Top 3 Money Mistakes To Avoid

6 Jul 2022

Learning how to save and invest money is amongst one of the most important things anyone can learn to do. If you do not safeguard your wealth, there are plenty of people willing to take it from you such as online retailers, the tax collector or even central banks as they erode the purchasing power of your currency. 

Here are three money mistakes that you should avoid. 

1. Not paying yourself first. 

When we receive our weekly or fortnightly pay check (if that's what you're receiving), it may be tempting to immediately spend the money on essentials such as food and bills. It may also be tempting to spend the money on other luxuries or during end of financial year sales. 

This is the wrong attitude. Before you spend any money, you should make sure you 'pay yourself'. By this, I mean that you should take part of your pay check and place it in a savings account before you even look at the rest of your expenses.

Doing this does several things. Firstly, it teaches you discipline. You know that $100 or so will be removed from your pay check so you know that you don't have a large amount of disposable income to spend. Secondly, you're creating a savings cushion that you can use for a multitude of purposes, whether it be to purchase an asset or to help you get through a rainy day when 'life happens'. And thirdly, it's also rewarding you. You can start putting your own long-term interests first as opposed to having to live pay check to pay check. While the benefits of saving might not become immediately obvious, they will do so when you've been saving for long enough and have developed a nice cushion. 

Now, you don't need to place an extremely large sum of money into a savings account; it can be a sum of money that is proportionate to your current life circumstances (e.g. $100). 

The best way to 'pay yourself first' is to set up a recurring transfer from your 'wages' account to a separate savings account. You won't even need to think about needing to transfer money; you'll know that it's being 'done' and that you don't have to worry about it. 

2. Letting your money become stagnant. 

This one is very common. While you may have saved a stack of money or you might be on a very high salary, you need to learn how to make your money grow or protect your wealth before it runs away from you. 

Perhaps one of the worst things you can do is let large portions of your savings sit in your bank account indefinitely because the purchasing power of your money will be gradually eroded away due to inflation. While it's still a good idea to apportion some money to sit in your bank account as 'dead money' so you have a savings cushion, you need to have a vision for how to invest the rest of your money. 

For this, you may want to look at different investments (precious metals, shares, cryptocurrencies, real estate) or placing your money into a savings account that pays interest (yes, even with recent rate hikes interest rates are still abysmal but it's better than nothing). You may also want to invest your money in a business you are creating or in some kind of 'equipment' that will earn you money. The options are endless but they do require careful research. 

3. Not understanding 'cash flow'. 

When we often thing of wealth we might think about how 'expensive' something is or how much 'value' it has. Stock investors are a common example of this as they (mostly) invest for capital appreciation, that is, for the price of the stock to go up. 

A rather underappreciated element of personal finance is 'cash flow'. Put simply, cash flow is all about how much money is 'flowing in' or 'flowing out' of your bank account, business etc. Sources of cash flow include wages, rental income and royalties. 

The reason I emphasise cash flow is because your cash flow ultimately determines your financial health. Yes, you might have thousands of dollars in crypto assets that are appreciating in value, but ultimately this will all be pointless unless you have money coming in on a consistent basis to meet your expenses or to apportion to future investment projects. 

So in addition to considering assets that appreciate in value, you also need to look at how you can increase your cash flow. 

There are two ways to increase cash flow: To earn more money and to cut down on expenses. 

Ways in which you can earn more money include the following:

  • Working more hours or in a higher paying job (note: I'd probably recommend this the least because ultimately you want to get to a point where you're earning more money in less time). 
  • Earning rental income. 
  • Building a blog with sponsors and advertisers. 
  • Earning royalties from publishing a book.

The options are endless but they do require some thought. 

In terms of cutting down on expenses, I'd recommend the following:

  • Cancelling subscriptions that you haven't used in months. 
  • Opting for a cheaper mobile phone plan. 
  • Avoiding eating out and brining your own food to work. 
  • Eating 'seasonally' - Food sold in supermarkets that is in season is cheaper than food not in season. 

While cutting down on expenses won't make you super rich overnight, the small savings you make can often add up to produce significant savings and therefore increase your cash flow. 

Final Thoughts

Personal finance doesn't have to be overly complicated. It also doesn't have to be a source of fear where we are scared to look at how little savings we have or how much money we have spent over the past year. With a little education, time and discipline, we can all learn how to take control of our personal finances and to protect our wealth. 

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