6 Financial Mistakes We Don't Make Anymore (and 2 We Still Do)
When I was a recent college graduate working at my first real job, my friends and I quickly realized that making the minimum payment on our credit cards meant carrying a balance for a long time. We learned to make heftier payments and avoid consumer credit altogether. (See also: Good Habits of Responsible Credit Card Users)
A few years later, when my employer transferred much of its workforce to a larger city, I noticed that houses in our town were difficult to sell, particularly at prices that would return a substantial gain to homeowners. That experience taught me to be conservative when buying a house and not count on a quick sale, helping me avoid problems during the housing crisis later.
But there has always been more to grasp, especially as my personal circumstances evolved from single to married with children and the economy changed, tax laws were revised, new financial products introduced, etc. Basic principles remained the same, but each new phase required navigating more complex challenges and learning from more recent missteps.
Like me, many Americans are learning from the past and moving toward better financial stewardship, according to a nationwide survey by Citi that measures Americans' attitudes towards the economy. Specifically, the majority of people surveyed report the following changes:
- Establishing and maintaining adherence to a budget
- Saving money in an emergency fund
- Paying off credit card balances every month
- Developing a long-term financial plan
In addition, we are generally more optimistic about our financial futures in 2013 than when the first pulse was taken in 2009.
But Director of Financial Education for Citi's Personal Wealth Management, Jonathan Clements, cautions that "national foolishness" has not yet come to an end. We are not masters of our individual and collective financial destinies.
Sure, household debt is down 12% since its peak during the third quarter of 2008. However, this decline is due in part to loan defaults and home foreclosures that erased debt, not fiscally responsible Americans applying disposable income to loan balances. In addition, student loan debt is rising. Further, student loan delinquencies have grown from 7.55% in the second quarter of 2008 to 10.9% in 2013.
Jonathan points out that Americans who are more upbeat about the economy tend to have such an attitude because of personal financial circumstances rather than broader notions of increased prosperity for all. That is, those who are employed today tend to have a more positive outlook than when they were unemployed and unsure of their financial futures during the Great Recession. As unemployment numbers declined, countenances brightened.
Similarly, MBA professor and portfolio manager Barbara Friedberg celebrates the decline in credit card delinquencies while expressing concerns about credit card balances. She indicates we may have shown slight improvements in financial discipline without making more substantial changes.
According to Barbara, "The recency behavioral finance bias suggests that we weight recent events more heavily than those in the past. If that's the case, then we're saving more and paying our bills because we remember the recent financial crises. This theory also predicts that once we forget about the financial problems of the recent past, we'll all go back to over spending, over borrowing, and just living beyond our means." (See also: 4 Ways Credit Cards Manipulate You Into More Debt)
Still, making adjustments to our current reality is a good first step in learning from our mistakes.
Mistakes We Won't Make Again
After thinking about mistakes that I won't make again, I spoke with Jonathan and folks at Citi about what Americans may have learned in the past few years. Here are items that made our list.
1. Assuming a High-Paying Job Will Always Be Available
Those unemployed during the most recent recession have learned that finding a high-paying job is difficult if not impossible. Many have taken salary and wage cuts in order to pay current bills.
2. Assuming Stock Market Investments Will Earn Double-Digit Returns
We've seen that the stock market can be volatile and steady returns are not guaranteed. People are starting to develop long-term plans considering this new reality.
3. Counting on a Modest Retirement Nest Egg
We now realize that we need to save much more and/or develop and maintain an income from a full-time position, part-time work, or business to support ourselves through much of our lifetimes. (See also: 6 Ways to Avoid Running Out of Money in Retirement)
4. Not Having Enough Cash
We realize that we need to have cash available to service debt, handle major expenses (such as home repairs or auto purchases), and capitalize on down markets (allowing us to buy low and sell high).
5. Spending Impulsively
The prevalence of mobile apps to monitor bank balances has helped curb spending. The constant awareness of how our habits affect financial solvency is beginning to impact our decisions.
6. Thinking That Spending More Means Getting More
For example, Americans in general and millennials in particular are increasingly opting out of expensive cable television packages in favor of lower cost streaming subscriptions. Similarly, teens and their frugal parents are shopping at Goodwill or thrift shops rather than name-brand stores. Frugality has become more in vogue for certain purchases.
Mistakes We Still Make
Though we are more happily coping with the new normal today and embracing greater frugality than in the recent past, we are persisting in making a number of finance mistakes.
1. Not Saving Enough
2. Chasing Investment Performance
We still have a tendency to put our dollars into investments that have recently experienced high returns. Jonathan points to potential buyers re-engaging in house bidding wars as one example.
Recognizing our errors is the first step in correcting them. But we also need to look beyond our present circumstances and avoid past mistakes as we prepare for the future.
What financial mistakes have you stopped making?