The three most common money mistakes

The three most common money mistakes

Even though they defy common sense, they’re surprisingly easy to make.

In his book Master Your Money, Ron Blue describes the top money mistakes that keep us from our full financial potential. At first glance, these money mistakes are easy to dismiss as obvious. This is elementary, right?

They may be basic missteps — and yet, they’re still pervasive. Here are the top money mistakes that trip us up:

Mistake #1: Living at (or above) your means

It is impossible to make progress on goals — like paying off debt, making a major purchase or owning a business — unless there is cash left over at the end of the month. You don’t have to be an accountant to understand this, yet it’s an easy trap to stumble into. In Master Your Money, Ron Blue calls this a “consumptive lifestyle.” It’s a lifestyle that consumes all of the money coming in (or more), leaving nothing left over for the future.

Society bombards us with advertising. The $200 billion ad industry is adept at getting us to think of all the things we should spend our money on, creating discontentment. Combine this with our “buy now, pay later” culture and you have the perfect storm for overspending.

Think overspending wouldn’t be an issue if you brought home a little more each month? Not so. Overspending is an issue at all wealth levels. It’s often assumed that margin will increase if income increases, but this is not usually the case. Lifestyle expenses almost always adjust up with increased income. As the old saying goes, “Often all it takes to start down the road to bankruptcy is a small raise in pay.”

Mistake #2: Not having a spending plan

Even if we’re spending less than we make, most American families go without a budget. Fewer than one in three have a spending plan in place. Having cash margin (in other words, living under your means) is about long-term goals. A spending plan is your roadmap to get there, with short-term goals in place to make progress.

Many of us worry that a budget would be constraining, and that’s why most people avoid it. But a budget is really just a plan, built with intentionality and awareness. Any constraints that people feel come from having desires that are bigger than their means (see first money mistake). The way to make progress on those desires is by creating the spending plan in the first place! As another saying goes, “Those who fail to plan, plan to fail.”

Mistake #3: Overspending on cars

I drive an older car. On hot summer days like we’ve had lately here in Kansas City, I often dream of upgrading to a newer car with a better AC system. But every time I think of how much money I’d be spending just to drive to work and back, I stop. The opportunity costs — the other things I’d rather be doing with that money — are too high.

When I found out I needed a number of major repairs, I decided to do a cost analysis. Would it be worth putting the money into this old vehicle, or was it time to upgrade? After running the numbers, I saw that even with the repairs, it was cheaper for me to stick with the older vehicle.

Ron Blue says it this way: “The cheapest car anyone can ever own is always the car they presently own.” From a strictly economic standpoint, this assertion holds up even when you factor in things like insurance, gas, repairs and depreciation.

I’m not entirely sure why, but buying a car will be one of the most emotional purchases you’ll make. Our vehicles are some of our most public possessions, so perhaps the emotion comes from the pride of being identified with what you drive. Otherwise rational spenders can go completely berserk when deciding on a car.

I’ve worked with millionaires and billionaires for almost a decade now. The wealthiest people I’ve served have consistently driven practical, low-cost vehicles. A study from earlier this year backs up my observation. The richest Americans aren’t driving status symbols or luxury cars. They’re using that money for better things.

Which of these three do you struggle with the most? Learning how to manage our finances is a lifelong endeavor, and some lessons are more challenging than others. If you want to achieve your financial goals, avoid these most common mistakes and stick to the financial principles behind success. Of course, working with a financial planner can help you stay clear of missteps and out of denial. Reach out to us at Sound Stewardship if you believe it’s time to take your progress to the next level.

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