What personal finance mistakes should everyone avoid?

I’ve been learning about personal finance for 10 years and teaching personal finance for 7. Here are the top five common mistakes I’ve observed:

ONE: Spending more than you earn

I had two friends. One was a lawyer who earned $100K a year and spent $110K. The other was an engineer who earned $60K a year and spent $40K. Who do you think was in a better financial position after 5 years?

TWO: Not having an emergency fund

I had two friends. One took my advice to build an emergency fund which had about 6 months of expenses. The other spent all she had every month because YOLO.

After 3 years of work, both wanted to change careers. The first did so, depending on her emergency fund to tide her over for 4 months while she pursued the necessary qualifications. The other is still stuck in her job because she has no savings.

Here’s a step-by-step guide to creating an emergency fund.

THREE: Not having medical insurance

I had two friends. Both were fresh graduates who just entered the teaching profession. One purchased medical insurance for hospitalisation. One did not, thinking she would not need it.

Both faced immense stress in their jobs and one year later, both had illnesses that required hospitalisation. The first paid from his savings first, and the insurance company reimbursed him later. The second paid from her savings.

Who do you think was in a better financial position?

FOUR: Depending on someone else to manage your finances

I had two friends. Both became widows. One depended on her husband to manage the family finances. The other learnt from her husband how to manage the family finances.

When the first became a widow, her husband left a sum of money for her. It was quickly spent and lost to various “advisers”. When the second became a widow, she was grateful she took the time to learn how to manage her finances.

She now teaches other women how to manage their finances.

FIVE: Not knowing where investment returns come from

I had two friends. They both had some money to invest. They met two advisers. The first sold gold bars which promised 2% return a month. The second sold a safe investment which promised 2% return a year.

They both came to me for advice. I told them the first investment was a scam and the second was legit.

The first friend didn’t believe me and put all his money in gold. He lost all his money when the scam revealed itself a year later. The second friend listened and is still earning 2% a year on her investment.

Knowing how money works and where investment returns come from are crucial to not getting fleeced by the many investment schemes out there.

This article is taken from Lumina Planners, the fee-based financial planning arm of Elpis Financial. 

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