property.
While it can be tempting to tap into this equity for various expenses, wealthy individuals understand the importance of preserving and leveraging home equity wisely.
Using home equity as a piggy bank can have serious financial consequences. It depletes the value of your home and reduces your net worth. Moreover, it can saddle you with additional debt and jeopardize your financial stability.
Wealthy individuals recognize that home equity is an asset that can be utilized strategically. They refrain from using it for unnecessary expenses or short-term desires.
Similar to the good debt bad debt point we made earlier, using your home equity to finance the purchase of another asset that will put money in your pocket can be a great move. But using it to finance lifestyle choices is a quick way to reduce your wealth.
12. Not Having Money Set Aside For Emergencies
Life is unpredictable, and unexpected expenses can arise at any time. Over a long enough time horizon, you can count on at least a handful of these “unexpected” big expenses to pop up in your life.
Not having a small safety net in place can lead to financial stress and potential setbacks.
Most of all, it’s import to be able to cover these expenses without having to use high interest options like a credit card or personal loan. One of the best strategies for this is to set aside a portion of your income specifically for unforeseen circumstances, such as medical emergencies, car repairs, or job loss.
This is commonly referred to as an “emergency fund” and acts as a buffer to handle those unexpected expenses without derailing your financial goals.
13. Overreacting To Short Term Market Conditions
The financial markets can be volatile, with ups and downs being a normal part of the investment journey. In the last 10 years alone it feels like there have been dozens of anomalies and things that came up in the markets which were unexpected.
Guess what? That trend is probably is going to continue. Wealthy individuals understand the importance of maintaining a long-term perspective when it comes to investing. They don’t get swayed by temporary market movements or let fear and panic drive their investment decisions.
Similarly, they don’t throw money at the latest meme fad simply because of the hype around everybody else doing it.
Instead, they focus on their overall investment strategy and remain disciplined in their approach.
Overreacting to short-term market conditions typically leads to poor investment decisions, such as buying high and selling low or constantly changing investment allocations.
This behavior can result in missed opportunities for growth and hinder the compounding effect that long-term investing provides. It’s best to stay informed and educated about market trends for sure, but don’t let short-term noise dictate your investment strategy.
14. Paying Everybody Else First
Not being disciplined about paying yourself first and investing in your future can lead to a cycle of living paycheck to paycheck, where there is little left to save or invest.
Wealthy individuals have mastered the art of budgeting and setting aside a portion of their income for savings and investments. They automate this process by setting up automatic transfers to their savings or investment accounts, ensuring that money is allocated for their own financial growth before it can be spent elsewhere.
That way, the very first thing that happens when money comes in is an investment that will continue to pay dividends over time.
15. Not Having A Plan Of Action
Without knowing where you want to go, it becomes difficult to set specific goals, track progress, and make informed financial choices. It’s like driving without a destination in mind – you will end up going in circles or getting lost.
Even if it makes you uncomfortable, take the time to reflect and think about where they want to go in life. From there, align your financial habits with that vision of what you want to achieve and the steps needed to get there.
Mistake avoidance on its own can play a big role in helping you build positive momentum in your personal finances. We hope you found this list of the most important money mistakes to avoid to be helpful!