Ten Financial Mistakes That Will Put You In The Poor House
As a teenager, I became a much better driver after my only car accident, in which I crashed into an oncoming vehicle and both were totaled. I was a much more aware motorist, and certainly drove more carefully, after this event. Mistakes can be the best teachers, as the lessons learned are ingrained by the outcome of our failures. Finances are the same way. You can avoid making bad financial mistakes (that could land you in the poor house) by learning what not to do. Here are ten of the biggest financial mistakes people make that you can avoid.
1. Spending more than you earn
Whether you make $20,000 a year or have another zero on the end, your spending habits are the single biggest influence on your financial success or, conversely, your failure. Avoid the poor house by spending wisely and keeping your expenses in line with your income. Ideally, save and invest a percentage of each paycheck or income source you have. And don’t spend money on a credit card that you can’t pay off when the bill arrives.
2. Wasting money frivolously
Spending money wastefully, even if you do spend less than what you earn, is another bad money idea. Even if you think you can afford the payments, buying a new car every two years just doesn’t make fiscal sense for most people. Ironically, most first-generation millionaires buy slightly used vehicles or drive their new ones for many years instead of frequently buying expensive, depreciating vehicles. The problem with wasting money is that you have less for saving and investing.
3. Not having a financial plan
Eschewing a financial plan, and not setting goals can set you up for financial problems. Success in any area is largely dependent on having a written plan, short-term and long-term goals, and by working that plan. Reevaluate your plan and track your progress often using whatever method best suits you, whether it’s through online software or in longhand in a notebook. Discuss money with your spouse or partner, meeting regularly to go over the budget and common financial goals.
4. No insurance or the wrong type
Allowing yourself and your assets to be exposed to damage, injury or lawsuits without proper coverage is another way to lose everything you’ve worked to obtain. Health insurance protects you in case of physical injury and high medical bills, and an umbrella policy over your house, auto and other policies protects you from lawsuit judgments.
5. Investing in get-rich-quick schemes
Putting your money in investment vehicles you don’t understand or buying those get-rich-quick packages will put you on the fast track to the poor house. Your best bet for avoiding all of that is to invest in things you understand and regularly adding to and diversifying your holdings. Don’t waste your money on online courses and packages that promise to teach you how to earn six figures online. Do the research before you spend the money.
6. Taking on too much debt
How much is too much debt? Some financially-savvy advisors say any debt is too much, including Dave Ramsey, who became a millionaire and then lost everything because he relied too heavily on debt in his personal life and for business finances. Others are comfortable with small amounts of debt, or house mortgages and auto loans. But realize that even student loans can be hard to handle if money is tight. If you do acquire new debt, do so cautiously and after researching the best loan options.
7. Not expecting the unexpected
Life happens, and if you don’t have any emergency savings, life insurance on yourself and your spouse and contingency plans for potential income loss, you’re setting yourself up for financial trouble. Plan to save three to six months’ expenses in easy-to-access savings accounts as a starting goal for a rainy day, whenever it happens.
8. Working the minimum
Whether you’re just doing the bare minimum at your job or only making enough money to scrape by, working the absolute smallest number of hours you can get away with or completing only the essential tasks, you’re putting your career in jeopardy. To get ahead at work or in your business, give your work the time and attention it deserves. After all, your ability to make income is likely the biggest financial asset you have.
9. Counting on Social Security funds
If your retirement plan is entitlement benefits, it’s past time to reevaluate that plan. Social Security is on shaky ground, and the sensible approach is to discount it entirely when planning for your future. That way, if anything does come through, it’s just icing on the cake in retirement.
10. Putting money above family
While most people tend toward not doing enough for their financial success, there are those at the opposite end of the spectrum whose priorities have been warped until money takes the highest place in their lives. Take the time to evaluate your life and the place money has in it. Money is simply a means, a tool, and should never be sought as the end in itself.
Just Say ‘No!’
It is not just a cheesy anti-drugs campaign. Saying ‘No!’ should be a regular expression for someone trying to stay in the black. Anytime you’re presented with a reason to spend, be it for just a large sized fries at lunch, additional coverage, or buying two to get the third free, alarms should sound and you need to ask why you’re forking over that extra dough. Don’t let it just apply to things you add on to a bill. Just say ‘No!’ to everything that forces you to open your wallet, then take a good hard look and decide if it’s worth your hard earned money.
What financial mistakes have you made? Which ones have you been able to avoid?
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Nice list. This article The credit card minimum payment trap explains why paying the minimum is bad for you.
1,4,6, and 7 are completely naive. They assume you are starting with something to lose. Why is it that most financial advice aimed at how not to be poor is completely useless to people who are already poor.
Wonderful post! A lot of people live beyond their means — which really hurts their financial status in the long run.
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The only shaky grounds that Social Security is on are political. The funds are well maintained through their planning horizon. Please, use accurate data when fear mongering. It works so much better. That said, SS will exist when I retire (assuming the politicians leave it be), but it probably won’t be enough to retire comfortably with. A better phrasing might suggest that you shouldn’t count on SS as your ONLY retirement option, since it will probably not cover your expectations.
There is no fear mongering in the simple statement that Social Security is on shaky ground. Whether it’s politics or that promised entitlements are greater than revenues, or both, Social Security benefits are indeed in jeopardy. Your annual Social Security Statement admits as much. The one I received on May 13, 2008 states the following: “Now, however, the Social Security system is facing serious financial problems … In 2017 we will begin paying more in benefits than we collect in taxes.” This is signed by Michael J. Astrue, Commissioner.
Some great points, but you have to agree with the comment above (ML Harris)- Social security will probably be there, but you need to realize its only part of an income stream for retirees.
Currently, Social Security = A Big I.O.U.
That’s shaky ground, if you ask me
Brad,
They are not naive by any means. I used to be pretty poor (17,600/year in the 90’s isn’t a lot of money). I had no insurance either, which could have been a huge problem. Likewise, any major emergencies I had to use a credit card for, sending my debt to earnings ratio sky high. So, rather than just get angry that I couldn’t have those things, I decided that it was time to work harder to figure out how to have a better income. I worked a ridiculous amount of hours on my own teaching myself skills that I knew would become useful as I pursued the career I wanted. I was poor when I attended college, and there is a ton of financial aid available for those in a similar position. Here’s my financial advice to people who get angry about not having money: Take the initiative and utilize the plethora of resources available to get yourself a higher-paying job or career. Still, I think the author’s main point was to live within your means, whatever that means may be.
Excellent list. Too bad that those of us who need to read it and burn it into our brains are the one’s who will instantly forget it.
Social security will remain in some form or another. Almost all of our politicians, of any affiliation, are terrified of letting it crumble. The political consequences are too much so they will do something to keep it running.
We may not like the something, but baring a total collapse of the US economy, it will be done.
@Russ:Currently, Social Security = A Big I.O.U.
So is money. These dollar bills are just forms of IOUs. Bonds, government securities, employment contracts, etc. So it’s kind of a rough comparison.
At best we have to “risk-adjust” each of these. Based on time left to “retirement”, you have to adjust the value of that IOU based on the risks.
@Maria: Brad nails it, these are very “middle-class”-centric issues. (but hey, if you’re not at least middle-class, you’re poor right?)
Fundamentally, there are two problems that will put you “in the poor house”:
1. spending too much
2. not earning enough
Of your 9 points, only 1 deals with problem #2, and even then it’s questionably worded and explained:
8. Working the minimum
“Working more than the minimum” is not the solution. In fact working more than the minimum can just be a waste of your time. You are describing a symptom, not the problem.
The problem is “Failing to generate enough value in work”. The goal is to create more value for your employer. You don’t need to work more, you need to work better, you need to learn about your job, your field, your competition, your customers. You need to create opportunities, find ways to generate more revenue.
Most people aren’t “work poor” because they’re lazy and working the minimum. Most people are “work poor” and failing to progress b/c they’re doing all the wrong things.
in turn with the “just say no” philosophy- just say no to eating out! your wallet, AND heart will thank you!
Brad,
I agree with you partly, but most fortunes are made with OPM, other peoples money. So, to those that may have been born into a poor situation still have the advantage of keeping their credit rating/scores in check and then they can arm themselves with the knowledge of cashflow and investing. Nobody enters the world with bad-credit. Their is good debt, by the way. Debt that generates more money than the debt itself. Of course you still can have too much. Moderation is the key. The library is a free resource for all that dare to enter. You have nothing to lose and everything to gain.
@ GatesVP: Working the minimum
So true, so completely and totally true. I wish more people would read that and understand it.
Numbers 1,3, and 6 are the ones I violated and they really messed me up the last 2 years since I graduated college. However, ever since I joined Mint.com I have become more self conscious with respect to everything related to my personal finance. I have become 100x more efficient with my money and this site allows me to be organized with all my information at my fingertips. It really sprung me into reading blogs and finally starting my own. I love this site and can not wait for the investing feature to make some moves!
4, 6, and 7 are dumb advice. It induces people to buy more insurance when the chance of a mishap to happen is 1 in 1M or 1 in 10M. It’s easier to get struck by lightning.
The author assumes people are stupid not to understand the risk involve in their financial obligations. Taking in debt is good because if anyone is willing to give you money, they trust you can pay back, the person giving you money knows how to adjust their financial risk by allowing you to borrow/loan. Otherwise, of course, they wouldn’t let you. I don’t think accumulating debt is a bad thing, being irresponsible about the debt that may ruin your potential to buy a house or large items on debt may come back. Though, if you estimate that you have good future potential, go ahead and accumulate the for your future investment.
As for 7, it’s go without saying, you can pay insurance up your crack hole and never have it ever bite you. The fact that insurance is high is because 1) government requires it 2) there’s people like the author in scaring people to buy insurance. The fact that people pay on average $60/mo on car insurance if they have one car, $250/mo on medical insurance, $90/mo on mortgage insurance, if they put less than 20% downpayment, pay $230/mo on PMI, and life insurance at $60/mo. These insurances do not take into account their spouse and children. Eventually insurance will surpass the amount people pay monthly for their car payment or even to the extent mortgage. And what’s even worse is that, when a disaster comes unexpected, the insurance company can fold, and they don’t have to pay you a PENNY. These kinds of insurance is not FDIC insured which is backed by the government up to $100,000 for each deposit. And even this has risk that the FDIC may default which they have yet in their existence YET. But insurance companies have.
The author needs to do more research. It’s funny, the statements are qualitative without any data to back up. Articles like these are weak and does a disservice to readers.
@Adam Smith: The only scenario where taking in debt would be good is if you expect to make more money with it than the interest you pay for it. But if that would be that easy and risk-free, why wouldn’t the lenders just do it themselves rather than giving the money out to you?
If you’re talking about consumer debt like credit cards or car loans, then, frankly, you’re not very smart.
And 7 talks about establishing an emergency fund. Believe it or not, a well-sized emergency fund actually allows you to skip certain types of insurance, like collision/comprehensive car insurance. If you wreck your car or it gets stolen (the 1 in 1M chance you talk about), just buy another one with the money out of your emergency fund. If you avoid debt, you never need mortgage insurance. The only types number 6 talks about are risks that threatens your complete net worth, and these are liability and death, if someone depends on your income. Please don’t tell me that you drive without liability car insurance.