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The 5 Most Preventable Financial Mistakes You're (Probably) Making

Don't be an idiot—at least not with your money. Here's how to avoid these all-too-common pitfalls.
The 5 Most Preventable Financial Mistakes You're (Probably) Making

On second and goal, Seattle Seahawks coach Pete Carroll called for a pass instead of sending Marshawn Lynch plowing across the goal line. Ben Affleck hopped a private jet from the Bahamas to Vegas with his nanny instead of his Hollywood-actress wife. Shame-faced Volkswagen execs admitted they’d tweaked the software in their diesel engines to be able to cheat on emissions tests. 

Chances are, you committed some absolutely avoidable, almost comically boneheaded errors this year, too—with your money. And while they may not be on the same level as whiffing on a surefire Super Bowl win, making Jennifer Garner want to divorce you, or losing upwards of $18 billion on a single vehicle recall, they cost you nonetheless. 

So I asked several financial experts to tell us the most expensive preventable mistakes they commonly see committed and what to do to avoid them. Because, let’s face it: The worst kind of mistake is the one you saw coming.

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“The biggest unforced error of all.” That’s how Allan Roth, a fee-only financial adviser, describes the habit of boosting your spending in tandem with your income. Why? Because few people who do it end up any happier. To understand why, imagine stepping into an air-conditioned room on a hot day: At first it feels great. Then it just feels normal.

It all comes down to the most basic rule in the book: When you subtract your expenses from your take-home pay, the larger the amount you’re left with, the better off you are.

The easiest way to get a handle on your spending: Recognize the difference between needs and wants, advises Gary Schatsky, founder of Needs include expenses such as rent, utilities, food, 401(k) contributions, and deposits to your savings account. And if you have money left over? Set your priorities. What would make you happier, that new car or a Caribbean vacation?

Surprisingly, research suggests the vacation might be the better choice. Dan Ariely, Ph.D., a Duke behavioral economics professor, offers three reasons. First, it takes longer than a week to tire of a beautiful beach, so you’ll leave before the initial joy wears off. Second, the vacation memories will provide happiness long after the trip’s over. And third, you won’t be committing yourself to big spending in the future. A new car needs upkeep, insurance, and, in few years, a shiny new replacement to show off. Not so with a great trip—you’ll never see a better one of those in your neighbor’s driveway.

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“Equity ownership is the best path to long-term wealth creation,” says “Money Honey” Maria Bartiromo, host of Mornings with Maria on Fox Business Network. The numbers back her up: Over the long term, stock returns blow away gold, real estate, bonds, you name it. But 2015 stocks have been a losing proposition in the short term: Think of the market’s recent volatility as a temporary sale.

But you should view the market from a much higher altitude. “Evidence shows that millennials are scared of stocks,” says Roth. “They saw Mom and Dad panic in the dot-com bubble, then lived through the real estate and financial bubble. They learned not to invest.”

Consider, briefly, an alternative: A savings account at Chase pays 0.01% interest—at that rate, you’re set to double your money in just 6,932 years. In other words, after inflation, you’re guaranteed to take a loss. Meanwhile, the stock market has averaged roughly 10% annual returns over the past 90 years. Yes, that’s included vicious bear markets in which even diversified portfolios have been cut in half.

But guys in their 20s and 30s have a huge advantage over older investors: time.

“The younger you are, the more risk you can tolerate,” Bartiromo says. Ditto Dan Wiener, CEO of Adviser Investments. He told his son to put all his savings in the Primecap Odyssey Growth Fund (POGRX). In 2009, the kid complained: It had gone straight down month after month for a year and a half. But since then, it’s compounded at 20% a year.

Today, Wiener’s 31-year-old son has doubled his money.

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Anything you’ve heard that makes investing sound fun, exciting, or complicated, forget. Investing’s not easy, but it should be simple. For example, in 2015 those oh-so-clever hedge fund guys were on track to fall short once again. And while some funds have done well, on balance the industry has underperformed a simple stock/bond mix every year since 2002.

So turn off CNBC, says Wiener. Adds Roth, “If you can’t explain it to an 8-year-old, don’t buy it.” Invest in low-fee mutual funds like the Fidelity Spartan Total Market Index Fund, which gives you exposure to the entire U.S. market. Then add the Vanguard FTSE All-World ex-US Index Fund and get the rest of the world. If you want to try and beat the market, consider the Primecap fund Wiener recommended to his son, but realize it will probably underperform in some periods.

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While it’s unlikely you’re purposely funneling extra cash to Uncle Sam, you may be failing to take all the deductions you’re due. This past year, for instance, if you’d donated $400 worth of old clothes and other stuff, that would’ve knocked about $100 off your tax bill, says Gary Schatsky. So hit up the charitable organizations and get receipts for all your donations. This advice gets more important as you make more money: the higher your tax bracket, the bigger the benefit of a deduction.

Also, did you act on that “hot stock tip” your buddy gave you? Assuming you lost money (which is what happens with most hot stock tips), you have a potential tax deduction. “Man up,” says Schatsky: Admit the investing mistake and sell the losing stock. You can then deduct the loss against any taxable market gains or, if you don’t have any, your ordinary income. Invest what’s left in a low-fee fund.

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“The worst scenario is when some guy thinks he’s got a great idea and buys a stock and it doubles or triples, and he think he’s a genius,” Wiener says.

I spend a lot of time talking to financial pros—on TV, at conferences, on the phone—and I’ve noticed that the smartest guys have one thing in common: humility. Roth, for instance, loves to share the lesson he learned early when, with the certainty of youth, he spent all his college graduation money on an investment in gold. His average annual return over 35 years: 1.49%, which means he’s lost money to inflation. Wiener will tell you how he tried to predict the direction of interest rates, got it right a few times, then lost all his profits when his lucky streak ran out. Chris Davis, a prominent mutual fund manager, devotes a wall of his office to plaques commemorating his worst investments so that he and his team remember the mistakes and learn from them. And Warren Buffett is planning not only to give away all his money but also to outsource the distribution, because he thinks someone else will do a better job. Now, that’s humble.

But humility’s sometimes hard-earned. Case in point: As the market marched steadily higher in recent years, it was easy to look at your returns and call yourself brilliant. Then came the August bloodbath, when stocks plunged in a single ugly week. How brilliant did you feel then?

So admit you don’t know what the market’s going to do, or what will happen in your career, or if buying that house will turn out to be a great move. Only then can you focus on the things you can control: paying low fees, saving, and benefiting from compounding. Over time, you’ll do far better than a guy who thinks he’s smarter than the crowd. “The best way to build wealth is to avoid mistakes,” says Roth. “So live below your means, buy boring stock index funds, and don’t let Madison Avenue tell you what car to drive.”

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