After more than eight years of working in every corner of FinanceI’ve come to realize that personal financial success is *not* about choosing the best stocks or having a high income. Financial success is about careful planning, and avoiding mistakes, the BIG ones, that can blow everything up.
Here are the most common ones I see as a financial planner.
Not Having an Emergency Fund
At some point, sh*t will hit the fan. A random medical expense. Taking fluffy to the vet. Replacing some ungodly expensive piece of your home, like the damn furnace.
You never know what your next emergency will be. But if one happens and you don’t have a stockpile of cash — a small surprise can lead to credit card debt, withdrawals from investment accounts, and even set you back with your early-retirement goal.
Avoid the stress and stay on track for financial success by planning for these moments. Start by putting a thousand in a savings account, and label it “emergencies” in your banking app. For even more security, build your emergency fund to 3–6 times your monthly income.
Waiting to Invest
Why wait? There’s no such thing as having too little to invest. Micro investing apps like Acorns and Stash help you invest your spare change. Robinhood allows you to buy fractional shares of companies like Apple and Tesla. You can own a diversified portfolio of real estate with just a few hundred bucks with the Fundrise app.
Your edge as a young investor is time. The small amount you invest now will grow, compound, and hopefully double a few times before you need it. That’s how you save the millions you’ll need to retire early.
If you wait to invest, on the other hand, you’ll need to save more out of your own pocket for retirement. All because your money had less time to sit in your investment account and grow.
Not Having a Plan with Clear Goals
Money decisions should align with your goals. In the world of finance, this is called goals-based planning. A client’s strategy optimizes for the stuff they care about: their goals and values.
If you’re aiming for financial success, it helps to get clear about and plan for…
- how much you need to retire early
- your timeline (worst, median, and best-case scenarios)
- how much to save from each paycheck
- what accounts to use for growing your money
- how to adjust your strategy along the way
That’s in addition to planning for the 3–5 other goals you might have.
And your plan doesn’t have to be a stack of documents with graphs and legal jargon. Head over to Reddit or Quora for case studies on people who’ve laid out the strategies that helped them retire early. If you’re still overwhelmed, consider the help of a professional, like a financial planner or money coach.
Focusing On Expenses More than Income
Reducing your spending is easier than making more money. It takes less time, and there’s no need to negotiate or pitch the idea of lowering your cable bill to your boss. This is why the idea of minimalism aligns so nicely with early retirement.
But there’s a shallow limit on how much you can cut from your monthly budget. Whereas with your earning potential, the ceiling is much higher. And combined with the power of compounding — your ability to earn an extra million over your lifetime moves the needle A LOT more than saving $47 a month on cable.
So in addition to cutting the fluff from your budget, focus on building a long-term side hustle. Preferably one that gives you scalable income. For me, that looks like blogging on Medium, pouring my expertise into my Substack newsletter, and experimenting with e-books and courses down the road.
Avoiding Risk At All Costs
Nobody wants to lose money. That’s the risk we refer to in the context of investing. With every investment, there’s the possibility of financial gain (reward) and financial loss (risk).
Thanks to the work of behavioral psychologists Daniel Kahneman and Amos Tversky — we know that, in general, humans (aka average investors) hate losing twice as much as we enjoy winning. This is loss aversion, a decision-making bias that can lead you to avoid and focus on losses more than gains.
In real life, this can result in avoiding investing altogether. Something I see from millennials who’ve directly and indirectly experienced (through parents) record-setting stock market crashes and economic recessions.
But risk, or the possibility of losing money, will always be a consequence of using the stock market to build wealth and reach financial independence.
The key to avoiding financial ruin is NOT to avoid risk completely. Instead, the key is capping your downside with diversification (in your income and investments) and making the right adjustments to your financial plan as you move through life’s different stages.
Failing to Adjust Around Major Life Events
Life is constant change, and your financial success plan is a reflection of that. Your 20s and 30s are when major life events start to happen faster and more frequently.
The big ones are…
- buying a home
- getting married
- having kids
- switching jobs or careers
- starting a business
Each milestone serves as a reminder — time to update your financial plan. After having kids, for example, it’s a good idea to reassess your emergency fund, increase your life insurance, create a basic estate plan, and start saving for college.
Failing to adjust your plan removes you from the driver’s seat on the road to early retirement. You become a passenger who reacts to whatever life throws at you, hoping everything shakes out according to your goals, instead of proactivelysteering and adjusting to give yourself the best chance.
Failing to Protect Yourself from Blowups
Financial blow-ups are when an external event (that you have ZERO control over) wipes out your net worth. Forcing you to start over with your goals, which is a tough place to recover from financially and emotionally.
And the worst part…there are 101 different things that can blow up your finances.
- stock market crash
- medical emergency
- losing your job
- becoming an entrepreneur
- getting divorced
This is why it’s important *not* to be one-sided with your finances. You can’t plan for the events, but you can ensure you and your future financial success can overcome the. Growth isn’t the only thing you want to optimize for. Protecting your downside is just as important.
A healthy pile of cash, diversification with income and investments, the appropriate amount and types of insurance, and a basic estate plan all give you a margin of safety when disaster inevitably strikes.
Thinking Short (instead of long) Term
Long-term thinking is a skill. One that allows you to look into the future, set clear goals based on your future wants and needs, then make an actionable plan to achieve them.
The problem is, our brains are wired to seek short-term satisfaction. Thinking about what you’ll want two decades into the future is hard to fathom. This is why every investor struggles with the dilemma…
“Should I spend and be happy now, OR save and be happy later?”
Forget trying to crystallize what life will be like 10 or 20 years into the future. Just know that at some point, you’ll want the freedom to say “yes” to starting a business, taking time off work, investing in your friend’s company, traveling the world…or whatever the future, unknown opportunity looks like.
Flexibility (and not a perfectly laid out plan) is the incentive to help you think and make long-term money decisions.
Sacrificing Your Happiness Now
Giving up all of life’s pleasures — fancy dinners, travel, happy hours with friends, your morning coffee — is a sacrifice many FIRE enthusiasts think you have to make to leave the rat race by 45.
I think it’s a recipe for failure. You need the joys of life, big and small, to stay motivated with a decades-long goal like early retirement.
So instead of going full-on minimalist, consider stealing Ramit Sethi’s spending philosophy for a more balanced approach.
“Frugality, quite simply, is about choosing the things you love to spend extravagantly on, and then cutting costs mercilessly on the things you don’t love.” — Ramit Sethi
Not Getting Help Along the Way
Asking for help is the fastest path from point A to B. But it’s not a skill that comes naturally. Most see it as a sign of failure. A sign that you’re incapable. A sign of giving up.
But that couldn’t be farther from the truth. Asking for help with your early retirement goal gives you the best chance of achieving it on time. Because if you’re making a mistake that goes unnoticed, it could mean delaying your goal or giving it up altogether.
Smart investors know what they don’t know, then fill in the knowledge gaps with expert advice, technology, and tools. Aka help.