5 Rookie Money Mistakes Even Smart People Make
By: Christopher Kokoski
Tags: Budget, Life, Finance, Money, Life Lessons

1. The Sinkhole of Debt

The worst, easiest, and probably most damaging mistake for your financial future is digging yourself deep into debt. Unfortunately, I know this first hand.

I borrowed my way through college, bought a brand new car, a new house, and stacked up credit card debt like I was playing a financial game of Jenga — with a bunch of the bottom pieces missing.

The world runs on debt, so it’s no surprise that, according to 2019 data from the credit bureau Experian, the average American has $90 460 of debt.

Accruing debt early will trap you in an endless cycle of payments and stress. That is no way to live. The good news is that you can avoid all of the downsides with a few money moves.

“You cannot spend your way out of recession or borrow your way out of debt.” — Daniel Hannan

How to avoid this money mistake:

Commit to living beneath your means. This commitment is the most important decision of your financial life.

Cancel subscriptions to services that you don’t use or need (Amazon Prime, Wine-a-Month Club, Nintendo Switch Online, etc.).

Create a simple monthly budget to track expenses.

Don’t spend money that you don’t have in your bank. Consider using cash for all purchases.

Don’t get credit cards (or only use one for an emergency). If you have credit cards, get rid of them.

2. The Shiny New Car Syndrome

Unless you are buying a new car with cash, you are volunteering for debt. Worse, you end up paying more money than your car is worth because of the interest payments and the depreciation of the car as soon as you drive off the lot.

It can be really tempting to purchase a really nice new car as soon as possible. I know the temptation, first hand. Heck, as I mentioned, I gave in to this temptation right after I graduated from college.

However, what starts as a dream can quickly descend into a nightmare of financial obligations.

Vehicles rank as one of the biggest first purchases for most people. As Melissa Thakor and Kristi Hedges point out in their article in Forbes, cars are one of five purchases that will consume 50% of your lifetime earnings.

It makes sense, then, to approach such a purchase with careful thought and planning.

How to avoid this money mistake:

Buy a used or previously-owned vehicle that is within your monthly budget.

You can often find good deals on cars online, at some car dealerships, or through friends and family.

Don’t forget to calculate gas and car maintenance into your budget.

Consider if you really need a car. You might be able to save money by using public transportation, biking, or walking.

3. Home Equity = Free Money

One very tempting mistake is to refinance your house and take cash out to spend. Doing so almost always ends up with a higher long-term cost, no money saved, and unknowing giving ownership over to another person or entity.

Yes, I made this mistake, too, with my first house.

But I learned my lesson with my second house. It was still too big and too expensive, so I downsized for my third house. I pay less per month now than most people pay for their apartments — and I am building equity.

Buying a house is a big decision — it ranks as one of the most expensive purchases most people will make in their lifetimes. Especially when you include property tax, maintenance, and interest.

How to avoid this money mistake:

Do everything you can to avoid refinancing your house.

Tighten your budget, start a side hustle, or cut back expenses elsewhere.

Sell your house and get a new, cheaper one that you can afford.

If you have already refinanced, don’t cash out any equity.

If you have already refinanced and taken out money, use the money to pay off other debts, such as your car or credit cards.

4. Cost + Interest = The Real Cost

One of the biggest money lessons I learned is when I realized the true cost of my purchases. Especially my big purchases such as houses, cars, and appliances.

If you don’t calculate the real cost of your purchases, you can end up spending way more money than you first intended.

How do you figure out the true total cost? You can calculate what you will actually pay with this formula: Cost + Interest=the Real Cost.

According to the U.S. Federal Trade Commission, when you take interest into account, you will likely end up paying twice as much for your product. That’s shocking!

For example, let’s say you want to buy a new washer and dryer. The cost is $1,800 for both appliances at the store. You don’t have that much cash at your disposal, so you agree to pay for the appliances over time with interest.

I’d rather you save up the money to purchase the appliance outright, but we’ll use this as a teachable example.

Let’s look at how you would apply the formula to calculate your real cost. First, you gather the details:

The price of the appliances is $1,800.

We’ll conservatively say that the interest is 15%, which is lower than the average 22% reported by Acorn Fiance.

You plan to pay off the appliance in 12 months.

Next, we plug the details into the formula: Cost ($1,800) + Interest (15% x $1,800, or $162.46 per month) = The Real Cost ($1,949.58)

Yes, you end up paying $1,949.58 for appliances that cost $1,800.

The real costs only surge when you look at bigger expenses like cars and houses.

How to avoid this money mistake:

Save up money so that you can afford to purchase the appliances with cash.

Calculate the true cost of purchases using the provided formula (Cost + Interest = Real Cost) so that you can adjust your budget.

Shop around for the best interest rate.

Purchase only under contracts that offer no interest for 12 or 24 months (and only if you are completely certain that you can pay off the appliance within the established timeframe).

5. Passive Planning Pitfall

If you don’t manage your money, someone else will happily manage it right out of your pockets.

That other person could be a bank, an online marketplace, your kids, your spouse or partner, or even an unscrupulous financial advisor. But someone will almost certainly come along, notice your passive approach to your finances, and gladly take over for you.

What does this mean for you?

It likely means that you will lose money and gain debt. Of course, the situation could be much worse, but I’m not into catastrophizing.

A passive approach to money management is a mistake. Even small actions, taken repeatedly, can have an outsized impact on your finances. Dave Ramsey, bestselling author and financial guru to millions, calls these small but smart money moves “baby steps.”

You can read my interpretation and specific application of these baby steps in the bulleted list below.

How to avoid this money mistake: Start actively managing your money. It may not be easy but commit to taking personal responsibility for your financial present and future.

If you have been passive in the past, here are some small but important steps you can take to start actively managing your money:

Create a simple budget by listing your expenses and income.

Ask a friend, partner, or family member to help hold you accountable to living within your budget.

Set a savings goal. Perhaps you want to save $100 or $300 per month.

Set a meeting with a financial advisor to make a financial plan (financial advisors are not bad as long as you focus on ultimately managing your own money).

If you have debt, pay it off as quickly as possible (the financial advisor can help you with a few strategies).

Avoid refinancing your house.

Avoid buying expensive, new cars.

If you struggle to make house payments, consider selling your house and buying a cheaper one. Or rent out a room to help with mortgage payments.

If you struggle to make your car payments, consider selling your vehicle and purchasing a cheaper one.