Rules of Money

I wanted to write about the mistakes I made with money when I was younger. Being a financial planner, I feel foolish writing about my own money mistakes but then I realized it we’re not born naturally good with money, including myself, that is: until I started learning. How would we know what to do with our money unless we learn about it? And most people don’t have the interest. Learning about money is not fun, it’s definitely not as fun as spending it. But I want to write this post so you can recognize your own financial mistakes and try hard to correct them before they negatively affect your life and future.

 Money Mistakes I Made:

Not all investments are created equal: I never realized how much fees I was paying for some of the investments my financial institutions recommended me. I was paying about 2.5% in fees when I realized even with a 1% reduction in fees, it will cause my portfolio to increase by 30% in value 30 years from now when I need the money. That’s a lot easier than trying to get 30% in investment returns.

Make a note to look at your investments and find out how much fees you are paying. It’s called the MER. Don’t just blindly trust what the sales representative at the bank says, since some investments are chosen to help them make more money. However, there are many investments offered at banks that are not recommended to you, which are low in fees and may be a great option – they are called Index Funds.

 Investing in what I did not understand: I’m not proud to say that I’ve purchased stocks in the past because my friends all bought it, or the price kept on going up and looked like it could never come down, or that it paid a great dividend, or because I knew someone who worked at the company and they always had great things to say. None of the factors above should be how you make a decision on what to invest. To invest smartly, you really have to do the research and understand the core of the business and if you don’t have the time or interest to research thoroughly about the companies you invest in, then investing in index funds (which follows the general market) is probably a good idea in order to create the right amount of diversification.

Spending on too many “things:” I’m sure I’m not the only one who likes to spend money on things, because it makes me happy. But does it? Dr. Thomas Gilovich, a psychology professor at Cornell University who has been studying the question of money and happiness over two decades, says

“One of the enemies of happiness is adaptation, we buy things to make us happy, and we succeed. But only for a while. New things are exciting to us at first, but then we adapt to them.”

Rather than buying and accumulating things, Dr. Gilovich suggests we’ll all get more happiness if we spent our money instead on experiences – travelling, going to an art exhibit, or learning a new skill.

Keeping up with the Joneses

With social media, we are constantly bombarded with updates of what our friends are up to – we see pictures of their fancy dinners and exotic vacations, we realize pretty soon we also want that lifestyle. It’s hard to avoid keeping up with the Joneses. If you haven’t heard of the term “hedonic treadmill” – It’s a phenomenon where as a person makes more money, their desires for better things also increases, and when they finally do make that purchase, there is no permanent gain in happiness.

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