5 Money Mistakes Financial Advisors Won’t Share with You

saving-money-in-piggy-bank

Wealth consists not in having great possessions, but in having few wants.

Epictetus

We all have our own personal relationship with money. Some track every cent that leaves their bank account while others pay someone else to do it for them. As a professional in the finance industry I’ve seen clients with average incomes in better financial health than clients making well over six figures.

When you obsess over money like I do you’ll learn that financial stability is not solely based on income. Financial stability is all about developing healthy money habits and avoiding pitfalls. Sure, a higher income can help move you forward faster but it’s not the only way to create wealth. 

Anyone can create wealth with the proper knowledge and tools. If you want to improve your financial health avoid these 5 money mistakes financial advisors won’t ever share with you.

1. Avoiding the numbers

Personal finance app

If talking about your money sends chills down your spine, know you’re not the only one. I’m still shocked at how many people avoid tracking their finances at even the most basic level. 

It is not uncommon for individuals to have a certain amount of anxiety towards their finances. An “if I don’t look it doesn’t exist” mentality. If this sounds like you then this should hopefully be your wake up call. You’ll never be able to save for your goals and for the long term without knowing your numbers!
Money management doesn’t have to be stressful either. We have technology to make it less painful. The financial planning app Mint, for example, links up to your bank accounts and credit cards and automatically categorizes your spending for you to easily track spending. You can set a monthly food budget to track and you’ll receive alerts if you’re close to or over spent on your budget.

2. Not addressing high-interest debt

Priority debts

Not all debt is created equal. Money mistake number two is not addressing your high interest debt first.

So ask yourself, which high interest debts can I focus on paying off first? 

20% interest carried over month over month on credit card debt, for example, is like a massive anchor dragging you down deeper and deeper. If you’re only paying off the minimum balance on your credit card you’re wasting money on paying interest instead of the original debt. Instead of paying off a bit of each focus on paying high interest debt like credit cards first. 

If you’re in a position where you own a home, borrowing against your home is the cheapest money you can find. 

Borrowing money from family or friends with little-to-no interest is another great option. If you ultimately need to take on debt think twice about how you approach it. Always look for the cheapest money you can find and don’t hesitate to refinance or consolidate your debt when it makes sense.

3. Underestimating leverage in real estate

Leverage in real estate illustration

If you invest $500,000 to buy a property and you sold it for $550,000 in a few years. You made a 10% return. 

If you invest $50,000 in downpayment and get a $450,000 mortgage and then you sold your property for $550,000 in a few years. YOU MADE 100% return on your initial investment of $50,000. 

Invest small sums of money upfront to free up money for other investments. In the example above, instead of tying up your money in a single property you could invest it in other asset vehicles like a business or the stock market. 

4. Living above your means

Optimizing your lifestyle

As I mentioned before it’s not uncommon to see someone with a six figure income still living paycheque to paycheque. This is what happens when someone lives above their means. 

We call this “lifestyle creep”. When an individual’s income increases their spending habits typically do as well. If you received a promotion at work, for example, you might trade-in that Honda for a Mercedes or maybe you’ll add an extra day of eating out or shopping. 

A little extra spending is fine. We should enjoy the money we make, of course. The problem is when one spends far and beyond what they have coming in. With nothing left at the end of the month they have nothing to save for the long term. A single accident or major life event has a high potential to cause financial ruin. Not good.

Trying to keep up with the Jones’ is a major money mistake. Live within your means and avoid comparing your lifestyle to others for the sake of appearance. 

5. Not minimizing taxes

Minimize taxes

Here in Canada, we pay a lot of money towards taxes but there are programs to help reduce your tax burden. Money mistake number five is not taking advantage of these tax break advantages.

Maxing out your Registered Retirement Savings Plan (RRSP) contributions is one of the easiest ways to do that. Your RRSP contributions are tax deductible. That means you can claim them as a tax deduction when you file your income tax return. Less tax means more money in your pocket. Capitalize on saving for your future and take advantage of the tax benefits. 

Whether you live in Canada or elsewhere in the world, take some time to research what benefits are available to you and use them. 

Don’t give up

Sometimes life throws a curveball our way. The better equipped we are the better we can avoid money mistakes. To summarize, the money mistakes to remember are:

  1. Avoiding the numbers
  2. Not addressing high interest debt
  3. Underestimating leverage in real estate
  4. Living above your means
  5. Not minimizing taxes

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