American business magnate and billionaire, Warren Buffet is famous for coining the phrase:
- ‘Rule number one: never lose money,’ and
- ‘Rule number two: don’t forget the first rule.’
This financial advice can be applied to any area that involves money in your life.
One way you can avoid losing money is by avoiding common money mistakes that most people make and that you are likely to make either knowingly or unknowingly. Your financial habits have an impact on your financial future.
You may have financial habits that you consider useful, but on the contrary, they end up costing you more. The mistakes you make will hinder you from achieving your financial goals. Avoiding losing money at all costs is a financial strategy that can radically improve your life.
In this article, we will discuss these common financial mistakes that may cost you more.
Common Financial Mistakes You Need To Avoid That May Cost You More
1. Considering Cost Over Quality When Buying Products
Quality, quantity, or cost? Which of these criteria do you usually use to purchase your products? Most people look at the cost. It may be good for your budget at the time, but it will cost you more in the long run.
You may have heard of the phrase cheap is always expensive. Spending upfront on quality items will save you money for years to come rather than spending less money on imitations that won’t last.
Here Are Some of the Reasons You Should Consider Quality Over Cost in Personal Finance:
a. Cheap Items End up Costing You More
How many times have you had to replace a cheap item? The clothing section is the largest culprit. If you opt for cheap clothes, you will have to replace them very often, and you end up spending more.
You may have to replace it because of color fades or tear. Pricier apparel arguably lasts longer. The same goes for vehicles. A very old car will cost you less at purchase, but you will pay more in repairs and insurance rates.
b. You Will Spend Less on Quality
Yes, you may view the purchase price as expensive. However, when you delegate $600 to your wardrobe to last you between 3 to 5 years, you will spend less as opposed to $200 every year for cheap clothes.
Take a look at your current finances. How much are you spending on repeat purchases? The sum of the repeat purchases will be more than the cost of purchasing a quality item.
c. Quality Saves You More
I have been frustrated by having to replace an item now and then, especially after I purchased it for a relatively low price. Have you had an item break just after the expiration date of the warranty?
Cheap items tend to have the break and replace cycle that never seems to end. Some times, an item may break at a time when your finances are low. You may have to dip into your savings or emergency fund to replace it.
Everyday Items That Will Cost You More If You Buy Them Cheap
1. Kitchen Tools. Knives are a good example. Cheap knives tend to become blunt quickly. You may get a wide range of knives for an affordable price, but you will have to replace them quickly when they become dull.
2. Car Maintenance. Car maintenance is one area where you must AVOID the cheap. Furthermore, you should always follow the manufacturer’s replacement instructions when it comes to items like oil, coolant, brake fluid, transmission fluid, among others. If you go for cheap maintenance, you will end up replacing a part for a considerable price.
3. Furniture. Always opt for solid wood furniture rather than a cheap particle board furniture. Solid wood is easy to repair and refurbish. Cheap particle boards call for replacements.
4. Clothes and Shoes. Expensive shoes and clothes last longer. Moreover, they are also very comfy.
5. Paint. Cheap paint offers poor coverage, and you have to use multiple coats to get a good shade and appearance on your walls.
6. Blenders. Expensive blenders offer a powerful motor and a better chopping blade. As a result, they last longer.
7. Toys. Go for Lego, wooden blocks, or any other sturdy toy. They will be able to survive your child’s hard plays and clumsiness.
8. Bedsheets. Cheap sheets tear quickly and become uncomfortable to sleep in. You will need to replace them after a few washes and a short while. Remember, every day you spend 8 hours on your sheets.
2. Ignoring Debit and Credit Card Rewards
People avoid credit cards for various reasons. However, credit cards can help you save money in as much as they put you in debt. We often ignore the rewards that banks and financing institutions offer for using credit and debit cards.
For credit card users, the following are the rewards banking institutions offer. Check if you are eligible for:
a. Cash Rewards
You can earn cash rewards when you use your credit card. The banking institution may pay you in the form of a check, credit to your account, direct deposit to your account, or gift cards. You can redeem the cash rewards once you attain a specified minimum or increments, for example, $25.
b. Point Rewards
Every dollar you spend will accumulate some points depending on the banking institution. The most common is one point for one dollar spent. Banks offer various ways to redeem the points you accumulate on your credit card.
One simple way is to redeem your points for merchandise available in online shopping malls. Other card issuers offer travel miles, cash, or gift cards in exchange for your credit card points. Credit card points also have a positive reception from merchants.
Most of them offer between 10% and 20% off the price of gift cards. Some point rewards cards you should use include hotel rewards cards and auto rewards cards.
c. Travel or Mile Rewards
Travel or mile rewards cards award you miles based on your credit card usage. You get to convert these miles into air tickets. Each credit card offers miles of rewards at a varying rate of expenditure.
Furthermore, each frequent flier program accepts a certain number of miles in exchange for an air ticket.
You can transfer your miles across various frequent flier programs. However, some mile points are lost during transfer. Mile rewards offer you and your family a chance to get a free trip.
For Debit Card Users, the Following Rewards Are Available for You:
- Cashback Rewards
Having a cashback checking account can earn you up to $300 on qualifying purchases made using your debit card. The 2008 financial crisis affected cash-back rewards on debit cards. Most banks scrapped the cashback rewards off while others offer less cashback than before.
You should check with your banker to see what options are available.
- Point-based Rewards
The points you gain depend on how much money you spend. Institutions have different formulas to award points based on your expenditure. Some award one point for every dollar spent, others 1 point for every $5 you spend, among others.
Either way, they present an opportunity to save money as you get to redeem the points to make purchases.
- Relationship Rewards
Relationships rewards offer you discounts as you shop at specific websites and stores. These rewards can help you save a lot when you redeem credit and debit card rewards. You will incur avoidable extra costs if you ignore these reward programs, which is a financial mistake.
3. Sticking to DIY
DIY activities are helpful and fulfilling when you have a manual. Installing, fixing, and building manual projects will save you money and give you a sense of accomplishment. It is a different case when it comes to the financial sector.
The road to success and satisfaction in financial management is more treacherous when you stick to DIY, and it often leads to common personal financial planning mistakes. When it comes to manual DIY, an error in fixing has a lesser impact as compared to a personal finance error.
However, if you evaluate the cost of hiring a professional, it is worth it as they will exercise excellent planning and apply their skills and experience to minimize or avoid any errors. It is hard to recover from a financial mistake like improper real estate planning.
People who opt for DIY in financial matters rely on their confidence, experience, and intellect for decision making.
Here Are Some of the Common Financial Mistakes DIYers Make:
- Ignoring Possible Risk
As humans, we try to ignore the reality of problems. A direct example in the financial market is when you hold on to a losing trade. When there is no immediate change in market conditions, we tend to ignore risk factors.
As a result, inexperienced DIY investors are influenced by feelings such as fear rather than underlying fundamentals. An experienced investor will help you uncover factors that could cause market change, to know when the market is overreacting or to know when profitability and growth rates are impaired.
If you are looking for ways to get started as an investor, here are 11 Easy Ways To Start Investing As A Beginner.
Mutual funds offer diversification. However, if you invest blindly, you will uncover that some of the funds you have invested in the same company in multiple funds. This is called an overlap. Thus you will own shares of a company like Apple 10 times.
Such investments increase your risk as they may become inefficient and expensive as your tax obligations will be significant.
- Subscription Services Such as Magazines and Newsletters
You should be aware that those who make the content in these magazines or newsletters gain profits from your subscription. The information may sound right, but it does not always address your best interests.
- Judge Mutual Funds Based on Star Ratings
A 4-star rating on your mutual fund will surely boost your confidence. However, it would be best if you were wary of fluctuations which may lower the rating to 1 star in a matter of hours or days.
- Investing Heavy Equity in U.S Stocks
U.S stocks provide a comfort zone as a third of global equity opportunities are here. DIY investors are thus tempted to invest heavily in them. However, when market shifts happen, your investments could incur a significant hit.
Furthermore, the market corrections could result in the market crash which is even worse.
- Overdependence on long term bonds
Long term bonds offer better interest rates as compared to short term ones. However, long term bonds are highly volatile and could drop in value and raise interest rates at any time. A DIY investor will stand to lose a lot from such inflations and fluctuations.
We advise that you rely on professional and experienced investment advisors before making any drastic investment decisions that could cause you heartache.
4. Inefficiency With Your Time
The phrase ‘Time is money’ can be translated to the rate of productivity over a given period. The phrase was coined by Benjamin Franklin in 1748 when he wrote the handbook ‘Advice to a Young Tradesman, Written by an Old One’.
Franklin advises the young tradesman to work hard, pay debts, and save on time to achieve financial freedom. Despite the equivalence of time and money in the phrase, time can buy you money, but money, on the other hand, cannot buy you time.
One of the significant financial mistakes we make is being inefficient with our time. Inefficiency means you spend more time than necessary to achieve a specific objective. It will lower your productivity as you may have to work longer to achieve your goals.
Time efficiency can be used to work smart. You will have to build a sustainable stream of revenue while you:
- Live small in terms of expenses
- Use a minimal amount of time to be productive
Time Inefficiencies Can Be Caused By:
- Poor Time Tracking or Failure to Track Time
Do you own a watch? Do you follow your calendar? Do you schedule your activities precisely? Schedules, watch, diary, and calendars help you track time. You will be able to distribute your activities appropriately to realize financial productivity.
Do you charge an hourly fee? Even if you charge per project, failure to track time will make you lose hours on your hourly fees, or lag on a single project. As a result, you will undercharge and lose thousands of dollars in a year.
- Lack of Data
You will need data to make the most of your time. For example, what are your hobbies, and how much can you delegate to work. You will also need data that could drive your workflow, for example, a budget that lists your goals, debts, and what you intend to spend your money on.
You will be able to apportion your time efficiently to be your most productive self.
5. Cutting Corners on Health
Your health is of paramount importance. You will not make any financial advancements with poor health. Cutting health corners is a common financial mistake that can be fatal or make a huge blow to your finances down the road.
People Usually Cut Health Corners By:
- Skipping Doctor’s Appointments. We usually skip doctor’s appointments to avoid co-pays. Furthermore, we tend to think we do not need a doctor’s appointment and make assumptions we are healthy.
- Delaying Treatments and Procedures. You may delay medical procedures and treatments, assuming that your insurance does not cover you. You should rather payout that procedure from your pocket rather than suffer further health complications that could cost you later.
- Google Doctor. Most people tend to rely on ‘Google doctor.’ ‘Google doctor’ is health information available on the internet. For example, when you feel discomfort, you google it. It may cause you to panic or ignorance. If you panic, you will visit the doctor for no major reason.
The internet isn’t always the best place to find answers as you may follow misguided counsel, which may impact your health. It’s good to look up a healthy diet, but your doctor will help you identify a deficiency that you can easily tackle.
Your doctor can be able to tell you what your body needs at the moment, aside from the general needs like exercise. Ensure you review your health premiums to know whats your coverage, for example, vision and dental coverage.
Furthermore, make sure you make regular visits to your doctor, not just when emergencies arise. You do not want to lose your health and finances at a go.
Final Word– Avoid Learning the Lesson the Hard Way
Cheap solutions are not always the best option. They may be for your immediate budget, but in the long run, you will end up spending more.
The Five Most Common Financial Mistakes We Tend to Make Include:
- Consider cost over quality when buying products
- Ignoring debit and credit rewards
- Sticking to DIY
- Inefficiency with your time
- Cutting corners on your health.
You Can Generally Avoid These Mistakes If You:
- Research and plan your activities well
- Budget and Monitor your expenses
- Pay attention to details
- Take heed of professional advice
- Do not compromise your health
- Consider expenses in terms of future costs.
Please follow this advice, and any sound counsel your friends and family have to offer. If you learn the lesson the hard way, it will mean that you have incurred a loss that you could have easily avoided.