With that in mind, the following are five common mistakes people make about money and also their solutions.
1. Not saving
The first, and indeed the most common mistake people make about money is not saving a part of their income. For a variety of reasons, far too many people do not save. They claim that their income is insufficient, they have too many commitments, they are too young to save, the money is needed for other more pressing needs and there are people who do not even know the meaning of the word ‘saving’!
This is the most dangerous mistake of them all – if you do not save, you will never be wealthy, no matter how much money you make. In fact, it is very likely that you can soon fall into financial difficulties.
So save a part of your income. Ten percent is a good start. And yes, you must save on a consistent basis.
2. Not having a Reserves Fund
The second mistake is not having a Reserves Fund. Some people save money and then quickly invest all that money so they can make more money. They want to make the money work hard for them instead of just them working hard, following the suggestion in numerous books on personal finance.
This strategy works fine during the good times and if everything goes to plan. However, real life being what it is, times are not always good and life doesn’t always go according to plans. Some emergency crops up and rain falls even in the driest plains. Often time, these situations require a lot of money to be put right. Without the Reserves Fund, the individual has now to cash out his investment, often time at a loss.
So always, always have a Reserves Fund. The money in the fund should be worth at least three months of living expenses (more is obviously better). Keep it in a safe and liquid place so you can have quick access to it.
3. Raiding their savings
Others save money. However they cannot leave the money alone. As long as they see some spare cash, they will find a use for it – to buy the latest gadgets, to go on vacation, to make investments or simply to give themselves a treat. They will raid their savings again and again. This is as bad as not saving at all.
One method you can use to avoid this by allocating a certain percentage of your income as ‘play’ money. That right. Use the play money to treat yourself but keep your savings and investments aside.
Of course, at the end of the day, you will have to develop the discipline not to raid your savings. Without this discipline, it will all come to nothing because you will keep taking the money out. There will always be something new, something interesting, something useful and something nice out there. But just because it is out there does not mean you have to have it, or have it now.
4. Rushing to invest
Another common mistake people make is rushing into an investment. After hearing of a fabulous opportunity, some people cannot wait to jump in. They want to be part of the winning team, and more importantly, they do not want to miss out. After all, the salesman said that ‘only a few days are left’.
When it comes to investments, rushing is not a good thing. No matter how good an investment may be and no matter how grand they may appear, take your time. Check, investigate and ask around first. In short, do your homework first. If the answers are positive, then invest your money. Otherwise, keep your money and look out for the next opportunity. There will be plenty more down the road.
5. Not willing to cut losses
A way too common error. People are not willing to cut losses. Even if they are down thirty, forty and even fifty percent, they will still hold on to the investment, while secretly hoping that prices will turn around and they will get back their initial capital. (Similar thoughts run in the brain of a losing gambler in the casino.)
Avoid this error. If an investment is not performing as well as expected within a certain time frame, then sell it. Yes, sell it, even at a loss. The law of averages will tell you that you cannot win all the time, especially when it comes to investments. In fact, if you could make money eight times out of ten, that’s a fantastic achievement! Something for the record book already. Just don’t forget to sell that losing two investments.
So sell a losing investment. Learn the lesson so you will not repeat it. And move on.
So there you go folks, the five common mistakes people make about money and also their solutions.