6 common money management pitfalls

There are so many aspects to how we choose to spend, manage and invest our money. Far too often, people get tangled in the weeds of money management instead of building a strong foundation.

I’d encourage you to really nail what you think about money management, because life is fluid and things change. It’s important that you want your money to stay invested once it’s invested and not withdrawn to be used for day-to-day life.

There are some common pitfalls people get stuck in when managing their personal finances. A few of these follow, along with my contrarian view and rationale for each one:

1. Debt consolidation

The theory is that if you have multiple debts (cars, personal loans, credit cards) with various interest rates and monthly payments, you consolidate them into one debt and just pay that one debt down.

My contrarian view: you’re not fixing the problem – you’re just moving the debt. The problem is that you overspend. Get a spending plan and pay the debt off.

2. Zero-based budgeting

This is akin to a traditional budget where you allocate very specific amounts from your pay to exact categories (down to the cent!). For example, each time you are paid, each dollar is given a specific job and anything left over is targeted at saving or investing. This approach requires a very close eye and a lot of time reviewing expenses. Imagine trying to achieve a specific target of $0.00 in your account after you’ve allocated money to your expenses!

My contrarian view: Expenses go up and down, and trying to be specific to the dollar can make it exhausting to manage. This is why I like to have a spending plan that allocates money each pay into accounts for specific purposes using rounded-up figures. Give it a few pay cycles and you’ll see these accounts build up. It takes a whole lot of pressure off non-engineer type people, who need to ensure they have money ready when they need it.

3. Credit cards

Many ‘money people’ say that a credit card is a great tool because it allows you to use other people’s (the bank’s) money without paying interest for the month, while your own money can sit in an account receiving interest.

My contrarian view: many people suck at managing money and have no self-control, so paying the debt off within the interest-free period often doesn’t happen. There is a high chance that people will overspend on credit, negating the whole strategy.

‘Doing it for the points’ is also a strategy that seldom works for many, as the potential for overspending and being sloppy means you actually buy the points with the overspent money.

The risk with this overspending is you end up with debt that you struggle to pay off and the cycle starts again and continues.

4. Paying down debt

If you receive a bonus or come into some money, even $1,000, and you have debt, many ‘money people’ will say that you should pay this straight onto your buy-now-pay-later account, personal loan or credit card. You didn’t expect the money anyway and you need to get out of debt!

My contrarian view: don’t pay down the debt. Put this money into a starter emergency fund, out of sight and out of mind. You need to ensure that you have some money behind you in case you find yourself in a financial pickle. Debt is not your biggest problem – your spending behaviour is. This is the start of a behavioural change for those who are stuck in the debt cycle. If something bad happens, you don’t want more debt, so that $1,000 will come in very handy.

5. Investing in shares as soon as you can

The sooner you start, the more money you will have down the track. Compounding interest (and compounding dividend reinvestment) is the true magic of money. These statements can’t be more true. However…

My contrarian view: devote time and energy to building your career before you worry about putting all your money away for the future, even if this means you stay cash heavy until you’ve finished your education, training or get established into your career. Your ability to earn money from your job will outpace any dividends you receive or investment capital you allocate.

Your career is the first investment you should make. It can be helpful to put smaller amounts into investing apps while you build your career to stay focused and engaged with investing, but your career still needs to come first.

6. Investing in quality companies only

It’s common to hear that it’s important to invest in quality companies that have a strong track record, future earnings growth and a moat around them. Spend time researching these companies before you invest in them.

My contrarian view: Who has time to read and understand financial data and then form a view? Not me. With the availability of ETFs nowadays, there is no reason to not diversify. They say ‘don’t put money in the bank – buy the bank’. Don’t buy the bank – buy all of them, and another few hundred companies in one go. This will stop FOMO when you see other single companies that you don’t own doing better than the ones you own.

This is an edited extract from The Quick Start Guide to Investing: Learn how to invest simpler, smarter & sooner by Glen James & Nick Bradley (Wiley $32.95), available at all leading retailers.

Want more? Get our newsletter delivered straight to your inbox! Follow Kochie’s Business Builders on Facebook, Twitter, Instagram, and LinkedIn.

Now read this