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There's a common misconception that highly intelligent people always have their finances under control. However, it's often the case that even the brightest minds and highest income earners struggle to organize their money effectively. Like Biggie said, more money more problems.
Today we’ll cover 3 common yet avoidable mistakes that smart people tend to make when it comes to managing their finances. People make these mistakes, despite their IQ, because it’s not a matter of lacking intelligence or even lacking ambition, but rather a result of overlooking important aspects and succumbing to common misconceptions.
The majority of people are broke because they follow the majority. The truth is, if you want to be financially secure, you have to think and act differently than most people.
In a complex financial world where today’s decisions have long-term consequences, it's important to recognize these 3 crucial mistakes that people make with their hard-earned money.
1) Not living below your means
Social media can make it seem like everyone you know is living a lavish lifestyle of nonstop fun. When scrolling through your feed, you may feel pressured to keep up with the flashy trends and fancy activities of others. But here's the trick- by living below your means and following a strategic financial plan, it actually becomes easier to resist the urge to show off or impress others. Why? Because you have a clear path to follow for achieving your most important life goals.
Many young adults see nothing wrong with living beyond their means today, relying on future earnings to make up for it. In our consumer-driven society, we’re constantly encouraged to spend money and take on debt. In fact, ever since President Obama nationalized the student loan industry (1) in 2010, the government has actively supported the idea of teenagers borrowing money for higher education, betting on future income to cover the debt.
The problem with this type of thinking is that you’re developing bad habits. More often than not, when you start earning more money, you also start spending more money. Some people may disagree with this, but if you can’t save money when earning $50,000, you probably won't have the discipline to save money when earning $500,000. Notably, a recent survey of US consumers found that 51% of people earning more than $100,000 per year reported (2) living paycheck to paycheck in December 2022.
2) Taking financial advice from the wrong people
We saw a lot of this during the Covid-19 stock market mania. Teenagers were promoting shitcoins (3) and NFTs (4) online, and uncertain laws surrounding crypto tempted some celebrities (5) and major organizations to get in on the fun of promoting these products as “investments.” Random reddit forums promoted failing companies and (kind of) managed to create a whole new asset class known as meme stocks.
Now I’m not saying that people labeled as “experts” are the best sources of information, but I am saying to be wary of any info you receive, whether it’s financial, political, or anything else. Make sure you have reason to trust the source other than their strong online presence or their athletic skill. You wouldn’t listen to Lebron James about politics, would you? When it comes to your finances, it’s important to get your advice from someone who understands your personal situation, is properly registered to give financial advice, and is held to a higher legal standard than random folks online.
3) Buying financial products you don’t understand
When you see others making money in some new investment, it’s certainly wise to take notice. But if you, like myself, can’t see the value of owning a picture of a digital ape (6) on your phone, then you shouldn’t throw your money into NFTs. If you’re putting money into a product that you don’t really understand, are you really investing or are you just gambling?
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