MONEY financial advice

The 2 Biggest Money Mistakes

70% of Americans are prone to one or the other. Here's how to correct them.

Imagine coming to America as a young adult with a few hundred dollars in your pocket and, by the time you’re 34, selling your company to a Fortune 500 company for over $100 million.

How do you think you would feel? Ecstatic, jubilant, ready to reward yourself?

The answer for me was none of the above. My wife and I discussed celebrating by taking a multi-month vacation in Greece with our young daughters. Sadly, I was too afraid about the future to spoil myself and our family. The next few years I tracked our net worth regularly and watched our spending like a hawk. I was not behaving the way I would tell any of my friends to act in a similar situation.

I’ve spent my entire career helping people understand their financial lives, and helping them to make smarter choices. I have learned over time that people’s relationship with money is deeply personal. In our internal financial lives we each have a “protector” and a “pleasure seeker” battling it out and one usually wins out. Because of this, we find ourselves repeatedly making the same financial mistakes. Rather than simply learning a lesson and moving on, we keep repeating the same mistakes until we learn to regulate both perspectives.

According to our own research, 70% of people in the U.S. approach money from a place of abundance (pleasure seeker) or one of scarcity (protector). That has some big implications when it comes to making financial choices, and ultimately how we end up living our entire lives. So let’s discuss the two biggest mistakes, their consequences, and what you can do about it:

1. Spending money too casually: The pleasure seeker

It’s easy to spend money and it’s hard to save it, because spending provides instant gratification and saving is a deferred reward. Many people would rather have the certainty of feeling good now than the possibility of feeling good later. The early warning signs of this pattern are high credit balances on your credit cards, low savings for retirement, and inadequate saving for your kid’s education or your rainy-day fund. More subtle but important markers are whether you avoid looking at your credit card bills, or if you don’t have a net worth summary that you update at least twice a year. We all have pleasure seekers inside us, but perhaps you are allowing this trait to overwhelm your need to save and protect.

2. Spending money too carefully: The protector

This might seem like a very strange bad habit. But despite what you might pick up from the media, a large portion of society uses money for security and doesn’t enjoy success enough. These protectors feel so good seeing their net worth increase that they would rather defer any spending for as long as possible. This might maximize their net worth but lead to an under-optimized life. The following are early warning signs: updating and reviewing your net worth summary all the time, feeling guilty after shopping, and seldom feeling like you can spoil yourself. While we all need money to keep us safe from bad outcomes, some folks let their protector take too dominant a role.

As in all things, balance is the key to a stable and healthy relationship with money. That often comes with time and experience, but first you need to be aware that the choices you make are harming you. Here’s a three-step plan to taking control of your bad money habits, whichever camp you fall into:

  • Step 1: Identify if you have a bad habit that has to change. How often do you regret your financial choices? If you feel trapped by money rather than in control of it, it might be time to acknowledge you have to change something.
  • Step 2: Identify whether you are primarily a pleasure seeker or a protector. No doubt you have largely justified why you act the way you do. But if you have not learned how to control your inner pleasure seeker or protector then you will keep repeating a pattern that is hurting you financially.
  • Step 3: Take action. The easiest way to get rid of a bad habit is to replace it with a good one.

After determining if you are a pleasure seeker or a protector, here’s what to do next.

If you spend too casually:

  • Review your net worth. Take all your assets and then subtract all your debt. Create a simple way to update this regularly. Set realistic goals of how much you would like to have in savings five, 10 and 15 years from now. Create a specific list of what those savings would provide you. Take pictures, link articles or write down specifics in order to make what you’re saving for tangible and rewarding.
  • Establish a realistic monthly budget that takes into account your habits but establishes a monthly amount to deferred responsibilities like building an emergency fund or amassing a down payment on a house. Match the savings to your targets for those longer-term goals.
  • Do something that forces you to think about what you are giving up every time you are about to spend money. Some folks wrap a rubber band or a piece of bright tape around their credit cards. Some wear a reminder wristband. Do something that will remind you every time you are about to spend that you are taking away from your long-term savings and what your savings will get you. This habit of thinking about the consequence of what you are spending will train your protector to become more dominant.

If you are too careful with spending:

  • Establish your priorities. You no doubt have a very good understanding of your net worth, but have you clearly articulated what you are saving the money for? If you had free rein to spend all your money over the coming 12 months, guilt free, what would you choose to do? Create a list of things you buy that bring you the most joy: vacations, dinners out, a nice car, new shoes—whatever makes you feel good.
  • Establish a reasonable budget for guilt-free spending that doesn’t compromise your longer-term goals. Have an annual number to spend for some of the things that bring you joy. Rewarding yourself in the here and now matters a lot and relieves some of the pressure you place on building your net worth.
  • Limit yourself to reviewing your net worth on a pre-set schedule. For most people, four times a year is more than enough. Also, create a simple reminder on your phone every week to see what you did with your “spoiling budget.” And once you’ve spent the money, take time to think about, and appreciate, what you got. Do not focus on what you spent!

Life is short. I have seen people struggle financially in their later years and have to be supported by their children. I have also seen parents sacrifice their entire lives to build a comfortable nest egg, only to watch their kids spend the money buying the things the parents never bought themselves. The good news is that learning from past experiences can start right now. Thanks to my mistake a decade ago, I take every opportunity to spend time with my family, max out my vacation time, and relish our time together. I’m not sure I would have gotten there without the lessons of the past.

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Joe Duran, CFA, is CEO and founder of United Capital. He believes that the only way to improve people’s lives is to design a disciplined process that offers investors a true understanding about how the choices they make affect their financial lives. Duran is a three-time author; his latest book is The Money Code: Improve Your Entire Financial Life Right Now.

MONEY financial advice

How to Manage Your Finances Without an Adviser

woman painting $20 bill on wall with roller
Getty Images

A financial professional explains how to avoid needing his help.

As a financial planner, I’d like to let you in on a little secret: Everyone has the ability to manage their finances on their own. In theory.

The information and knowledge you need to make the right financial decisions is at your fingertips. You simply need to do three things: learn, apply and manage. Let me explain:

Learn the Fundamentals

There is a ton of technical financial information out there, and it takes time to learn what you need to know. The Internet, though, has made this process easier.

You need to focus your attention on these areas:

  • General principles of financial planning
  • Insurance
  • Investing
  • Taxes
  • Retirement
  • Estate planning

If you look at those areas and feel overwhelmed, I understand. It’s a lot.

On the other hand, if you look at that list and feel that you know it all, I’d suggest rethinking that. No one out there knows it all. There is always something else to learn.

Again, the Internet makes finding this information easier, but there’s a catch. You need to carefully validate the sources of the information you collect before accepting it as true and accurate. Many financial blogs and podcasts can be extremely valuable, but others are based more on personal experience than on years of education, training, and professional work. Personal stories can help you tune in to your own situation, but they might not reflect a comprehensive understanding of finance or relevant laws and regulations.

Read next: How Do I Figure Out My Financial Priorities?

Wise Bread and Daily Finance offer advice from both bloggers and professional advisers. Bankrate has calculators that help you visualize how various savings and debt repayment strategies will impact your finances. Play with the numbers and notice how a slight adjustment to a periodic savings amount or interest rate can completely alter your results.

Apply Your Knowledge

Knowing that you need to budget and understand your cash flow is one thing, but actually doing it is another.

Start with the basics. You need to track all your money coming in (your total income) and everything going out (your fixed expenses and your discretionary spending). Once you know what your money is doing, you can set up a budget to help keep you on track from month to month. From there, you can determine what you’ll contribute to savings and investments. Make those transfers automatic.

After you set up the basics, your financial planning needs get more complicated. For example, you might start out by calculating how much money you need in your emergency reserve account, but then realize that you also need to figure out how much to save for retirement. Additionally, anyone earning income is exposed to various risks, including becoming disabled, so you’ll want to find the best way to protect yourself.

It’s all about understanding your unique circumstances, applying appropriate strategies and setting up systems to help you stay on track. There’s no right answer—only the answer that works and makes sense for you.

Much of what applying your knowledge looks like in practice is simply taking action and holding yourself accountable. It can help to write out your financial goals and check in with those regularly to remind yourself why you’re working hard to manage your money.

And to make sure you stay on the right track over time, you should set up check-in points periodically throughout the year. For example, you might want to revisit your budget monthly, your investments quarterly, and your overall financial plan annually.

Manage Your Behavior

This is by far the most challenging piece, because emotions often cloud our thinking. It can feel simple to manage our own money when times are good. However, we often fall prey to recency bias—assuming that what happened in the recent past will continue into the future. Confidence (or fear) projected into the future can distract us from making prudent decisions.

When things get stressful, you get distracted. Other things take up your time, energy, and attention, diverting you from managing your finances.

As you continue to learn, you might also find yourself confused by a myriad of opinions and different ways of doing things. Decision fatigue can set in. It can become extremely challenging to make even the simplest of decisions as you start questioning yourself and your knowledge.

After all, there’s a lot on the line—your money and your life. You don’t want to make a mistake, and you want to do everything you can to maximize your financial resources. Your decision-making can become clouded by fear, and it can just as easily be affected by greed.

To successfully manage your own money, you need to manage your own behavior. That means taking small, consistent actions over time. You need to create your plan of action and stick with it through market ups and downs, through everything from personal struggles to professional triumphs.

Why Work With a Financial Planner Anyway

All that being said, it’s worth reiterating that managing your own behavior is the most difficult part of managing your personal finances. Most people cannot do it successfully.

Most mistakes happen when people depart from rational decisionmaking with their finances. Hopes, dreams, fears, and other emotions start creeping in. We all do this.

It’s easier to manage our behavior when we have an outside perspective. While we can’t necessarily see the bigger picture when we’re immersed in it, someone looking in from the outside, from an objective point of view, may be able to help steer us in the right direction. That’s where a professional financial planner can add a lot of value.

It’s possible to manage your own money, but it’s not probable that everyone can do it successfully. There is a reason why even some financial planners have financial planners. Everything is easier when you have someone who can help hold you accountable. A professional financial planner may be able to help you find more success than you would achieve on your own—even if you know all the right money moves to make.

Get started on your own by educating yourself, applying your knowledge, and practicing smart (rational!) behavior around money management. Then, for long-term success in avoiding behavioral traps and pitfalls, consider working with a financial adviser. Carl Richards put it bluntly but accurately: It’s well worth it to “put someone between you and stupid.”

Eric Roberge, CFP, is the founder of Beyond Your Hammock, where he works virtually with professionals in their 20s and 30s, helping them use money as a tool to live a life they love. Through personalized coaching, Eric helps clients organize their finances, set goals, and invest for the future.

MONEY Financial Planning

What’s Your Biggest Money Worry?

Do you worry more about repaying your student loans or saving for retirement?

We asked people in Times Square what’s their biggest money worry. Some said they worried about paying back their student loans–unlike the grads of this university, who got their degree for free–while some worry more about saving for retirement. One man even told us his biggest worry about money is how it can “control your mind.”

Read next: This Worry Keeps 62% of Americans Up at Night

MONEY charitable giving

4 Steps to Giving Money Away…Like Bill and Melinda Gates

How do you donate money wisely? A financial adviser breaks it down.

“How should a client think about giving money to charity?” was the question my colleague posted on an adviser forum.

I should know this, I thought.

But since I couldn’t coherently answer my colleague’s question, it seemed like a good time to review the latest thinking on the subject and update what I tell clients.

Turns out, there are four steps to giving money away. Even better, they’re pretty easy.

1. Develop a donation strategy.

That’s right, a donation strategy. That might sound like off-putting jargon, but we all have a donation strategy, whether or not it’s fully baked and conscious.

For instance, a lot of people I’ve worked with seem to give money to anyone who asks. A lot of people give money to their college. For some people, the more desperate an emotional appeal, the more likely they’ll give. For most people it’s more hodgepodge than a strategy.

A lot of charities are de-emphasizing outreach that seeks donations by evoking pity. The poverty-stricken face of a child who seems to be saying, “Just donate to this charity and my suffering will be alleviated,” may be on the way out. After seeing enough of these ads, empathy overload kicks and you start to wonder, are these kids being exploited?

Celebrity causes are changing too. This parody is a plea for Africans to send radiators to freezing Norwegians. Hey, frostbite kills, too!

Instead of pity and celebrity identification, charities are trying to appeal to people based on effectiveness.

Develop your donation strategy by asking these two questions:

  • What problem am I trying to solve?
  • What do I value?

To make it easier, you probably don’t even have to answer both questions. If one seems easy, just start there.

Next, consider the balance between what’s near to you (your church, your alma mater) vs. what’s far (ending extreme poverty, disaster relief). You might have different ideas for each.

Here’s what Bill and Melinda Gates did. First they thought, and I’m paraphrasing here, “What problems is capitalism crappy at solving?” The thing that bothered them the most was inequity. Globally, they asked, “What’s the biggest inequity?” And for them that it was children dying and/or not getting enough nutrition to develop.

Locally they took a different approach and said, “Okay, our educations really helped us. We want to help alleviate the inequities in the US education system.”

If you want help pinpointing global issues, Philanthropedia has thirty-six different causes. You can weigh the causes against each other and figure out which is most important to you.

Close to home, if you’re looking for ideas beyond what initially comes to mind, it makes sense to check out your local community foundation. These are organizations that help budding philanthropists figure out their donation strategy. You can find them quickly through the Council on Foundations.

2. Figure out which charities will fulfill your strategy.

Next, explore charities that prove they are effective at having an impact in the areas you value.

Figuring out your local charities might be easier than the global charities. When you give money close to home, you can pretty easily get a handle on how effective the organization is.

When you give away globally, it helps to have third parties evaluate which charities are the best. They take out their measuring sticks and examine the numbers. They research: What charities fulfill their missions in the most efficient way?

Three websites that summarize data and report on the effectiveness of specific charities are:

It’s a good idea at this stage to use your intuition as well. Melinda Gates said, “We come at things from different angles, and I actually think that’s really good. So Bill can look at the big data and say, ‘I want to act based on these global statistics.’ For me, I come at it from intuition. I meet with lots of people on the ground, and Bill’s taught me to take that and read up to the global data and see if they match.

“And I think what I’ve taught him is to take that data and meet with people on the ground to understand, Can you actually deliver that vaccine? Can you get a woman to accept those polio drops in her child’s mouth? Because the delivery piece is every bit as important as the science. So I think it’s been more, a coming to, over time, towards each other’s point of view. And quite frankly, the work is better because of it.”

3. Donate and feel good.

Giving money away makes us feel better than spending money on ourselves.

Elizabeth Dunn and Michael Norton report in their book Happy Money: The Science of Smarter Spending, “The amount of money individuals devoted to themselves was unrelated to their overall happiness. What did predict happiness? The amount of money they gave away. The relationship between prosocial spending and happiness held up even after taking into account individuals’ income. Amazingly, the effect of this single spending category was as large as the effect of income in predicting happiness.”

4. Pay attention to results.

This doesn’t have to include spreadsheets or anything fancy.

Notice the communication you get from the charities. Is it always a pitch for more money? Do they communicate their results?

Do you see where your money is going? Are they fulfilling the mission that you were contributing to when you donated?

Keep in mind that not every donation is going to succeed. For instance, Bill Gates says that his involvement in the attempt to develop a better condom didn’t get the results he was hoping for. He doesn’t detail exactly what was so ineffective about the project, except mentioning with a vague smile, “We got a lot of ideas.”

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Bridget Sullivan Mermel helps clients throughout the country with her comprehensive fee-only financial planning firm based in Chicago. She’s the author of the upcoming book More Money, More Meaning. Both a certified public accountant and a certified financial planner, she specializes in helping clients lower their tax burden with tax-smart investing.

MONEY Estate Planning

Why My Grandparents’ Home Got Torn Down

Empty residential lot
Shutterstock

Estate planning can prevent a lot of heartache.

My family loves get-togethers—we find any reason to gather and eat. We credit this wonderful trait to my grandparents. They were gracious hosts with amazing culinary skills. Their home, built with my grandfather’s hands, was a sanctuary for family, friends, and welcome strangers.

My grandparents didn’t just leave legacy of memorable gatherings; they also left their home to their children, expecting regular family reunions after they were gone. My grandparents would not have it any other way!

My grandmother died in 1994, eight years after my grandfather’s death.

Their children tried their best to embrace my grandparents’ vision of maintaining the family home. But time, distance, and money wreaked havoc on implementing the plan. Our hearts sank as the house slowly fell into disrepair. It took almost 14 years before the children agreed that one sibling would buy out the other childrens’ shares of the home.

By then, however, the damage to the home was done. Now, only the land and memories remain.

I believe that if my grandparents had addressed certain questions about the house, they might have been able to protect it after their death with some thoughtful estate planning. Here are those questions:

  • Who wants to keep the home?
  • Who would prefer their inheritance to be cash instead?
  • Who can afford to buy the home?
  • How will the children handle multiple owners now? How would they handle ownership upon their own divorce or death?
  • Who will pay the property taxes?
  • Who will ensure upkeep?

One option might have been an estate-planning provision requiring the home be sold, with the first rights to buy given to the children. Or maybe the home could have been left to one or more children, and other assets left to other children to equalize inheritances. Maybe they could have established a trust in order to fund perpetual care of the home, and to manage generational ownership.

These considerations and others in the estate planning process might have allowed the children to preserve both their wealth and their legacy.

A significant amount of wealth is transferred through real estate. According to a 2014 study by Credit Suisse and Brandeis University’s Institute on Asset and Social Policy, the primary residence represents 31% of total assets for the top 5% of wealthy black families in the U.S. and 22% for the wealthiest white Americans. The percentage of wealth embodied in a primary residence is even greater for less well-off households.

Now it’s up to my aunts and uncles to get it right for the next generation. Will wealth be lost again or will it transfer for the benefit of their descendants? It’s a great question for the next family gathering…at a place to be determined.

———-

Lazetta Rainey Braxton is a certified financial planner and CEO of Financial Fountains. She assists individuals, families, and institutions with achieving financial well-being and contributing to the common good through financial planning and investment management services. She serves as president of the Association of African American Financial Advisors. Braxton holds an MBA in finance and entrepreneurship from the Wake Forest University Babcock Graduate School of Management and a BS in finance and international business from the University of Virginia.

MONEY financial advice

Vanguard’s Founder Explains What Your Investment Adviser Should Do

Jack Bogle, founder of the mutual fund giant, shares what makes an investment adviser worth paying for.

The life of a financial adviser can be very tricky. Many of them believe that leaving a client’s investments alone is the best option, but when, year after year, clients come in asking what the best course of action is for their money, what do you tell them? Jack Bogle, who 40 years ago founded the mutual fund giant Vanguard (it now has about $3 trillion of assets under management), explains exactly what a financial adviser should do and what a financial adviser should say.

Read next: Jack Bogle Explains How the Index Fund Won With Investors

MONEY financial advice

Financial Website Brothers Share Their Best Financial Advice

BrightScope co-founders Mike and Ryan Alfred talk about retirement savings and their biggest money mistakes.

Save until it hurts was the first thing Mike Alfred, a co-founder of BrightScope, said about retirement savings, and that’s part of his best financial advice to give others as well. “Live below your means,” he said, “which sounds very simple in theory but it much more difficult in practice.” His brother Ryan, the other BrightScope co-founder, suggests keeping your investments at arms-length so you’re not tempted to overanalyze them.

Mike said his biggest mistake was buying in to the dot-com bubble, while Ryan talks about how they funded a large part of their business on their own credit cards.

Read next: The Co-founders of BrightScope Share The Painful Secret to Retirement Success

MONEY financial advice

How to Become a 401(k) Millionaire

Fidelity Investments' Jeanne Thompson lays out three simple steps.

For millennials, retirement is something that feels like it’s forever away, which is a good thing when it comes to preparing for it. Jeanne Thompson, Fidelity Investments’ vice president of thought leadership, lays out three simple steps for hitting the ultimate 401(k) milestone: a million dollars.

1) Save a lot. Seriously, save as much as you can. One of the BrightScope co-founders phrases it simply as “Save until it hurts.

2) Start now. When you start saving while you’re young—Thompson says 25 at the latest—you give your money as much time as possible to mature alongside you.

3) Invest for growth. Keep your eye on stocks, and don’t shy away from aggressive investments.

Read next: The Painful Secret to Retirement Success

MONEY financial advice

The Painful Secret to Retirement Success

The co-founders of retirement and investment analytics firm BrightScope share the secret of a well-funded retirement.

BrightScope co-founders (and brothers) Mike and Ryan Alfred say saving is the most important thing you can do for your retirement. Start saving early and start saving a lot—way more than the 5% or 6% that workers put in their 401(k) to get an employer match. Ryan, president and chief operating officer, said he knows it can be hard to start saving when you’re young and just started a career, but he thinks you should start saving a little bit and try to increase how much you save each year.

MONEY financial advice

How Vanguard Founder Jack Bogle Invests His Grandchildren’s Money

Ahead of Father's Day, Bogle also talks about the investment advice he gives—or doesn't give—his children.

Just a few days before Father’s Day 2015, MONEY assistant managing editor Pat Regnier interviewed John C. “Jack” Bogle, the founder and former CEO of Vanguard, the world’s largest mutual fund company. The elder statesman of the mutual fund industry—and a pioneer in index investing—talked about the investing advice he gives his children, one of whom runs a hedge fund, along with how he invests, and doesn’t invest, on behalf of his grandchildren. Look for an in-depth interview with Bogle in an upcoming issue of MONEY.

Read next: Where are Most of the World’s Millionaires?

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