Money lessons can be a painful experience if you’re not careful. They say experience is the best teacher. This idiom suggests that real life occurrences rank supreme when it comes to learning versus studying something out of a textbook. Though learning from experience can help you dodge future mishaps, it can’t hurt to learn from others. Here, people share some costly missteps and tips to sidestep them in the future.
1. Minimize Lifestyle Creep
As your income increases, expenses tend to increase as well. You might be tempted to buy an expensive gadget for your business that you don’t honestly need or even a fancy car as an outward symbol of success.
“One easy way to minimize this is to follow the one-third rule. Every time you earn extra money, allocate one-third to long-term goals, one-third to short-term goals, and spend the last third,” says Alex Whitehouse Founder of FinHealthy.com, a financial health and wellness blog.
Future Step: Try to refrain from spending the extra money you just earned. Whitehouse adds by following the one-third rule you can concentrate on achieving your goals while still spending some of the money at the same time.
2. Don’t commit credit card abuse
She learned to avoid using a cash advance on a credit card. Credit cards can be dangerous if not handled with care. “The different interest rates on cash advances can make an out-of-control debt problem even worse,” says Lauren Bowling Blogger at FinancialBestLife.com I learned this the hard way right out of school.”
Future step: Fend off the urge to spend money you don’t have. Before using a credit card, ask yourself if this short-term fix is going to hurt you in the long run.
3. Don’t put all your financial eggs in one basket
The most dramatic snafu Tom Diem, CFP®, ChFC® of DiemWealth.com witnessed was when a business owner caught in a sunk cost trap. He overly invested in his company stock which surpassed 90% of his net worth. “This gentleman’s company was bought by a larger firm, and he was paid in stock. When the day came where he was allowed to sell shares, he refused. By this time, the shares had quadrupled, and on paper, he was worth several million dollars,” says Diem.
Diem goes on to say that the business owner couldn’t accept defeat and mistakenly believed it would go up again. An earnings report revealed accounting problems and the stock took a nosedive. The business owner was still in complete denial on the way down, and he lost everything including his family.
Future step: Diversification is essential. “Many investors have fallen to this same flawed thinking and have not bothered to be diversified in their investments,” says Diem. Also, take others financial well-being into account. A giant mistake can cost you your future and ruin relationships.
The Bottom Line
Though everyone makes mistakes, it’s best to research and seek out the help of a professional before making an important financial decision when necessary. Hopefully, you can avert any potential financial disaster and set a course in the right direction.
