How to Avoid Making Dumb Money Mistakes: A Five-Step Plan

×
Even smart people can be dumb about money. Here's how to avoid making money mistakes.It's not hard to find financial illiterates, even among those with college educations. Many people find themselves buying fashionable goodies they don't really need on credit -- and forgetting to save for retirement. How can people avoid these dumb money mistakes?

Financial adviser Bill Losey, who is based in suburban Wilton, N.Y., has a five-point plan for dealing with them. He learned it the hard way: He made many of the same mistakes himself. After he had dug himself out of a hole, he realized that he might be able to use his newfound knowledge to help others.

Here are the five things Losey says you need to do to break those tragic bad-money habits.

1. Make a budget: Most people, even rich people, live without a budget. But don't fret: You don't need a ledger or spreadsheet program to create a budget that works. Simply draw a line down a sheet of paper. On the left side, write down all the money that comes in; on the right, all the money that goes out. "It will show you how much money you are spending on essential items and how much of your income you are actually assigning to frivolous expenses," Losey says. Many of his clients find that they're frittering away between $200 and $800 a month on stuff they don't really need. Once you have found the miscreant bucks, you can use them to pay down debt, pay off your mortgage or save for retirement.
2. Distinguish between needs and desires: Do you really need that iPad 2 or do you just want it? "Do you understand that by borrowing money, you are actually spending away your future earnings?" Losey asks. These decisions can be difficult because emotions get in the way, fed by slick advertising.

3. Understand the difference between good and bad debt: Bad debt is debt incurred on goods that are going to depreciate in value. It's a debt on something that has no potential to make money. Good debts, on the other hand, are debts that can potentially create value, such as a mortgage, a business loan or a student loan. Of course, just because a mortgage is a good debt doesn't mean that you should take out the largest possible loan -- that also can get you in trouble. But this rule does mean that just about everything you buy on your credit card is a bad debt. Use your plastic for the miles and rewards, but pay off the balance due every month.

4. Educate yourself financially: Many people are convinced they are never going to be able to build wealth, and the root cause of this conviction is a lack of education, Losey says. "We live in a society of financially illiterate people," he says. "You have to educate yourself, because in school nobody teaches you how to manage your money." Losey's not talking about taking a course. Instead, he recommends immersing yourself in financial books and magazines. And you can't just read one book, no matter how good Suze Orman is. Things are changing so fast that you have to keep up with the latest developments. Pop quiz: Do you know the difference between an ETF and an ETN?

5. Set financial goals and take them seriously: When people educate themselves about money, they start to see how the financial world really works and they start to explore their own financial potential. Have a conversation with your spouse or a financial advisor to figure out how much money to save and what to do with it. Should you save to buy a house or put money aside for retirement? What about your children's college expenses? Losey receommends the 1% rule: Save 1% of your salary and take one third of any raises and add that to the pot. He says its best to save for multiple goals, but if you're forced to make a choice, save for retirement before a college education. "You can always finance a college degree but you can't finance retirement," Losey says.

Increase your money and finance knowledge from home

Basics of Diversification

Learn one of the fundamental concepts of building a portfolio.

View Course »

Introduction to Value Investing

Are you the next Warren Buffett?

View Course »

Add a Comment

*0 / 3000 Character Maximum

22 Comments

Filter by:
vendelavee

Most Americans are complete idiots when it comes to handling money. They are like little kids, only interested in immediate gratification and to hell with tomorrow. Nobody SAVES anymore! Everybody has to have the newest, the latest, the biggest, the best, the hippest, etc. It's spend, spend, spend with no thought of the consequences or their financial situation. Everybody lives from paycheck to paycheck, with even the people with good paying jobs pushing things to the max without saving. People develop lifestyles that exceed their income. Our economy has become so dependent on people overbuying that the slightest change in buying habits causes an economic collapse.

March 17 2011 at 8:27 AM Report abuse +3 rate up rate down Reply
2 replies to vendelavee's comment
malcolm

I agree 100%....priorities are really messed up..I'm so glad I got a divorce..cheaper to keep'em wasn't cheaper for me. My ex would buy crap because the neighbor next door had one. She'd go behind my back and purchase on credit cards etc then say life is To Short..I would reply life Could Be Real Long If You Owe Every Mother & Brother in Town. I was brought up as a saver not a spender. I know if you don't buy then economy will not pick up..but what you really want>>others to buy while you save. The problem today with this govt's mentality..if you save then you'll end up having to give it to those that don't..it's a catch 22. Why should I watch my hard earned dollars be given to those that want to ride on my coattail. It just doesn't make sense. I'm not a materialistic person, I'll help IF I CAN those that really need it.

March 17 2011 at 10:44 AM Report abuse +2 rate up rate down Reply
orbit7777

You must have a lot of idiots among your acquaintances and/or listen/read too much negative media. I know plenty of people who save ferociously and learn all they can about investment. ALL Americans are NOT dummies despite what the media would like to broadcast to the world. It seems that Obamaitis has spread like a virus throughout this country. Trash America 24/7. How about talking more about people who have been grand successes and maybe it will inspire others to follow suit. For my part, the media is responsible for a lot of over-buying. I don't listen to the garbage. If it isn't some ailment that you are going to die with tomorrow if you don't pay $199 for a year's supply of some supplement or other, it is ad for drugs that half-kill people supposedly trying to address something less threatening. We have highly trained people coming up with ads aimed at enslaving children and teenagers to junk foods that they will suffer from the effects of for the rest of their lives, etc. etc.. On the other hand, some of the media has tried to demonize the older generation that has saved until it hurt all their lives and now has money to enjoy in their old age. Of course, the media enjoys warfare whatever it is about and generational warfare is just another one on their list.

March 17 2011 at 11:28 AM Report abuse +1 rate up rate down Reply
licwinko

Did anyone send this article to Obama and the rest of the government

March 17 2011 at 8:21 AM Report abuse +2 rate up rate down Reply
Sam Das

There are no such thing as a good debt...the only good debt is no debt. Debt trap works in a very mysterious way and consumes most...don't borrow and live frugaly.

March 17 2011 at 1:46 AM Report abuse +4 rate up rate down Reply
Franco

It's the extreme left and the extreme right that are trying to puff themselves into a majority. That is what a peacock does, it puffs itself up like a blow fish with feathers. CENTRIST HERE.

March 16 2011 at 10:58 PM Report abuse -2 rate up rate down Reply
Franco

It's the extreme left and the extreme right that are trying to puff themselves into a majority. That is what a peacock does, it puffs itself up like a blow fish with feathers. CENTRIST HERE.

March 16 2011 at 10:58 PM Report abuse -2 rate up rate down Reply
footballartie

Saving 1% of your salary will get you nowhere unless you are 19 years old

March 16 2011 at 9:00 PM Report abuse +2 rate up rate down Reply
1 reply to footballartie's comment
Colleen

No kidding--it is one thing to have a typo that spells a word wrong but it is deplorable to print an article about finances and screw up such an important number as this!! Probably meant to say 10 is even better. Hopefully nobody takes this information to heart and saves 1% of their income.

March 16 2011 at 9:48 PM Report abuse +1 rate up rate down Reply
landslowrance

For Men Only; Just date women, don't marry them! Nough Said!

March 16 2011 at 7:13 PM Report abuse +4 rate up rate down Reply
2 replies to landslowrance's comment
eangelk922

I Agree ...Same goes for women!

March 17 2011 at 12:46 AM Report abuse -1 rate up rate down Reply
orbit7777

I wonder how many women have worked to put some scoundrel through college and then he left her for some floozy. I am ashamed of many of the so-called "men" among us.

March 17 2011 at 11:32 AM Report abuse +2 rate up rate down Reply
kv37

And by the way, just for the record, the sky is not falling.

March 16 2011 at 7:08 PM Report abuse +1 rate up rate down Reply
pm0501

Here it is folks, just the DOW plunge I was predicting since March 1st. Too late to sell off now, time to hold and wait, wait, wait, wait.... Not likely to sink below 11,000 but theclimb back over 12,000 will take a long time.

March 16 2011 at 2:12 PM Report abuse +1 rate up rate down Reply
1 reply to pm0501's comment
orbit7777

"...the climb back over 12,000 will take a long time." We have heard that so many times until nobody should believe it anymore. Maybe six months is a long time to you or even three months, but that is minute when it comes to investing.

March 17 2011 at 11:40 AM Report abuse +1 rate up rate down Reply
fpfp040408

RNC please read the article above so you do not add to your 22 MILLION debt ! RNC is now due to total financial mismanagement is not paying their bills and hurting many many people = this will cause many to lose their jobs !! Though the Repubs said they were going to solve the unemployment problem !! Repubs have done NOTHING but make the problem WORSE !!

March 16 2011 at 12:26 PM Report abuse -3 rate up rate down Reply
2 replies to fpfp040408's comment
fpfp040408

Repubs are adding to the unemployment problem and making it worse.

March 16 2011 at 12:27 PM Report abuse -3 rate up rate down Reply
karen and brooke

if the dems would stop passing financial regulation and health care, then maybe jobs could be created. but obama and his moratorium on oil and everything else is keeping this country down. down with obama

March 16 2011 at 2:44 PM Report abuse +5 rate up rate down Reply