7 Common Dumb Money Decisions Made by Smart People
Welcome to the 146th edition of the Inkosi Wealth Scoop!
In this episode, I will reveal seven dumb money mistakes that many smart people make, so you can steer clear of them and make the right choices for your financial future.
- Dumb Decision #1: Spending Money on Things You Don’t Need
- Dumb Decision #2: Using Average Assumptions in Retirement Planning
- Dumb Decision #3: Chasing ROI Too Much
- Dumb Decision #4: Supporting Family to Fuel Their Lifestyle
- Dumb Decision #5: Putting Faith in the Wrong People
- Dumb Decision #6: Not Paying Attention to Investment Details
- Dumb Decision #7: Upgrading Lifestyle Before They Can Afford It
If you want to become a wiser investor by learning from other people’s mistakes, then make sure to listen to this episode!
06:17 Dumb Decision #1: Spending Money on Things You Don’t Need
07:33 Dumb Decision #2: Using Average Assumptions in Retirement Planning
09:03 Dumb Decision #3: Chasing ROI Too Much
11:53 Dumb Decision #4: Supporting Family to Fuel Their Lifestyle
13:39 Dumb Decision #5: Putting Faith in the Wrong People
14:40 Dumb Decision #6: Not Paying Attention to Investment Details
15:46 Dumb Decision #7: Upgrading Lifestyle Before They Can Afford It
16:42 Final Thoughts
Sometimes, we believe that having more knowledge about money will prevent us from making money mistakes.
We also think that earning more will solve all our financial problems, and we may even try to protect our loved ones from experiencing financial struggles, thinking it’s the right thing to do.
But in reality, what we’re most worried about is making a mistake with money that we can’t fix.
If we can identify some of these common mistakes, we can use a combination of knowledge and good judgement to avoid them and protect ourselves from losing money.
Instead of obsessing over increasing our income, we can focus on turning our current income into long-term wealth. We can also intentionally teach our kids and loved ones valuable lessons to help them build good money habits and character.
Ultimately, we all want to feel more comfortable and confident, making our journey towards building wealth less stressful.
Let’s start this episode with a quote from Charlie Munger, who is known as one of the best investors of the last century.Read More
He said, “It’s amazing how much long-term advantage people like us have gotten by trying to be consistently not stupid instead of being very intelligent.”
What he means is that avoiding stupid mistakes is more important than trying to be very smart.
I can relate to this because I’ve made many mistakes with money myself, and looking back, I realise that most of those mistakes happened because I did something silly or didn’t pay attention to something obvious.
I’ve noticed that the investors who keep things simple and don’t worry too much about the latest trends often get the best results. Instead, they focus on finding investments that will give them long-term returns and pay attention to potential risks.
Let me share a story with you.
About 15 years ago, there was a woman who lived in a beautiful house in Melbourne.
It was worth around three to four million dollars by today’s standards, and it even had a second dwelling that brought in some extra income.
Her husband passed away, leaving her a decent sum of money in her super account, and her house was fully paid off.
She also had a couple of investment properties that generated a steady passive income.
But because she wasn’t very financially literate and hadn’t done much investing, her easy life had given her a false sense of confidence in her investing skills.
Unfortunately, a developer took advantage of this woman, who convinced her to sell her house and buy another one in a neighbouring suburb as part of a development plan.
She didn’t understand the numbers but believed they would make her rich.
She took out a large mortgage to buy the new home, but the developer later revealed that the project might not happen due to issues with the council.
So she had to sell the house and suffer a loss of about $400,000 due to the falling market.
To make things worse, she made another bad decision and bought another property in the same development. She hoped it would bring in more money, but it didn’t.
To add to her troubles, she allowed her children to access her retirement funds, which caused her savings to drop drastically.
Ultimately, she lost her home, all her savings, and her investment properties.
She went from being financially secure to having a lot of debt and being financially tied to her children.
Now I’m sharing this story with you because I have seen many smart people make foolish decisions regarding money.
They can look back and see the mistake, but at the time, they get blinded by the idea of making more. It’s like they only see dollar signs and forget about logic and reason.
So today, I want to share with you seven of the most common mistakes that smart people make when it comes to money. I believe that by being aware of these mistakes, we can avoid making them and save ourselves from financial trouble in the future.
Dumb Decision #1: Spending Money on Things You Don’t Need
One of the most common mistakes they make is spending money on things they don’t need to impress people they don’t even like.
This problem has worsened with “buy now, pay later” schemes and in-store credit cards from big retailers.
Many young people try to appear wealthy by buying the latest gadgets, furniture, and other items on credit. But this can lead to problems down the road.
If you want to be a thriving investor, you need to understand that any form of credit can hurt your ability to borrow money in the future.
Buying things just to show off is not a good strategy for building wealth, and it’s important to avoid this trap if you want to be financially successful.
Dumb Decision #2: Using Average Assumptions in Retirement Planning
The second mistake people make is using average assumptions in their retirement planning.
When people plan for retirement, they may go to a financial planner who will help them calculate how much money they need for retirement.
The calculator uses certain assumptions about how much they will withdraw and how much their money will grow.
But this method often does not account for unexpected events, like a sudden downturn in the stock market.
For example, if someone is five years away from retirement and is planning on having a certain amount of money saved, but then the stock market crashes and their savings are reduced, they may not have enough time to make up the difference.
To avoid this, challenge assumptions in retirement planning, stress-test them, and diversify investments to create multiple safety nets.
Dumb Decision #3: Chasing ROI Too Much
The third dumb decision smart people make is chasing high returns and focusing too much on the ROI (or return on investment).
For example, if you invest $100 and get back $120 in two years, your ROI is 20% ($20 return divided by $100 investment).
The problem is that ROI is time-dependent, and people are often presented with misleading yield or income stream figures.
For instance, a property may be advertised as having a gross yield of 5%, which sounds attractive. But this only considers the income before expenses.
After expenses like property management, interest rates, and other costs are factored in, the returns could be zero or even negative.
In commercial property investments, buyers may be presented with a net return figure that only considers expenses but fails to account for interest expenses.
Interest is usually the biggest expense when purchasing a commercial property, unless you buy it outright with cash.
So the reason I’m bringing this up is that it’s very common for investors to focus too much on the yield or return when making investment decisions.
But other important factors should be considered, and investment decisions shouldn’t be based solely on yield or return.
You need to be aware that numbers can be manipulated, and people can easily make a small change here or there to make something seem more profitable than it is.
As investors, we have to be cautious and ask questions about how yields or returns are calculated, and we should stress-test the assumptions presented to us.
Dumb Decision #4: Supporting Family to Fuel Their Lifestyle
Smart people’s fourth common mistake is supporting their family’s lifestyle.
Sometimes, we work very hard to get where we are, and we don’t want our children to go through the same struggles we did.
So, we may try to remove obstacles for them, such as by buying them expensive gadgets, their first car, and so on. However, this can lead to trouble.
If we never let our children experience financial struggles or hardships, they won’t learn important financial literacy and management lessons.
It’s okay to help your children, but allowing them to experience struggles and learn how to manage their finances is essential.
I’ve noticed that many ultra-rich people who are smart with money want their children to understand how money works.
They want to educate their kids and help them with medical expenses, education, financial literacy, and investing. However, they don’t want to just give them money to spend on a luxurious lifestyle.
The reason they do this is because they want their children to learn how to manage their finances and not become reliant on handouts.
This is becoming a common trend among wealthy people, as they have seen the negative effects of giving their children too much money without teaching them how to handle it responsibly.
Dumb Decision #5: Putting Faith in the Wrong People
The fifth mistake that people make is putting their trust in the wrong people.
Sometimes, someone with less knowledge about finances might feel intimidated by people who throw around a lot of technical terms or numbers.
But you have to remember that building wealth doesn’t have to be complicated.
If someone is trying to convince you to invest in something you don’t understand, be careful. Don’t let them use jargon to confuse you into making a bad decision.
Instead, make sure you trust the people you’re working with and that they have the necessary knowledge and experience to help you.
They should also be able to explain things to you in a way that you can easily understand.
Dumb Decision #6: Not Paying Attention to Investment Details
The sixth mistake is not paying attention to investment details.
Sometimes people try to convince you to invest in something by making it sound really good and professional.
They might have nice brochures, facts, and figures, and even make you feel bad if you don’t invest.
But if you’re not experienced or not paying attention, you might miss important details.
This happened to people who invested with Bernie Madoff, who refused to give them any details.
He said they weren’t the right fit for him if they were interested in the details.
So it’s crucial to understand everything about an investment before you invest your money to increase your chances of success.
Dumb Decision #7: Upgrading Lifestyle Before They Can Afford It
The last mistake that smart people make with their money is upgrading their lifestyle before they can afford it.
It can happen at any stage of life, even if they are in a good financial position.
Sometimes, they take risks with their money just to achieve returns they don’t need or invest in things that make them look good.
They may make these decisions because they think, “If not now, then when?” but they can’t afford it.
I want to wrap up this episode by saying that we commonly judge others’ decisions and think we wouldn’t make the same mistakes because we’re not foolish.
But I’ve made some poor financial choices, that were motivated by either being too eager for more or being too scared, and these decisions have cost me years of progress.
Sometimes people intentionally make poor financial decisions that seem reasonable to them but not to others.
For instance, some individuals claim they want to accumulate wealth but end up taking on a car lease for an expensive car that affects their cash flow negatively.
So, let me leave you with some important questions to think about.
First, have you ever made a financial decision in the past that turned out to be a mistake?
Second, what steps can you take to prevent making similar mistakes in the future?
Establish some rules for yourself and have checks and balances in place.
This could mean limiting your spending on certain things, creating investing rules, or discussing with your family or partner before making big financial decisions.
Don’t be one of those smart people who make one bad decision and end up causing bigger problems.
Take the time to reflect on your past mistakes and create a plan to avoid them in the future.
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