Financial Mistakes to Avoid When Building Wealth

Financial Mistakes to Avoid When Building Wealth

Financial success stories can be incredibly motivating. When we read an article or hear an interview about someone who went from zero to millionaire, it instills a sense of hope for achieving our own financial goals.

With the blessing of hindsight in our favor, here are the financial pitfalls that were common among many money masters. 

Spending Without a Plan

By living for today and not planning for tomorrow, we’re letting our money control us instead of the other way around. This can happen when we live without a monthly budget and spend our money haphazardly.

If we’re able to give every one of our dollars an assignment each month, unexpected financial surprises will start to fade away. 

Living Without an Emergency Fund

When we have little or no money in savings, we’re leaving ourselves vulnerable to financial attack. Unexpected money surprises can come in the form of a flat tire, a broken HVAC unit, or even a deductible payment for a trip to the hospital. These everyday problems become huge nightmares when you have no money to pay for them.

Leaving yourself a cushion of three to six months of expenses can help you avoid this trap. Not only will you be better prepared to pay for these unwelcomed surprises, but you’ll also be able to rest easier at night knowing you’re protected. 

Taking on High-Interest Debt

If we spend with no plan and live without any emergency savings cash, high-interest debt will undoubtedly become our go-to solution.

Credit cards can get us what we want fast, but they can also leave us paying for our purchases for much longer than we wanted. We can be hit with double-digit interest payments if we’re not paying off our credit card balances each month, which can severely slash our chances of building wealth.

With credit card debt reaching an all-time high of over $1 trillion in the U.S., it is more important than ever that we take a hard look at our high-interest debt. Balancing our needs versus our wants and creating a monthly cash flow plan can help us rid high-interest debt from our lives for good.

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Investing in Something You Don’t Understand

Investments like mutual funds, real estate, stocks, and even cryptocurrencies have made certain people very rich. They have also completely bankrupted many others.

The major difference between these two camps is the education and research that investors have personally put in. If you’re going to invest a great deal of money into anything, you need to fully understand what you’re getting into.

“Get rich quick” plans are often flawed and lead people into financial trouble. Take your time to investigate all of the details of an investment. It’s easy to get drawn in by the allure of high returns and financial freedom, but sometimes the pitfalls are more important to discover. 

Living Without Proper Insurance Coverage

One thing is for certain: None of us know what tomorrow will bring.

Based on that reality, we need to protect ourselves (and the ones we love) from the unexpected. Proper insurance coverage is an excellent place to start.

Here are some important insurance policies to consider:

  • Homeowners or renters
  • Health
  • Long-term disability 

Insurance may feel like a costly payment each month, but without it, you’re exposing yourself and your family to the potential of a much larger financial burden. 

Buying More House Than You Can Afford

When you find a home you love, the temptation to buy can be overwhelming. This is when the house has shifted from a want to an “absolute need” in our minds.

Unfortunately, our dream home can turn into our worst nightmare if we don’t consider the total costs associated with homeownership. It is important to remember that the monthly mortgage payment is only one piece of this pricey puzzle.

Other important homeownership costs include:

  • Closing costs
  • Inspection fees
  • Furnishing the home
  • Utility bills (natural gas, electric, water, cable/internet)
  • Monthly home maintenance 

After you factor in all of those costs, ensure you’re working with a provider that makes the mortgage process simple and easy to understand. Signing up for a confusing mortgage product can ruin your homeownership experience. 

Relying on a Single Income Source

We quite often hear about the importance of diversification regarding our investments. The same line of thinking goes for our income as well. 

If, for some reason, your single income source goes away, you could truly be stuck. An emergency fund will help for some time, but your sense of financial security may be shaken at this point.

Protecting yourself with diversified income streams will help you avoid unneeded financial stress and allow you to build your wealth at the same time. Routes like index fund investing through a taxable brokerage account, rental property investments, or even small-business development are excellent ways to help ensure your income will remain stable during tough times. 

Trial and Error For the Win

No one is perfect. We all make mistakes. The positive side of making financial blunders is that we learn from them.

Even the richest and most successful among us have had their fair share of money problems. We can get back up and try again after we’re knocked down that counts.