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9 (more) financial mistakes that can destroy your net worth

Oct 12, 2018

A while ago, I wrote a post about the financial mistakes that can have a really bad impact on your net worth. I stopped at 9 mistakes, but I knew there were more (and, by the way, we have probably made all of them!). So this is an extension to that list, with an indication of what the family has learned from them.

Spending more than your earn

Last time I wrote about things that can destroy your wealth, I skipped this as I thought it was pretty basic. However, considering we have made that mistake too, it’s worth calling it out: you shouldn’t spend more than you earn. And although it is OK to do it occasionally (eg. an investment, a deposit for something etc) there is one golden rule that needs to be followed at all times: never do it without realising it. That’s why it’s important to track your expenses!

The family’s perspective: Been there, done that! A while ago we were exactly in that situation: we were spending way more than we were earning. We discovered about it just by chance. But we have learned our lessons and in the past 10 years, our ability to save has increased massively.

Thinking purchases are assets

If there is one thing you want to remember from R. Kiyosaki’s book “Rich dad poor dad”, it’s this: assets put money in your pocket; liabilities take money out of your pocket.

If you buy a PlayStation 4 for £200, your net worth doesn’t grow by £200. That PlayStation is not an asset. It does not produce money. If anything, it’s a liability, as it takes money away from you. In fact, your net worth has probably decreased by £200, due to the negative cash flow and the likely non-existent residual value of that PS4.

The same goes for cars, clothes, computers etc.

The Family’s perspective: I have seen many people include the value of their cars as assets when they calculate their net worth. Wrong. They trick themselves. We calculate our net worth by including only the assets that are either liquid or will become liquid (eg. pension). Anything else we own, even if of great value, is not counted in.

Buying discounted items you don’t need

Black Friday anyone? We are attracted to discounts. The impulse to buy becomes stronger the bigger the percentage, to the point that some shifty shops can artificially increase the sales of an item by artificially inflating its RRP, then discount it massively so it returns to the original price. (this practice, for good reason, is unlawful in lots of countries).

It’s obviously ok (and advisable) to try and get a discounted price on something you already wanted to buy. What’s wrong is to buy something which is not needed just because it’s on offer.

The Family’s perspective: I would love to be able to say we never make this mistake! We are getting much better at spending money wisely though!

Not controlling the cost of your investments

Not many people know exactly how much they are paying in fees for their investments. It’s likely to be something between 1 and 2%. It sounds small, doesn’t it?

It isn’t.

Imagine you have 100,000 invested. If the account earned 6% a year and had no fees, in 25 years that would grow to 430,000. But add a 2% fee per year, and in 25 years it would just grow to 260,000.

This is one of the key reasons why ETFs and other passive investments are so popular these days: they keep costs very low.

The family’s perspective We are fully aware of the impact of costs. We invest just 20% of our assets in Funds (which are expensive) and prefer to invest in individual shares to keep costs down. We have also renegotiated fees with our broker, achieving massive savings – more on this in a minute.

Not shopping around / negotiating

In the era of online offers, fixed prices and depersonalised relationships, we have forgotten that it’s still possible to negotiate with real people.

Companies are eager to make customers happy. In fact, many of them have targets to meet around customer satisfaction. Salespeople are eager to sell; customer service are eager to decrease the number of complaints etc. So feel free to pick up the phone and talk to them. Is there any way they can give you a better offer? If they can’t (and even if they can!), shop around. Pitch them against each other. The worst that can happen is that you’ll pay fully price.

The family’s perspective: We use an online broker for our investments. For a long time I thought online businesses, would only have “take it or leave it” fixed prices, equal for everybody, and the best I could do was to move to a competitor. However I called my broker and told them I felt I was spending too much in fees. Instead of waiting for them to offer a discount, I told them what I would be comfortable paying. A negotiation followed, and at the end they agreed to reduce our fees by two thirds.

Not complaining at the right moment

This is not something that necessarily can destroy your net worth – but it’s definitely part of the list of financial mistakes as it links to getting fair value and not wasting your money.

Say you are at the restaurant, and the food is not good. The waiter comes towards you and asks “Is everything ok with your food?”. What would you do?

Quite a few people would probably pretend everything was fine – “All good, thanks!” – only to go home and vent their anger by writing a scathing review on Tripadvisor.

This is a mistake because a) they don’t fix the situation they’re in b) it doesn’t give the business owner the chance to put things right and c) it deprives them from any additional perks (eg a free drink, a discount on the bill etc.)

TL;DR: If you are are not happy with the service you are getting, tell the owner, and give them the opportunity to fix things!

The family’s perspective: We were once in a restaurant, waiting for order of burgers and fries. The waiter came with our meal (and also the two table’s beside us) and after a few minutes he came back to check everything was fine with our food. He asked first the other two tables, and they all responded “perfect, thanks”. Then he asked us, and we said “it’s good thanks, but our fries are cold”. Immediately, the other two tables went “actually, ours are cold too”. Result? The waiter apologised, replaced all the fries with new, hot ones, and he also put them on the house. The other tables owe me. 🙂

Being “too smart” an investor

Buy, sell, repeat. Lots of investors think they can perform better than the market. So they become active. Very active. Too active. Buy, sell, buy, sell… In the end, they perform way worse than other, less frequent, traders. And are probably much more stressed!

Patience is golden when it comes to investments. You may have heard of a study by Fidelity who discovered the best performing portfolios belonged to people that didn’t trade often… because they were dead! And the second best performing group was made of people who had forgotten they had an account with Fidelity!

Although this study is probably just a hoax (or at least Fidelity never confirmed its existence), there are other studies that confirm this. For example this one from University of California examined the behaviour of 66,000 investors and concluded that the more they traded, the lower were their returns.
So when it comes to investing, it may pay to play dead! 🙂

The Family perspective: A while ago I was reviewing our own list of transactions for tax purposes. I didn’t think of myself as a very active trader anymore, and yet I could see way too many transactions. I’ve reduced my activity since.

Hanging out with high spending friends or social group

People you have around influence your behaviour and your well being. Social pressure and the desire to ‘fit in’ can push you to spend more than you would normally do.

If all your friends drive new cars, or live in very expensive houses, or order very expensive wines at dinner, you may feel the need to buy things just to keep up with them. You need to ask yourself whether you really like that life, and if the answer is no, then maybe hang out with different people.

The Family’s perspective: We tend to hang out with people we find interesting (eg. with whom we can have a good laugh or a nice conversation) but we are rarely influenced by their behaviour. So, lots of money, little money – we don’t care. What does matters is that we share the same values. If we are out for dinner with a friend and we see them treating the waiter badly just because “he’s just a waiter”, well, we’re out.

Not having insurance / will

It’s easy to think that nothing wrong will happen…until it does. It’s so much better to take care of things when everything is going well. This is even more important for people with kids (or other dependants), who should make sure their affairs are taken care of, so they don’t have to be a burden to others.

The family’s perspective: We have an health insurance in place, which covers invalidity and other severe conditions. We don’t have a will currently, but we are looking into writing one. We feel this is not super urgent at the moment as we don’t own a house, but we need to look at ways to minimise inheritance tax on other assets (mainly, our investments).

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