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Ten Financial Mistakes You Might Be Making

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Why do we make so many financial mistakes in our lives? Studies in the new fields of evolutionary economics and behavioral economics are starting to shed light on this question. I will report on the latest research in the Unusual Ways Newsletter. In the meantime, here are ten common money mistakes to avoid. How many are you making?

1. Getting Competitive

Unless you are playing poker or negotiating a business or investment deal, trying to "beat" anyone else is a bad habit. Being the first to buy new technology means you get the worst version at the highest price. "Winning" at an auction means you paid more than anyone else was willing to. The science of evolutionary economics explains why we feel this need to "win." It has to do with position in the tribe, which used to increase one's survival odds, but this tendency of ours is of very little value in a modern economy.

2. Thinking Someone Owes You Something

Unless you have a contract or at least a promise, nobody owes you a thing. Not the government, society or your boss. Getting hung up on what is "owed" to you is a financial mistake because it gets in the way of doing what is necessary for financial health. Consider how health insurance came to be expected of large employers. It was based on nothing more than the fact that many provided it. If many companies had provided cars to employees, we would think we are "owed" a car by any good employer.

Never mind what is "owed" to you. Work honestly to get what you can. Try for that raise, but if you aren't paid enough, find another job. Take that unemployment benefit if it's available, but don't rely on these programs. When you stop looking for your "due" you can start looking at what others want, and then provide that for a profit, even if that profit is in the form of a paycheck.

3. Thinking Value Is All About Prices

If a television normally sells for $900 and is on sale for $400, most people think it's a great deal. But the value of personal items is measured by what the individual user needs and wants. If you can be as happy with a $200 television, then the other is over-priced from your perspective. A personal purchase is worth what usefulness it has to you, and nothing more.

4. Thinking Value Is All About You

I saw a man lose $30,000 by pricing his home too high and leaving it empty for years. This is one of the more common financial mistakes. Value, when it comes to investments, has nothing to do with what a thing is worth to you. Value is what the market will pay.

Don't confuse personal consumption items with investments. A car is not an investment. Even that $22,000 kitchen remodeling project isn't, if future buyers will pay only $10,000 more for your home as a result. It doesn't matter at all if you think it added $30,000 in value. Enjoy that new stove and cupboards, because they were not investments, but a $12,000 (your net loss) personal purchase.

5. Thinking High Profits Are Unfair

If a sale is honest, the price is fair. It wastes your time and mental energy to think a business makes too much profit. Suppose your own house has a market value of $400,000. You wouldn't lower the price to make it more "fair," so why expect any business to charge less than what the market dictates? The profit made on something is entirely irrelevant to what its value is to you. Buy it or not, but don't waste time complaining about a profit you would gladly accept if you were on the other side of the transaction.

6. Comparing Yourself to Others

The classic "keeping up with the Jones's" is perhaps one of the worst financial mistakes. There is little evidence that buying more toys and better cars and homes makes people happier. On the other hand, there is evidence that the debt taken on in this process creates stress that does get in the way of a happy life. Never think about what others have when deciding what you need.

7. Buying for Status

Again, there is no evidence that impressing others with what you have makes you happier. In fact, this catering to the ego makes one more dependent on the opinions of others and therefore more afraid of losing that status. Apart from the resulting stress and desperation, there are the financial consequences of buying more than you need. Unless you need something for a particular financial purpose (a real estate agent may need a nice car to drive clients around in), don't think at all about what others will think. That includes thinking you'll impress others with the "deal" you got. The latter is a good way to go broke "saving" money on purchases.

8. Not Considering the Bottom Line

I once worked at a casino where 20 employees quit because of a change in pay that amounted to a 20% increase in hourly pay. The details are funny, sad, and not worth getting into here. A summary of the reason for the departures: employees were angry about the $1.50 per hour base pay (the casino was on an Indian reservation which didn't need to abide by minimum wage laws). Though with tips they would get more than they used to make, many preferred to work for less money than be paid "unfairly." You may have also seen people take jobs that pay several dollars per hour less than others because they have better benefits - even though those benefits could be easily bought from the excess pay of the other jobs.

9. Looking Only at the Bottom Line

It's important that you make enough money to pay the bills, but looking only at the bottom line is one of the worst financial mistakes you can make. You may not always love the work you do, but if it only pays the bills you better like it or look for something else to do. Jobs you don't like can serve a temporary financial purpose, like providing savings to buy a home or eventually follow your passion. On the other hand, if you can work at something you love, why look for more pay elsewhere?

10. Looking to Government to Solve Financial Problems

This one is under the category of "cultural financial mistakes." We want something for nothing, preferring for example, to believe that government can make more oil appear on earth rather than adjust our habits as prices rise. Looking to government to "control" prices or solve financial problems creates a victim mentality that gets in the way of simply doing the best we can with our time and money.

We forget too, that all laws are enforced at the point of a gun. Is it really fair for us to negotiate that way? We always have a choice to buy or not to buy. No honest company sells a single thing for more than buyers are willing to pay, or there wouldn't be a sale.

Of course there are many other money mistakes that people make. This list didn't even touch on the issues related to buying on credit. There are enough mistakes made in that area to create a whole new list.



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