10 Mistakes That Keep Even Smart People Dirt Broke
Find out the 10 common mistakes even smart people make that keep them from achieving great wealth and financial freedom, along with a few lessons in behavioral economics that will help you avoid them.
Even "smart" people make dumb money moves.
In fact, it's the straight-A students that typically struggle with achieving financial freedom, because of certain characteristics and traits they possess.
Often times, they don't even know they're standing in their own way.
But, hey, it isn't your fault.
Most of our financial moves are governed by principles collectively known as "behavioral economics"—the study of how psychology drives economic decision-making.
Often, our money decisions are driven by emotion rather than rational thinking—no matter how smart we are!
For example, even the brainiacs among us can succumb to panic and sell stocks during a brief market downturn, rather than ride it out.
Or…we'll hold onto falling stocks for too long because we're afraid to lock in our paper losses.
Even decisions like buying that dream car with the price tag that could literally pay for a college tuition, but you rent your home. How many of us have been there? I know I have. And I learned from it.
The good news is that you can avoid common financial slip-ups—many of which will, literally, cost you—by knowing the psychology behind the financial decisions you are making.
This awareness can lead you to change your behavior in ways that will ultimately put you ahead in the money game, and enrich your financial future.
We've identified the top 10 money pitfalls even "smart" individuals need to steer clear of.
By the end of this article, you should be able to identify the beliefs and habits that are preventing you from thriving financially.
Better yet, you'll have the confidence to take concrete steps toward altering the way you think and act with regard to money—making the changes needed to gain control of your financial future.
And now for the big 10…
1. You're indecisive
Some of our biggest financial mistakes come as a result of the actions we don't take.
Or, in another form, the actions we do take—but at the wrong times.
Think about an opportunity you missed.
What would it have meant for your life had you just taken the leap?
If you had started investing in your 401(k) the very first time you started working, for example, you'd probably have thousands of dollars already stockpiled for retirement.
The good news is that you're not alone, and there is a way to push past the natural tendency to do nothing at all.
Hesitation doesn't necessarily mean you're doomed. Even a financial giant like Warren Buffett (who has one of the highest financial IQs in recent memory, not to mention lots and lots—and lots—of money) has missed out on massive gains because of the moves he didn't make.
For example, the Sage of Omaha has famously declared he would never sell his shares in Coca-Cola, but it took 15 years for the stock's value to increase beyond its value in 1998.
Had he sold his Coke shares and invested those same dollars in other stocks, his bank account would have been overflowing with cash!
Buffet also lost out on billions of dollars when he stopped buying additional Walmart shares in the 1990s.
And don't even get him started on Amazon.
At Berkshire Hathaway's annual meeting in May 2017, Buffett said he wished he had invested in Amazon instead of IBM as his value tech stock.
The fact that he was "too dumb" to have seen the potential in the e-commerce giant, he said, "cost people a lot of money."
Being honest with yourself, like Buffett is, by recognizing when you're just being indecisive—or have simply made the wrong decision—will help you take the next leap forward when it comes to savvy money decisions.
Push past fear and embrace change by fueling yourself with facts. To overcome indecisiveness, it helps to understand why you aren't acting on things that will lead to financial freedom down the road.
Typically, the higher the stakes, the more resistant we are to deviating from our familiar modus operandi.
Just like Buffet—his avoidance of tech stocks hurt his bottom line.
And no one wants to have to face the regret of being wrong.
But sometimes you need to take action anyway, as long as you are confident it's the smart move.
Problem is, the less information you have, the more confused you are—and confused people often fall victim to "decision paralysis."
Beat indecision and inaction by gathering all the facts. To encourage action, research your next move carefully to gain a bit more direction and clarity, so you don't end up too confused to take action.
Then, give yourself a binary choice.
Too many options can be confounding, so use a process of elimination to narrow your options down to two.
The fewer options you have, the clearer the solution becomes and the easier it is to act.
The key is to come up with a concrete plan for your next step, financially.
Take it one step at a time, and you'll master your money in no time while also gaining confidence.
2. You don't realize that every dollar spends the same
People tend to treat money differently depending on what it's for, where they keep it, or where they get it.
I bet you do it too.
You'd never use your paycheck to pay for $500 shoes, but if someone gave you a $500 gift card to Barney's, I bet you wouldn't think twice about treating yourself to a new pair.
This is not always a bad thing, since making ourselves happy is what makes life worth living, but it can lead to poor financial decisions when you attach a certain emotional value to money because of the story you've told yourself about it.
For example, you may not want to spend your emergency fund (even when it can get you out of a jam, like debt or taxes) because you believe it should only be used for a "real" emergency.
Or maybe you're afraid to choose an investment allocation for your retirement fund because you're scared of losing money—but you spend your entire paycheck without even thinking about it.
Resolve to treat all your money equally. It doesn't matter how you got it—whether you earned it, inherited it, or won the lottery.
Money is money. A dollar set aside for retirement or education is not more sacred than a dollar from your savings account or travel fund.
And don't let where you store that money (whether in a savings account or an easily accessible wallet) change how quick you are to spend it.
When you view each dollar as equal to every other, you're less likely to spend money recklessly, and, conversely, you're not too tight-fisted to a point that you miss out on big wins or opportunities.
3. You diversify before you optimize
With so many priorities lined up for our money, it's hard to double down on ONE money goal, such as paying off those pesky student loans or saving for a down payment on a house.
The problem is, when you don't achieve results in one area, you might begin to think that you're not good with money at all.
And without a firm resolve and focused concentration, you're unlikely to achieve any of your financial goals.
Then there's the problem of achieving success in one area (you're rocking your 401(k)) and assuming you're automatically going to be an investment genius, too.
The issue there is that—surprise!—nobody is a jack of all trades.
Different money goals require different skills, so be willing to learn.
And let's not forget about the goal hoppers—they achieve success (or reach a brick wall) with one money goal, so they immediately move on to something else.
Doing so makes it hard to achieve any significant success and could mean missing out on a lucrative opportunity.
So where does that leave you? Glad you asked…
Beat the best by embracing small tweaks. You don't need to change your entire lifestyle in a day. Instead, come up with a tweak that will help you get closer to achieving a specific money goal or mastering a specific aspect of your finances, and incorporate it into your routine.
So if you're having trouble saving for your next vacation, experiment with tools like automatic withdrawal to make saving money toward your next travel destination super easy.
4. You're an opportunist instead of a strategist
Many smart people get distracted by opportunity—which may not be good for you.
An opportunist works for short-term wins as opposed to playing the long game.
Strategists, on the other hand, don't say yes to anything that doesn't serve their goal.
The most successful corporations seize opportunities that make the best use of the resources and capabilities they already have.
To beat the opportunist mindset, learn to take it step-by-step. Set one specific measurable outcome (i.e., paying down your student loans).
Create a flexible plan of attack using the resources available to you.
Got a car? How about driving for Uber or Lyft at night and on weekends to make extra money to pay those loans off quicker?
Stick your plan, say yes to opportunities that serve your goal, and don't get distracted by anything else (you might have to turn down dinner invites for a while—but it'll all be worth it when you achieve your goal).
5. Your past experiences dictate your money moves
Our past experiences taint our ability to make sound, objective decisions in the present.
For example, you may not want to invest in the stock market because you previously experienced losing your hard-earned cash through an unfortunate investment decision.
Conversely, you could be pouring money down the drain toward a doomed enterprise simply because it paid you some dividends a long time ago, and you're still hoping it will do the same, despite all the signs to the contrary.
Shift your mindset by understanding that every situation is different. Look at your current situation as neutral—neither good nor bad.
Don't tell yourself a preconceived story based on your past experiences.
Instead, let only the present facts influence your decisions.
That's not to say that you shouldn't learn from your money mistakes. Just don't let them frighten you into inaction.
6. You have LBS (Leaky Budget Syndrome)
Even the smartest people we know are prone to overextending their budget.
From impulsive buys ("I need a new winter coat and boots"—uttered in July) to unexpected costs (the car broke down and the brakes need to be replaced) to unintended wastefulness (think of all the expensive produce rotting in your fridge), we all experience "budget leaks."
Plug up those budget leaks by tracking your spending. Use pen and paper or software like Mint, Quicken, or YNAB to identify where, what, and how you spend your money—right down to the last penny.
After a few months, you'll be able to see where all your hard-earned cash is going and how you can budget better moving forward.
Maybe it's time to cut back on your daily Starbucks habit, or brown bag it a few times a week.
For problem categories, you might want to switch to cash-only payments—and stop spending when the cash runs out.
7. You fall prey to the ego trap
Is your ego running amok, seizing control of your financial decisions?
Here are some telltale signs:
- Do you operate outside your comfort zone?
- Are you a perfectionist who likes to act alone, without consulting others?
- Have people told you you're too smart for your own good, or that you overcomplicate things that should be simple?
Letting your ego drive your finances is a sure way to end up with an empty wallet.
Beat the ego by adopting a "student" mindset. Admit that there are areas you aren't an expert in (including finances), and commit to learning more.
Avoid "confirmation bias" by surrounding yourself with people more experienced and successful than you.
So if you want to invest better, find friends who are known for their investment prowess.
Consult them on the tough decisions and seek advice instead of winging it when your ego tells you to.
This one personally resonates with me because after 20 years of writing and researching about credit and finance, I sometimes start to think there's nothing else I can learn, but my ego is proven wrong, time and time again.
8. You think that you're logical
Behavioral economists have found that most of our financial decisions are emotional in nature.
Only after we've decided on a course to take do we form a logical argument to justify our already finalized decision.
So we think we are being rational, but oftentimes, we are just deluding ourselves.
For example, you may decide to splurge on a weekend away with your friends and rationalize that, with all the work stress you've been under, you deserve it.
But if what's really stressing you out isn't your job but your out-of-control credit card bills, then your getaway simply won't do you any favors.
Institute a waiting period to avoid impulse decisions. This is especially important before makingany major financial moves.
And get in the habit of being your own devil's advocate.
Try seeing things from both sides and arguing against every big financial decision before taking any action.
9. You wear one hat at the expense of others
To accumulate wealth and achieve financial freedom, you'll need to wear multiple hats—and be equally good at wearing each of them.
Some smart people wear the "visionary" hat well.
They've got lots of ideas and they're typically "big-picture" people.
The problem occurs when your finances don't support all your big ideas.
Then you must be willing to wear the other hats of "investor," "ruthless financial advisor," or—gasp!—"frugal saver."
Learn to wear may hats—and prosper. Wearing many hats means being open to new experiences and different points of view when it comes to money management—and showing a bit of panache and savvy for each.
After all, committing yourself to financial freedom isn't a singular job.
Take, for instance, the saying:
In order to make money, you must spend money.
That's all well and good, but it's important to know how to spend, when to spend, and when to tighten the reins—switching hats accordingly, so to speak.
Become a master of dollars and cents style. In keeping with the hat analogy, it's also crucial to understand how to transition your money approaches—the same way you use various hats to transition between looks, depending on the situation.
In fashion and finances, adaptability is everything—knowing when, how, and where to transition your spending, saving, and/or investing styles will leave you with a beautiful bank account.
10. You're allergic to money
Most people have a terrible relationship with money (especially those who are not used to having it).
In some cases, they end up having an "allergy" to money.
This weird "money allergy" usually stems from their money beliefs, such as thinking that money is "dirty" or the "root of all evil."
Others feel that money is scarce or comes with a responsibility they can't escape.
Unfortunately, these money beliefs can prevent you from achieving your important life goals.
Identify your own money beliefs. Write down every single thing you believe about earning, multiplying, and keeping money.
Think back to your own history with money, and how your parents approached money.
Make sure to write each one down, then challenge every single one of these beliefs.
Your goal is to gain comfort with dealing with money and view it as a useful tool to achieving your goals.
And speaking of achieving goals, since 1998, through my company, CreditLoan, I've been teaching consumers the ins and outs on a wide range of financial topics while providing them with the tools, advice, and solutions they need to achieve their financial goals.
Chart a course for financial success by avoiding common mistakes
Correcting money mistakes is a learned behavior that involves taking a long, hard look in the mirror and closely examining your money habits and beliefs.
If you know what your own behavioral economics are, you can pick apart the negative beliefs and behaviors that are keeping you from achieving wealth.
You'll also be able to establish and cultivate beliefs that are conducive to financial success, and behaviors that give you a golden touch when it comes to money.
Was there a time when you felt like you were getting nowhere when it came to money?
Like a supposedly smart person who keeps making questionable money moves?
Have you overcome any of these common pitfalls by applying your own hacks and tricks?
What worked and what didn't?
Any personal stories (or nightmares) to share with the rest of us?
Let us know in the comments below!