5 Dumb Mistakes Smart People Make With Their Finances
November 4, 2021
You could be making $500k per year but if your net worth is $2m you’re barely getting by and if you drive a $180k Bentley and make $1m a year, good luck. Looks and income are the most deceiving things in the world.
To truly retire, your net worth should be at least 20x your gross income after taxes. Thanks to Biden’s new tax laws, this is only another reason for Americans to not rely on W2 earned income and instead become a part of the shareholder class through investments where you get to control how much taxes you pay.
If you weren’t aware, there are tons of stupid things you can do with your money because after all, it’s easier to lose it (spend) than gain it (earn).
To be financially independent and savvy, the gap between what you save and earn should be as wide as possible. No wonder the rich stay rich! They save almost 40% of their income while the bottom 70% save less than 10%.
Thankfully throughout this pandemic, Americans have learned about the importance of planning for the worst, hoping for the best.
Due to the slap in the face, they’ve been able to build up an appropriate cash nest (preferably 20% of your net worth), invest in the stock market due to boredom, interest in financial literacy, and all the retail trading hype mania, and record tech valuations, build up several passive income streams to never be dependent on 1 sole income or spouse again and focus on saving which in part is due to building up a stellar credit score to earn perks and great deals on a mortgage to help diversify a portfolio via real estate.
America has never seen this high of an average credit score of 720 and a savings rate of 10%! I’m proud of my fellow Americans but we can certainly do better especially as interest rate hikes are being considered by the Fed earlier than later after inflation fears this past week trembled markets after the CPI (Consumer Price Index Report) came out with higher than expected results by economists reporting of record spending and consumption specifically in used cars and clothing leading to inflation fears, inflated valuations for growth and tech stocks due to the partial sell-off and supply chain shortages, specifically for chips which are found in cars to phones.
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Too Good To Be True
Just like inflation, when there is too much spending, this raises demand and prices start to rise. This causes the central bank (Fed) which controls monetary policy to step in and raise interest rates as the economy looks better than expected and cool down on bond-buying, stimulus, and zero borrowing costs.
Same thing with our own finances. Although controlling the money supply, bond-buying, stimulus, and interest rates are a bit over our heads, our portfolio requires the same amount of attention.
When you have too much money, it’s easier to spend it and when you have too little with not enough income flowing in, you end up magically having no priorities, spending more of your income on necessities such as clothing, transportation, and housing which takes a toll over time and end up chasing more with high hopes that the future is too bright.
There must be a balance but unfortunately, people, especially smart egotistical ones fall into these careless traps not because they’re dumb, in fact, everyone on earth is logical especially if you are taking time to educate yourself on here, rather the education system in itself is messed up. Schools aren’t teaching us the basic necessary most vital skills in life: financial literacy, mental health, networking, and digital literacy.
Without them, you have nothing. Money controls our life whether we want it to or not and it starts with taking control of what we can control which most don’t realize we have a lot of power over.
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Dumb and Dumber
There’s no cap on how dumb you can get with money because it messes with the same part of our brain when we have an addiction to something like alcohol and social media. Dopamine hits when we see our bank account rise and instead of paying ourselves first which means stashing it into the investment or saving account, we feel we need to savor everything because we are so deserving.
These are instances of being extra dumb with your money:
Blowing all of your bonus + possibly extra
Expenses > Income
Buying bling, hype, following all the trends, and looking into depreciating assets
Attract friends to your money
Hurting your mental and physical self by buying into fads and toxicity
I could go on and on but I think you get the point. Money is dangerous like drugs if you don’t use it wisely.
But we can’t just stop there. Countless more dumb mistakes haven’t been considered by millions that need to be established ASAP especially if you have dependents, kids, a spouse since you have to strategize a scenario if you split, think about death since it happens to all of us, education, the future, and emergencies that WILL come up unless you live under a rock.
Far too many people in this world think everything will be jolly and sunshine and rainbows yet after every lucky break, life likes to pour down some negativity just to keep us in check and aware.
It’s a healthy dose of alertness.
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Dumb mistake #1: No health or life insurance
If you think you’ll live forever, I’m sorry but you won’t. The scary thing about life is that you DON’T know when you’ll be gone and no day is guaranteed so you need to be prepared for it.
Specifically, youngsters, millennials, or freshies fresh out of school believe they can live the frugal minimalist life by simply paying for rent, maintenance, utilities, etc. (home costs), food, electricity, and transportation. After that, since they don’t have kids to pay for, college, or a family yet, they assume they’re all set but what about your health your most precious asset along with your time?
Knock on wood if you are perfectly healthy but that doesn’t mean something, not in your control can come up anytime. The other day I was listening to a financial planner discuss a check-in she had with one of her 30-something-year-old clients. He is an entrepreneur and has high hopes about the future but has no idea if his dream will become reality. He has no backup plan of course since he just graduated and is lured by the Gates of the world. Since 99% of businesses fail, she knew he was over-confident and needed to set realistic expectations in case all else fails and ends up living on the street.
When he outlined his situation that he has no savings or 1 year of expenses built up and an unexpected illness that will cost him double or triple out of pocket without insurance, his financial situation was in ruin.
I’m impressed by those who can leave a stable high earned income for a volatile wild ride as their own boss but that doesn’t mean they are smart. With no health insurance, bad timing, and poor preparation, her client is in medical debt, the number one source of debt for Americans that is hard to get out of.
Your best bet is to get an HSA (Health Savings Account) where you can invest your money tax-free and pay for any qualified medical expenses in the fund or he should’ve just gotten a basic health insurance plan provided by his employer if it was provided before he fled + a severance would’ve been nice.
If you quit, you cannot get a severance (income package when you leave work) but if you’re laid off or furloughed you can.
If not, it’s best to get an umbrella plan which covers home, disability, life, medical insurance all under 1 so you don’t have to worry. Yes, you have to pay a recurring fee for something that you don’t use daily but what if something does happen?
Medicare provides medical coverage for many people age 65 and older and those with a disability. Eligibility for Medicare has nothing to do with income level.
Medicaid is designed for people with limited income and is often a program of last resort for those without access to other resources like this client will probably have to do if his medical bills eat up into his worth.
The caveat with insurance is that you CAN NOT buy it when you need it so be prepared.
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Dumb mistake #2: No will
Every single person, at least every American needs a will and there’s absolutely no excuse.
The more assets and dependents you have, a trust account is your best bet.
“Oh, I haven’t decided who I want to take care of me when I’m disabled or all my family members don’t seem like the best caregivers for my children. We have to think about it some more in a few years.”
Every time you delay your will, you are putting your life on the line. Similarly to health insurance, if something happens and you don’t have it covered, not only will you have to pay everything out of pocket and nothing is covered by your insurance agency, you will most likely get into debt, have no dependents, cannot work because you’re sick as we’ve witnessed in the above example and have to go through the treacherous probate.
If you pass and have no will, your family during those tough times dealing with your loss will have to go through probate (court), hire a lawyer (a few hundred to a thousand per hour), the government and judge will determine who controls your assets (property, investments, children) and most likely the government will take some of it.
Save yourself the hassle, set up a plan that is set in stone but can always be changed, and pay no more than $100 to get it in check. The more you own, the more it can be given up to the government and no one wants to help the government.
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Dumb mistake #3: No cash cushion
“Cash is stupid. It devalues, it’s not an inflation hedge, just sits there and doesn’t grow! Cash is for the retired!”
Those who say that most likely are utilizing their stimulus checks to their fullest benefit to pay down any outstanding debt while looking for alternative sources of income scrambling to make ends meet and selling their gains from the stock market while also paying a hefty income tax on top.
Now does cash seem more appealing?
With the cash that can all be prevented. With saving up a little extra, 20% of your income, in case you lose an income stream to get divorced, get in an accident, and want to pay out of pocket, cash is there when you need it.
And good news- since inflation fears are rising, although this isn’t great for cash per se since the dollar value and our purchasing power declines, interest rates rise which means rates rise, yields rise!
Banks and brokerages that offer a cash weighting recommendation during high-interest rate periods invest your cash to make more money off of you and you can do the same for yourself.
When 1 income stream goes down, another one usually does as well. Unless you were furloughed or laid off for your own, personal reason, it’s usually because your company had a slow year of profits and with business.
Budget always comes first, employees second, and when business is slow that usually entails something else is going on. Businesses do well during good economic prosperous times. Unless they took on too much leverage or did a faulty acquisition, there’s a deeper economic reason so watch out.
Plan for the worst hope for the best. What’s certain is uncertainty no matter how great of an employee you are.
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Dumb mistake #4: No multiple streams of income
You have to be pretty dumb to not have some cash on the side. I get it you are a 20 something still reliant on your parents and can take the hit if you cannot afford an unexpected expense.
But the older you get, along with cash, multiple income streams are necessary.
The average millionaire has 9–10.
You may be asking, how the heck do you find 10 incomes?
REITs (real estate investment trusts) traded on public markets
Alternative Investments: Private Equity, Hedge Funds, Venture Capital, Artwork, Lumber (commodities = not securities but still traded on the stock exchange), Foreign Property, BitCoin, Dogecoin (don’t recommend), etc
Sell your junk
And many more! The more you have, the less worried you are if 1 flips just like investing in an ETF or index fund. You monitor a basket of a few hundred stocks. If 1 tanks, you have 99 others to keep you afloat.
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Dumb mistake #5: No risk
No risk = no reward. If you want to move the needle in your life, you must risk something.
Get a degree, meet that person of your dreams, visit new places, explore hidden lands, take that trip, learn that new skill and invest in yourself!
We regret the things we didn’t do not the things we did do.
The stock market isn’t for old white guys anymore. You don’t need to go through a physical broker-dealer/bank or wait a 3 day turnaround time to hear back about placing your trades.
Go download the Robinhood, WeBull, M1Finance, Public.com, Wealthfront, etc. you name it app, set up an account, and invest whatever you have!
No more and no margin pleasseee…
If you only have $10 and you want to pitch into a $100 stock, then you can buy fractional shares of 10% into that stock. You don’t need to be an institutional broker or an accredited one. Take advantage of the next leader in finance that will be as ubiquitous as having a bank account today. Still confused? For more questions refer to Atticus to learn more about it.
Let your money work for you, be an inflation hedge, profit off of companies that you got rejected by, and stay prudent, humble, responsible, and don’t bite off more than you can chew.
Who cares if you have an IQ of 250 or 0 as long as you are creative, think outside the box and put your money to work, that will let your dumb money grow.
About the author: Mia Gradelski
Hey I’m Mia, a NYU student passionate about blogging what’s on my mind all finance, tech, lifestyle-related. I'm also an investment analysis intern here at Atticus!